Newman v. Scottsdale Insurance

May 7 2013

DA 12-0200

IN THE SUPREME COURT OF THE STATE OF MONTANA

2013 MT 125

JUDITH NEWMAN, as Personal Representative
of the Estate of Karlye Newman,

Plaintiff and Appellee,

v.

SCOTTSDALE INSURANCE COMPANY,
and NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA,

Defendants and Appellants.

APPEAL FROM: District Court of the Twentieth Judicial District,
In and For the County of Lake, Cause No. DV 10-280
Honorable Deborah Kim Christopher, Presiding Judge

COUNSEL OF RECORD:

For Appellant Scottsdale Insurance Company:

Bradley J. Luck, Garlington, Lohn & Robinson, PLLP, Missoula, Montana

Linda Wendell Hsu, Selman Breitman, LLP, San Francisco, California

For Appellant National Union Fire Insurance Company of Pittsburgh, PA:

Robert J. Phillips, Amy O. Duerk, Phillips Haffey PC, Missoula, Montana

For Appellee:

James A. Manley, Ann L. Moderie, Manley Law Firm, Polson, Montana

Lawrence A. Anderson, Attorney at Law, Great Falls, Montana

Elizabeth A. Best, Best Law Offices, Great Falls, Montana

Thomas J. Beers, Beers Law Offices, Missoula, Montana
 Submitted on Briefs: December 12, 2012

Decided: May 7, 2013

Filed:

__________________________________________
Clerk

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Justice Patricia O. Cotter delivered the Opinion of the Court.

¶1 This matter arises from a related case involving the suicide of a 16-year-old girl,

Karlye Newman, who was residing at the Spring Creek Lodge Academy in Thompson

Falls, Montana, at the time of her death in October 2004. Spring Creek Lodge Academy

was one of many “tough love” academic facilities associated with the World Wide

Association of Specialty Programs and Schools, Inc. (WWASP). Following Karlye’s

death, Karlye’s mother, Judith Newman, brought an action against the owner of the

school Robert Lichfield, its on-site directors Cameron and Chaffin Pullan, Teen Help,

and various related entities alleging, among other things, wrongful death, negligence,

breach of contract, deceit, and constructive fraud. A court-ordered settlement mediation

was conducted in February 2010 at which time Defendant Teen Help agreed to settle with

Newman by assigning to her its rights to $3 million in insurance coverage. The

settlement was later reduced to a judgment.

¶2 Claims against the majority of the remaining defendants were also settled before

trial. A jury subsequently ruled in favor of Defendants Lichfield and Premier

Educational Systems, LLC (f/k/a WWASP) and Newman appealed. We affirmed in part,

reversed in part and remanded for a new trial. Newman v. Lichfield, 2012 MT 47, 364

Mont. 243, 272 P.3d 625 (Newman I— wrongful death action).

¶3 In August 2010, after settling with Teen Help and while Newman I proceeded to

trial, Newman filed this action (Newman II—declaratory judgment/breach of contract

action) against Teen Help’s insurers, Scottsdale Insurance Company and National Union

Fire Insurance Company, to collect on the settlement and judgment. She argued the

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insurers breached their obligation to defend and indemnify Teen Help in Newman I.

After nearly eighteen months of litigation, the Twentieth Judicial District Court entered

summary judgment, determining that the insurers wrongfully refused to defend Teen

Help and thus breached their contracts with their insured. As a result, the court held that

Scottsdale and National Union were severally liable for the underlying judgment of

$3,000,000. The court also awarded attorney’s fees of $1,188,399.45, and interest on the

underlying judgment totaling $568,767.12. Scottsdale and National Union appeal. We

affirm in part and reverse and remand in part.

ISSUES

¶4 A restatement of Scottsdale and National Union’s issues on appeal is:

¶5 Did the District Court err in considering inadmissible evidence and facts beyond

the allegations set forth in the Newman I Third Amended Complaint, and resolving

disputed issues of fact?

¶6 Did the District Court err in finding a duty to defend under the insurance policies

but not applying the policy exclusions?

¶7 Did the District Court err in calculating and awarding attorney’s fees to Newman?

¶8 Did the District Court err in finding that Montana law controls?

¶9 For purposes of analysis, we consider the first and second issues together.

FACTUAL AND PROCEDURAL BACKGROUND

¶10 The facts and procedural history pertaining to the underlying wrongful death

action are set forth in Newman I and will not be repeated here. As noted above,

following settlement of the wrongful death claim with Teen Help, Newman brought this

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breach of contract and declaratory action in August 2010 against Teen Help’s insurers,

Scottsdale Insurance and National Union Fire Insurance. Scottsdale provided a

commercial general liability (CGL) policy to Teen Help while National Union offered an

excess, or umbrella, policy. Both policies obligated the insurers to defend and indemnify

Teen Help against covered actions and contained combined policy limits of $3,000,000.

Newman maintained that both insurers unjustifiably refused to defend and indemnify

Teen Help in Newman I, and refused to pay the settlement that Teen Help negotiated with

Newman.

¶11 Scottsdale moved to dismiss Newman’s Complaint arguing that its policy

excluded coverage for the claim against Teen Help. It based its assertion upon two

exclusions contained in the CGL policy: (1) a “designated professional services”

exclusion and (2) a “designated operations” exclusion. The “professional services”

exclusion stated:

With respect to any professional services shown in the Schedule, this
insurance does not apply to “bodily injury,” “property damage,” “personal
injury” or “advertising injury” due to the rendering or failure to render any
professional service.

The “Schedule” section of the policy described “professional services” as “any and all

professional exposures.”

¶12 The “designated operations” exclusion stated:

This insurance does not apply to any medical incident, “damages,” “bodily
injury,” “property damage,” or “personal and advertising injury” arising out
of the operations shown in the schedule above.

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The referenced “schedule above” described “excluded operations” as “all professional

other than premises liability at scheduled locations.” While the policy listed Teen Help’s

call center office in St. George, Utah, as the insured, there were no “scheduled locations”

identified in the designated operations exclusion. The policy provided a definition for

“coverage territory,” however. Coverage territory was defined in part as “the United

States of America (including its territories and possessions), Puerto Rico and Canada.”

¶13 Scottsdale maintained that Newman’s claim against Teen Help arose from actions

that constituted “professional services.” Scottsdale claimed that Newman’s complaint

alleging negligence and wrongdoing on the part of Teen Help constituted a challenge to

the professional recommendation and placement services provided by Teen Help, and

that such claims were excluded under the policy. Additionally, as the Complaint alleged

Teen Help was jointly liable for the negligence and intentional acts of the other

defendants, Scottsdale maintained that the actions of the other defendants were also

“professional services” that were excluded from coverage by the “professional services”

exclusion.

¶14 Applying the “designated” or “excluded operations” clause, Scottsdale further

argued that because Karlye’s death occurred at Spring Creek Academy in Montana,

rather than the St. George, Utah, location, coverage was excluded and Scottsdale had no

duty to defend Teen Help. Accordingly, Scottsdale asserted that because there was no

coverage available to Teen Help as assignor, there was likewise no coverage available to

Newman as assignee; therefore, the action should be dismissed.

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¶15 National Union also filed a motion to dismiss with a brief on February 7, 2011,

asserting that Newman had not alleged, nor could she allege, that the loss constituted an

“occurrence” as defined by the policy. The insurer argued that Karlye’s death was not an

“accident,” as suicide was a purposeful act for which the National Union policy did not

provide coverage. National Union also claimed a “professional liability” exception to the

policy. In addition, National Union asserted that, as an excess policy, it owed no duty to

defend or indemnify until after Scottsdale’s policy was exhausted.

¶16 National Union’s policy provided, in relevant part, the following definitions, terms

and conditions:

II. Defense

A. We shall have the right and duty to defend any claim or suit
seeking damages covered by the terms and conditions of this
policy when:

1. The applicable Limits of Insurance of the underlying
policies listed in the Schedule of Underlying Insurance
and the Limits of Insurance of any other underlying
insurance providing coverage to the Insured have
been exhausted by payment of claims to which this
policy applies; or

2. Damages are sought for Bodily Injury . . . covered by
this policy but not covered by any underlying
insurance listed in the Schedule of Underlying
Insurance or any other underlying insurance providing
coverage to the Insured.

. . .

IV. Definitions

C. Bodily Injury means bodily injury, sickness, disability or
disease. Bodily Injury shall also mean mental injury, mental

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 anguish, humiliation, shock or death if directly resulting from
bodily injury, sickness, disability or disease.

. . .

H. Occurrence means:

1. As respects Bodily Injury . . . an accident, including
continuous or repeated exposure to conditions, which result in
Bodily Injury . . . neither expected nor intended from the
standpoint of the Insured. All such exposure to substantially
the same general conditions shall be considered as arising out
of one Occurrence . . . .

. . .

V. Exclusions

O. Bodily Injury . . . expected or intended from the standpoint of the
Insured.

. . .

PROFESSIONAL LIABILITY EXCLUSION

This insurance does not apply to Bodily Injury . . . arising out of any act,
error, omission, malpractice or mistake of a professional nature committed
by the Insured or any person for whom the Insured is legally responsible.

¶17 While not raised by National Union in its Motion to Dismiss, National Union

subsequently argued that the notice provisions of its policy had not been satisfied. Those

provisions provided:

VI. Conditions

F. Duties in The Event Of An Occurrence, Claim Or Suit:

2. If a claim is made or suit is brought against any
Insured that is reasonably likely to involve this Policy
you must notify us in writing as soon as practicable.

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 H. Legal Actions Against Us

There will be no right of action against us under this
insurance unless:

1. You have complied with all the terms of this policy;
and

2. The amount you owe has been determined with our
consent or by actual trial and final judgment.

This insurance does not give anyone the right to add us as a defendant in an
action against you to determine your liability.

¶18 In addition to responding to the insurers’ motions to dismiss, Newman filed

motions for summary judgment against both insurers, disputing the arguments set forth in

their motions. She claimed, among other things, that the obligation to defend imposed

upon an insurer exists if the complaint alleges facts which, if proven, would present a risk

covered by the policy. She submitted that her complaints set forth adequate allegations,

facts and claims to trigger coverage. Newman also argued that neither policy contained

necessary definitions of such terms as “accident,” “professional,” “premises liability,”

“arising out of,” and “operations”; therefore, the claimed exclusions were ambiguous and

must be construed against the insurers. She requested that the court determine she was

entitled to payment of the Teen Help settlement and judgment, interest on the Newman I

judgment, and litigation costs for both Newman I and Newman II. In response to

Newman’s motion for summary judgment, National Union submitted a brief on March

28, 2011, arguing for the first time that Teen Help had never notified it of the pendency

of the Newman I claims so as to enable it to tender a defense in that action.

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¶19 In October 2011, the District Court denied the insurers’ motions to dismiss and

granted Newman’s motions for summary judgment and declaratory judgment. Following

a hearing requested by Newman, the court ordered Scottsdale and National Union to pay

Newman the $3,000,000 in combined policy coverage, an additional $1,188,399.45 in

attorney’s fees, and interest in the amount of $568,767.12. The order also stated that

legal interest would accrue at 10% per annum from judgment day on the $3,000,000 and

the attorney’s fees. Scottsdale and National Union each filed a timely appeal.

STANDARD OF REVIEW

¶20 We review a district court’s ruling on a motion for summary judgment de novo,

applying the same criteria of M. R. Civ. P. 56 as did the district court. Summary

judgment “should be rendered if the pleadings, the discovery and disclosure materials on

file, and any affidavits show that there is no genuine issue as to any material fact and that

the movant is entitled to judgment as a matter of law.” M. R. Civ. P. 56(c)(3); Labair v.

Carey, 2012 MT 312, ¶ 15, 367 Mont. 453, 291 P.3d 1160.

¶21 We review for correctness a district court’s interpretation of law pertaining to a

declaratory judgment ruling. Billings Gazette v. City of Billings, 2011 MT 293, ¶ 9, 362

Mont. 522, 267 P.3d 11.

¶22 The interpretation of an insurance contract is a question of law. We review a

district court’s conclusions of law de novo to determine whether they are correct.

Cusenbary v. United States Fid. & Guar. Co., 2001 MT 261, ¶ 9, 307 Mont. 238, 37 P.3d

67 (citing Babcock v. Farmers Ins. Exch., 2000 MT 114, 299 Mont. 407, 999 P.2d 347).

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¶23 We review the district court’s decision to grant or deny attorney’s fees for an

abuse of discretion. A district court abuses its discretion when it “acts arbitrarily without

conscientious judgment or exceeds the bounds of reason resulting in substantial

injustice.” Slack v. Landmark Co., 2011 MT 292, ¶ 15, 362 Mont. 514, 267 P.3d 6.

¶24 We review de novo issues of law, including a trial court’s decisions on directed

verdict, choice of law, and collateral source offset. Tucker v. Farmers Ins. Exch., 2009

MT 247, ¶ 23, 351 Mont. 448, 215 P.3d 1.

DISCUSSION

¶25 Did the District Court err in considering inadmissible evidence and facts beyond
the allegations set forth in the Newman I Third Amended Complaint, and
resolving disputed issues of fact?

¶26 Did the District Court err in finding a duty to defend under the insurance policies
but not applying the policy exclusions?

¶27 As noted above, the District Court concluded that Scottsdale and National Union

each had a contractual duty to defend Teen Help in Newman I and that they breached that

duty. It therefore granted Newman’s motions for summary judgment as to liability of the

insurers. We address the contentions of each insurer in turn.

A. Scottsdale Insurance Company

¶28 Teen Help timely demanded a defense and indemnification from Scottsdale.

Scottsdale rejected Newman’s demand, but denies it breached its duty to Teen Help. It

argued that it was required to determine whether it had a duty to defend Teen Help by

evaluating the information available to it at the time the request to defend was presented.

At the time the coverage determination was made, the only pleadings in Newman I were

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the complaints, including the Third Amended Complaint, and related exhibits. Based

exclusively upon the information contained in the Third Amended Complaint, Scottsdale

concluded that the exclusions within its policy applied to Newman’s claim and, as such, it

had no duty to defend. Scottsdale claims on appeal that the District Court should have

considered only the contents of the Third Amended Complaint and exhibits in

determining the correctness of Scottsdale’s conclusion. It asserts that the court erred by

considering inadmissible evidence presented with Newman’s motion for summary

judgment, such as a Lichfield deposition transcript, the Teen Help telephone sales script

and a settlement agreement.

¶29 Newman responds that an insurer has a duty to defend its insured unless there is an

“unequivocal demonstration” that the claim does not fall within the insurance policy’s

coverage. She maintains that because policy exclusions are to be narrowly and strictly

interpreted, Scottsdale should have filed a declaratory judgment action to resolve the

issue of coverage rather than refusing to defend. Newman asserts that the exclusion

language contained in Scottsdale’s policy is “ambiguous, repetitive and circular” and

contains terms subject to multiple interpretations because the policy does not provide the

definitions upon which Scottsdale seeks to rely.

¶30 It is well-established that “where [an] insurer refuses to defend a claim and does so

unjustifiably, that insurer becomes liable for defense costs and judgments.” Farmers

Union Mut. Ins. Co. v. Staples, 2004 MT 108, ¶ 27, 321 Mont. 99, 90 P.3d 381. In

Staples, Kenneth Huntsinger, while driving near Havre, Montana, struck a horse named

Frenchy. Huntsinger was injured and his car was damaged. Staples, ¶¶ 6, 9. As Frenchy

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bore Matt Corcoran’s brand, Huntsinger filed a complaint against Corcoran. Staples, ¶ 7.

Corcoran was insured by Farmer’s Union Mutual Insurance Company. Staples, ¶ 8. As

litigation proceeded, it became apparent that Frenchy’s ownership at the time of the

accident was unclear. Additionally, it was unclear whether Frenchy had escaped from

Corcoran’s or Staples’ pasture. As a result, Huntsinger filed an amended complaint

against co-owner Raymond Staples. Staples, ¶ 10. Farmers Union refused to defend

Staples as an “additional insured” because Farmers Union unilaterally concluded that

Corcoran had sold his interest in Frenchy before the accident, and therefore coverage

based upon ownership was no longer available. Staples, ¶ 11. As here, Staples

eventually confessed judgment in favor of Huntsinger and assigned his rights under

Corcoran’s policy to Huntsinger. Staples, ¶ 12. The district court concluded, based upon

the allegations in the amended complaint and the ownership dispute at the time, that

Farmers Union had a duty to defend Staples. Staples, ¶ 13.

¶31 Farmers Union appealed and we affirmed. We explained that “Montana law is

well-settled that an insurer’s duty to defend its insured arises when an insured sets forth

facts which represent a risk covered by the terms of an insurance policy.” Staples, ¶ 20.

“The insurance company must look to the allegations of a complaint to determine if

coverage exists under an insurance policy, thus giving rise to the insurer’s duty to

defend.” Staples, ¶ 20. We concluded that Farmers Union had breached its duty to

defend and was therefore estopped from denying coverage. Staples, ¶ 28.

¶32 In the case before us, Scottsdale does not dispute that Teen Help was an insured.

Therefore, in accordance with Staples, ¶ 20, we look to the facts alleged in Newman’s

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Third Amended Complaint vis-à-vis Teen Help, to determine whether these facts, if

proven, would present a claim covered by the policy:

1. Teen Help was a limited liability company doing business in Montana.

2. Teen Help purported to help parents of troubled teens obtain placement in an
appropriate treatment facility, but directed parents only to facilities owned and
operated by Robert Lichfield. Teen Help was the marketing arm of the other
defendants.

3. At all relevant times, Lichfield exercised control over all related entities, including
Teen Help, controlling personnel hiring, student recruitment and solicitation, and
student care, treatment and supervision.

¶33 In addition to the foregoing specific allegations against Teen Help, the Third

Amended Complaint also alleged that all defendants were alter egos of one another, and

that they jointly failed to implement adequate policies to protect the children in their care;

failed to hire, train and supervise staff; failed to properly evaluate Karlye’s needs; and

failed to meet the accepted standard of care in providing mental health treatment to

Karlye.

¶34 Scottsdale argues the District Court determined that its policy covered Newman’s

claims by erroneously considering evidence that came into the record after Scottsdale had

made its decision—based upon the allegations of the Complaint and its exhibits—that the

Complaint did not state claims for which the policy would afford coverage. Scottsdale

claims it was required only to look to the Complaint to determine whether coverage for

the claims existed, and that the court erred in looking at evidence outside the Complaint

and resolving issues of fact on summary judgment. It does appear that, in part, the

District Court took into account evidence outside the Complaint and its exhibits in

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making its determination. However, even if we discount evidence outside the four

corners of the Third Amended Complaint and its exhibits, we can still answer the duty to

defend question through an analysis of the Third Party Complaint, the Scottsdale policy,

and established case law defining the parameters of the duty to defend.

¶35 Scottsdale claims it had no duty to defend because exclusions in the policy clearly

applied to Newman’s claim. We disagree. Exclusions must be narrowly and strictly

construed because they “are contrary to the fundamental protective purpose of an

insurance policy.” Farmers Union Mut. Ins. Co. v. Oakland, 251 Mont. 352, 356, 825

P.2d 554, 556 (1992). Moreover, because exclusions are contrary to the fundamental

purpose of the policy, such exclusions are frequently subject to challenge for ambiguity

or inconsistency. Swank Enters. v. All Purpose Servs., Ltd., 2007 MT 57, ¶ 29, 336

Mont. 197, 154 P.3d 52. As such, the mere existence of the exclusions in Scottsdale’s

policy did not establish an “unequivocal demonstration” that the claim did not fall within

the insurance policy’s coverage.

¶36 Addressing the professional services exclusion, Scottsdale claims “[t]he

distinction between professional services and nonprofessional services is marked by

whether the insured is required to make a trained judgment,” and that professional

services “embrace[] those activities that distinguish a particular occupation from other

occupations, as evidenced by the need for specialized learning or training—and

distinguished it from ordinary activities in life and business.” Claiming that its policy

exclusions “contain plain and ordinary language,” Scottsdale opines that Teen Help’s

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recommendation that Karlye attend Spring Creek constituted a professional service,

coverage of which was precluded by the professional services exclusion.

¶37 Scottsdale relies upon Fire Ins. Exch. v. Alsop, 709 P.2d 389 (Utah 1985), in

which a licensed chiropractor, Michael Alsop, provided chiropractic services to a woman

during labor and delivery. The woman and child were injured during delivery and the

woman sued several defendants, including Dr. Alsop. Alsop demanded that his

homeowners insurance provided by Fire Insurance Exchange defend and indemnify him.

Fire Insurance filed a declaratory action to determine whether the policy covered Alsop’s

actions or whether his claim fell within the policy’s “professional services” exclusion.

Fire Insurance prevailed. Scottsdale asserts that the professional services exclusion in its

policy is similar to that in Alsop’s Fire Insurance policy which the Utah Court concluded

was “clear and unambiguous.”

¶38 Alsop is distinguishable and does not help Scottsdale in the case at bar. There was

no discussion in Alsop as to whether “professional” or “professional services” was

defined in the Fire Insurance policy. However, it was undisputed that Alsop’s services as

a licensed chiropractor were professional services that required Alsop to undergo

specialized training, education and licensing. As such, liability for Alsop’s professional

services was excluded under the professional exclusion clause. While not expressly

equating Teen Help’s employees with licensed chiropractors, Scottsdale insists that Teen

Help’s staff similarly rendered professional services in assisting in placements of

troubled youth into Lichfield’s schools and in Teen Help’s participation in the operation

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and planning of Spring Creek, thereby falling within the “clear and unambiguous”

professional services exclusion. We find this analogy inapt.

¶39 A licensed chiropractor would obviously be called upon to render professional

medical services. By contrast, Teen Help is described in the Third Amended Complaint

as no more than a marketing arm of the other defendants, directing parents of troubled

teens to facilities owned and operated by Lichfield as part of a civil conspiracy to profit at

the expense of the safety and health of children. These allegations do not suggest the

exercise of “trained judgment” or “specialized learning” unique to “professional

services,” as Scottsdale argues; rather, these allegations raise the specter of an injury

caused by an occurrence resulting from non-professional services. Because

non-professional services were alleged, a duty to defend was triggered.

¶40 We acknowledge that the Third Amended Complaint also alleged that all

defendants jointly breached some professional obligations. However, we have held that a

duty to defend is triggered where one portion of the complaint alleges facts which, if

proven, would result in coverage, even if the remaining counts of the complaint would

not be covered. Home Ins. Co. v. Pinski Bros., 160 Mont. 219, 227, 500 P.2d 945,

949-50 (1972).

¶41 Further, although Scottsdale relies on the “professional services” exclusion in its

policy as a basis for denying coverage, the policy does not define the terms

“professional,” “professional services,” or “professional exposures,” so as to alert the

insured concerning what services are covered and what services are excluded. At a

minimum, this renders the coverage confusing and ambiguous. It is well-established that

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any ambiguity in an insurance policy must be construed against the insurer. Wendell v.

State Farm Mut. Auto. Ins. Co., 1999 MT 17, ¶ 14, 293 Mont. 140, 974 P.2d 623. As

such, the District Court did not err in determining the professional services exclusion did

not preclude a determination that Scottsdale had a duty to defend based upon the

allegations set forth in the Third Amended Complaint.

¶42 Turning to Scottsdale’s “designated operations” exclusion, Scottsdale claims the

insurance policy provides coverage to Teen Help’s St. George, Utah, location only, and

therefore does not provide coverage for any “alleged liability [that] occurred in Montana

at the Spring Creek facility.” Again, we note that the policy exclusion does not define

critical terms, including “professional,” “scheduled locations,” or “arising out of.” Nor

does it expressly state a “scheduled location,” although it does provide for a “coverage

territory” comprised of the United States of America. In an attempt to interpret the

contract to give meaning to all parts of the policy, we find the absence of an expressly

identified “scheduled location” and the expansive definition of “covered territory”

confusing and ambiguous.

¶43 Furthermore, if we accept Scottsdale’s interpretation of policy coverage, it appears

coverage is illusory. According to Scottsdale, all of Teen Help’s employees are

“professionals” and any liability associated with their services is excluded from coverage

under the professional services exclusion. Moreover, given Scottsdale’s claim that the

policy covers the St. George, Utah, premises only, the policy would appear to cover only

the conduct of non-professional employees that occurs in the St. George, Utah, location.

Given that the Utah office is a call center that is not open to customers or the public, it is

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difficult to imagine a scenario under which coverage would be extended. We have held

that policy language which renders coverage illusory is against public policy. Hardy v.

Progressive Specialty Ins. Co., 2003 MT 85, ¶¶ 20-22, 29, 315 Mont. 107, 67 P.3d 892.

¶44 As did the District Court, we construe the confusing policy provisions against

Scottsdale and conclude that under a reasonable interpretation of the Third Amended

Complaint and the Scottsdale insurance policy, the allegations of the Complaint were

sufficient to trigger a duty to defend. Scottsdale does not deny that the Complaint alleges

“bodily injury” and an “occurrence,” both of which are covered under the Scottsdale

CGL policy. We have held that where a complaint alleges facts which, if proven, would

bring an event within the policy’s coverage, the duty to defend is triggered. Staples, ¶ 20;

Pinski Bros., 160 Mont. at 227, 500 P.2d at 949-50. Based on the foregoing, we conclude

that the Third Amended Complaint alleged facts which if proven true would bring the

matter within Scottsdale’s coverage. Therefore, we conclude the District Court did not

err in finding a breach of the duty to defend, and in entering summary judgment in favor

of Newman and against Scottsdale. Staples, ¶ 27.

B. National Union Fire Insurance Company

¶45 As did Scottsdale, National Union also argues on appeal that the District Court

erred in determining it had breached its duty to defend its insured.

¶46 National Union provided excess insurance coverage for Teen Help from May 7,

2004, through May 7, 2005. Karlye died in October 2004. Newman filed her initial

Complaint against Lichfield and others in October 2006. This Complaint did not name

Teen Help as a defendant. She filed her Second Amended Complaint adding Teen Help

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as a defendant on May 29, 2008, but it is unclear whether Teen Help was served with this

complaint. Ultimately, she filed a Third Amended Complaint on December 29, 2008,

and served Teen Help at that time. It is undisputed Teen Help did not notify National

Union of the suit nor did it tender a request for defense at that time.

¶47 National Union first learned of the cause of action in January 2010 when

Newman’s counsel submitted a policy limit demand letter directly to National Union.

The letter encouraged National Union to participate in a court-ordered settlement

mediation scheduled for February 19, 2010. Upon receipt of the letter, National Union

contacted Teen Help to obtain information and documentation. Teen Help was of

marginal assistance, at best. National Union then contacted Scottsdale’s attorney to

obtain information. Scottsdale provided National Union with a copy of the Third

Amended Complaint and informed National Union that Scottsdale declined to defend or

indemnify Teen Help because Newman’s claim was precluded under the professional

liability exclusion contained in Scottsdale’s policy.

¶48 After reviewing the Third Amended Complaint, National Union, in a letter dated

February 9, 2010, denied coverage to Teen Help on the following policy coverage

grounds: failure to exhaust primary coverage through Scottsdale, failure to establish that

Scottsdale’s policy did not cover the claim, failure to state a claim that constituted an

“occurrence,” and submission of a claim that was excluded under the policy’s

professional liability exclusion. Notably, at that time, National Union did not deny

coverage based upon Teen Help’s failure to notify it of the underlying lawsuit “in writing

as soon as practicable.”

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¶49 Having denied coverage, National Union did not attend the settlement mediation

but nonetheless encouraged Teen Help to contact it with questions or further information

upon which it could reconsider its decision. It is undisputed that Teen Help did not

contact National Union with additional information or requests for assistance.

¶50 Subsequently, in August 2010, Newman initiated this action. In its early filings in

response to Newman’s complaint and her motion for summary judgment, National Union

continued to assert that it had no duty to defend Teen Help based upon the policy

coverage grounds set forth above. In its March 2011 response to Newman’s motion for

summary judgment, National Union argued for the first time that Teen Help failed to

notify it of the lawsuit in a timely manner and that it was unfairly prejudiced by the lack

of notice. It asserted that the duty to notify was a “condition precedent to filing a lawsuit

against National Union for any claim, including a breach of contract claim.”

¶51 In October 2011, the District Court granted Newman’s motion for summary

judgment and denied National Union’s motion to dismiss the action. In its order, the

court based its conclusion that National Union had a duty to defend Teen Help upon a

determination that Teen Help was not a “professional” entity; therefore, the insurer could

not rely upon the “professional services liability” exclusion in its policy. The court did

not address the other defenses raised by National Union. Following entry of this order,

Newman moved for a hearing to determine attorney’s fees, costs and interest and for

entry of judgment. In December 2011, National Union responded to Newman’s motion,

arguing again that a judgment against it was barred based upon “lack of notice” and a

failure by Teen Help to “tender a defense.” National Union asserted that it was

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prejudiced in numerous ways by the passage of more than six years since Karlye’s death

and more than a year since Teen Help was served with a complaint. Unpersuaded, the

court subsequently entered Judgment against both insurers, severally, as described above.

¶52 On appeal, National Union argues that its policy identified only two circumstances

under which it had an obligation to defend Teen Help: (1) when the policy limits of

Scottsdale’s policy were exhausted by payment of settlement or judgment, and (2) when

damages were sought for bodily injury covered by National Union’s policy, but not

covered by Scottsdale’s policy. National Union claims that neither of these provisions

was satisfied. Additionally, it claims that under the terms and definitions of the policy,

Newman’s claim did not constitute an “occurrence.” The insurer further posits that the

claim was precluded under the professional liability exclusion. Lastly, National Union

maintains that Teen Help did not notify it of the filing of Newman’s lawsuit and never

made a demand upon it to tender a defense. The insurer asserts the District Court failed

to enforce the contract as drafted and as required under well-established case law;

therefore, judgment against National Union should be reversed.

¶53 Although the District Court addressed only the professional liability exclusion in

its decision, we address the remaining arguments presented by National Union as well as

the argument upon which the District Court ruled.

Exhaustion or Inapplicability of Scottsdale coverage

¶54 Reiterating that the case before us is a “duty to defend” case, we return to National

Union’s initial denial of coverage which precipitated its refusal to defend. In National

Union’s February 2010 denial letter, it claimed that its “coverage obligations have not

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been triggered, as no information has been presented evidencing that all underlying

coverage has been exhausted and/or that underlying coverage does not apply to this

claim.” The denial letter acknowledged, however, that National Union had been

informed by Scottsdale that Scottsdale disclaimed liability based upon a professional

liability exclusion contained in Scottsdale’s policy, and that therefore Scottsdale’s policy

would not cover Newman’s claim. National Union then denied coverage based upon its

policy’s professional liability exclusion, among other grounds.

¶55 National Union’s position on this issue is somewhat confusing. At various times,

it has acknowledged that Scottsdale’s policy did not cover Newman’s claim, and at other

times argues that Scottsdale’s policy did cover Newman’s claim but Scottsdale failed to

pay, and therefore Scottsdale’s coverage had not been exhausted. Moreover, on appeal

National Union presented the following issue: “Whether [National Union] had a duty to

defend its insured under its Umbrella Commercial General Liability Policy for a claim

that is not covered under the policy and, where unbeknownst to [National Union], the

insured’s primary insurer, Scottsdale Insurance Company declined to do so because the

claim was not covered under its policy.” As noted, the record indicates that National

Union knew at the time it denied coverage to Newman’s counsel, that Scottsdale had

concluded that its policy did not cover Newman’s claim for bodily injury. This

knowledge raised the distinct prospect that National Union’s duty to defend was

triggered.

¶56 As acknowledged by National Union, an insurer has no obligation to look beyond

the complaint in determining whether a claim is covered by a policy. What National

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Union does not acknowledge is that once an insurer does look beyond a complaint, it may

not then ignore the information obtained. Revelation Indus. v. St. Paul Fire & Marine

Ins. Co., 2009 MT 123, ¶ 30, 350 Mont. 184, 206 P.3d 919. National Union’s knowledge

of Scottsdale’s position on coverage was not obtained through a review of Newman’s

Third Amended Complaint or the National Union policy but rather through

communication with Scottsdale. As such, National Union became privy to facts beyond

the allegations in Newman’s Complaint, triggering the prospect of a duty to defend

and/or indemnify based on the information discovered. Revelation Indus, ¶ 30.

¶57 As we explained in our Scottsdale analysis above, there must exist an unequivocal

demonstration that the claim against the insured does not fall within the policy coverage

before an insurer can refuse to defend; otherwise, the insurer has a duty to defend.

Staples, ¶ 24. If an insurer unjustifiably refuses to defend a claim, that insurer is

estopped from denying coverage. Staples, ¶¶ 27-28.

¶58 National Union’s contention that it was entitled to reject Newman’s request for a

defense based upon the absence of evidence of Scottsdale’s position on coverage is

disingenuous. Moreover, Scottsdale’s position on coverage could not supply an

“unequivocal demonstration” that the claim did not fall under National Union’s policy.

Against this backdrop, we examine the other arguments posited by National Union.

“Occurrence”

¶59 National Union argued to the District Court and to this Court on appeal that in

light of the fact that suicide is an intentional act, Newman’s claim does not constitute an

“occurrence”; therefore, the insurer was justified in denying coverage and refusing to

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defend. The definition of “occurrence” in the policy requires that there be an injury

“neither expected nor intended from the standpoint of the Insured.” The Insured is Teen

Help. Certainly, it did not expect or intend Karlye’s suicide; therefore, her suicide could

arguably constitute an “occurrence” as defined in the policy. Interposing Karlye’s intent

as determinative of the existence of an “occurrence” makes no sense under the contract

because she is not the Insured. We therefore reject National Union’s argument that it was

excused from defending Teen Help because Karlye’s suicide, being intentional, did not

fall within the definition of an “occurrence.”

¶60 National Union’s interpretation of the term “occurrence” in a manner that

precludes coverage does not supply an “unequivocal demonstration” that the claim is not

covered under National Union’s policy. National Union therefore was not justified in

refusing to defend its insured based upon this defense.

Professional Liability Exclusion

¶61 We need not repeat the legal analysis set forth above vis-à-vis Scottsdale’s

professional liability exclusion. It is sufficient to note that the same analysis applies to

National Union’s policy and argument. Additionally, National Union’s policy does not

define terms used in this exclusion, i.e., “arising out of,” “professional,” or “professional

nature.” As we noted above, without such definitions, the exclusion fails to alert the

insured as to what services are covered and what services are excluded, thereby rendering

it confusing and ambiguous. We construe this exclusion against National Union.

Wendell, ¶ 14.

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¶62 Furthermore, as we explained above, exclusions are contrary to the fundamental

purpose of an insurance policy. The mere existence of exclusions in the insurance policy,

even exclusions that are not construed against the insurer, do not establish an

“unequivocal demonstration” that the claim does not fall within the policy’s coverage.

Notification

¶63 Lastly, National Union argues that because Teen Help did not timely notify it of

the underlying law suit or tender a defense, it could not have breached its duty to defend.

¶64 As noted above, in February 2010, National Union denied coverage to Teen Help

based on its policy definitions and exclusions. In later seeking to dismiss Newman’s

claim in this case on February 7, 2011, it argued to the District Court that the definitions

and exceptions under the policy established it owed Teen Help no duty of defense or

indemnification. Subsequently, in March 2011, National Union first raised the argument

that Teen Help failed to timely provide it with notice of the claim and that it was

prejudiced by the failure. The insurer repeated this argument throughout the duration of

the District Court proceeding but the court was not persuaded.

¶65 On appeal, and relying upon Steadele v. Colony Ins. Co., 2011 MT 208, 361 Mont.

459, 260 P.3d 145, National Union argues that “Montana courts have long held that an

insured’s failure to comply with a notice condition in an insurance policy bars recovery

under the policy.” National Union maintains that the District Court erred by not

considering the prejudice suffered by National Union based upon Teen Help’s failure to

notify it of Newman’s claim.

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¶66 In Steadele, we concluded that the district court properly granted the insurer’s

motion for summary judgment based upon its complete lack of notice of the pendency of

any claim against its insured, until more than 60 days after a default judgment in the

approximate amount of $1.88 million had been entered in favor of Steadele and against

the insured. Steadele, ¶¶ 8, 23. When Steadele attempted to recover the judgment

amount from Colony, Colony argued that the lack of notice of the claim severely

prejudiced it. We observed that because of the lack of notice, Colony was completely

deprived of the ability to investigate, locate witnesses, appoint counsel or negotiate a

settlement and therefore suffered prejudice. Steadele, ¶ 28.

¶67 There are notable distinctions between Steadele and the case before us. For one

thing, National Union was apprised of the pendency of the claim before judgment rather

than after, and made the calculated decision to reject the claim on the basis of policy

coverage defenses. The most significant distinction, however, is that in Steadele, Colony

Insurance asserted from the inception that because the insured never notified it of the

litigation, it was deprived of the ability to investigate and assess the validity of the claim.

By contrast, upon learning of the litigation against its insured, National Union relied on

multiple policy defenses in initially denying coverage to Teen Help, and in later

responding to Newman’s complaint. Lack of notice was not raised as a basis for denying

coverage until over a year after National Union first refused to defend or indemnify its

insured.

¶68 Numerous jurisdictions have held that where an insurer denies liability on some

other policy or coverage ground, the insurer cannot thereafter rely on the insured’s failure

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to give reasonable notice as a ground for avoiding liability. In other words, the insurer

waives its right to argue “failure of notice” once it has denied coverage on other grounds.

¶69 In Travelers Ins. Co. v. Peerless Ins. Co., 287 F.2d 742, 747 (9th Cir. 1961)

(applying Oregon law), the Ninth Circuit Court of Appeals held that if an insurer denies

liability to the insured on grounds other than those relating to defects in the notice,

compliance with the requirements as to notice will be deemed waived. See also Coulter

v. American Employers’ Ins. Co., 78 N.E.2d 131, 136 (Ill. App. 1948) (“It is a

well-settled rule that when one party to a contract refuses to perform and bases its refusal

on one ground it waived all other grounds, or is estopped when suit is brought, from

setting up other grounds for its refusal.”); Travelers Ins. Co. v. Reed Co., 135 S.W.2d 611

(Tex. Civ. App., 1939) (By denying liability on the ground that claimant’s petition

against insured contained “no allegation of bodily injury accidentally sustained,”

Traveler’s waived its later argument that it did not receive due notice of the suit.); and

Great Am. Ins. Co. v. General Ins. Co., 475 P.2d 415, 419 (Or. 1970) (Holding that the

rule that defects in notice are waived by a denial of liability on other grounds is

“fundamental, and scarcely needs to be supported by the citation of authorities.”).

Applying these authorities to the case before us, we conclude that by denying liability on

other grounds for over a year after notice of the claim, National Union waived its right to

now rely on defects in notice.

¶70 National Union argues that the lack of timely notice of the pendency of the

complaint against Teen Help prejudiced its opportunity to investigate the claim, retain

counsel, develop a trial strategy, and engage in discovery and perhaps settlement. We

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reject this argument for two reasons. First, we note that in the cases cited immediately

above, prejudice was simply not addressed. This makes sense because, logically, once

one waives the right to invoke an argument, the various components of that waived

argument—including as here, prejudice resulting from lack of notice—are simply not

relevant. Second, even if we were to consider the prejudice argument, it is belied by the

fact that National Union made a conscious decision to deny coverage and a defense from

the outset, based upon its asserted policy exclusions and defenses. It did not ever seek to

retain counsel, investigate the claim, or develop a trial or settlement strategy. Thus, not

only is the prejudice argument irrelevant in the face of waiver, it is wholly unsupported in

the record.

¶71 For the foregoing reasons, we conclude that National Union has waived its right to

now claim that lack of timely notice by the insured is fatal to this case. Further, we

conclude that the insurer failed in the District Court and fails here to “unequivocally

demonstrate” that Newman’s claims against Teen Help did not fall within the policy

coverage. Because coverage of Newman’s claims was arguably available under the

National Union policy, it had a duty to defend. It could have attended the mediation in

defense of Teen Help, and either negotiated a settlement or insisted upon taking the case

to trial. In the meantime, it could have sought a declaratory judgment that it had no duty

of indemnification under the policy. Staples, ¶¶ 26, 28; Mt. W. Farm Bureau Mut. Ins.

Co. v. Brewer, 2003 MT 98, ¶ 30, 315 Mont. 231, 69 P.3d 652. It did none of these

things. Pursuant to the foregoing authorities, we therefore conclude the District Court did

29
not err in denying National Union’s motion to dismiss and granting Newman’s motion

for summary judgment against National Union for its refusal to defend Teen Help.

¶72 Did the District Court err in calculating and awarding attorney’s fees to
Newman?

¶73 In addition to entering judgment against the insurers for $3,000,000, the District

Court also awarded Newman $1,188,399.45 in attorney’s fees, over and above the

$3 million judgment. The court explained that established case law allows an insured the

right to recover attorney’s fees in the event an insurer breaches its duty to defend. See

e.g. Brewer, ¶ 14. The amount awarded was based upon the $3,000,000 judgment

awarded in Newman I and the one-third contingency fee arrangement Newman and her

attorneys had agreed upon in Newman I. In reaching the fee award, the court considered

the eight factors set forth in Stimac v. State, 248 Mont. 412, 417, 812 P.2d 1246, 1249

(1991), which courts have used “when assessing whether to award the full amount of the

contingent-fee agreement as a reasonable attorney’s fee . . . .” In Stimac, the plaintiffs

had a contingency fee agreement with their counsel, who pursued and recovered on their

behalf contested wages from the defendant. The wage recovery statute at issue provided

that employees who recovered wages were entitled to the recovery of reasonable

attorney’s fees. Section 39-3-214, MCA.

¶74 Scottsdale argues that awarding Newman attorney’s fees in Newman II for work

performed in Newman I and based upon the contingency fee agreement entered in

Newman I was error. Scottsdale acknowledges that Newman, as assignee, stands in the

shoes of first-party insured Teen Help and therefore is entitled to the same fees to which

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Teen Help would be entitled had Teen Help sued Scottsdale. In other words, Scottsdale

maintains that as a first-party assignee, Newman should be allowed to recover only those

fees to which Teen Help would be entitled had it directly sued the insurers for declaratory

relief. The insurer urges us to reverse the District Court’s ruling vis-à-vis attorney’s fees

and remand with instructions to the court to recalculate reasonable first-party fees

associated with legal representation in Newman II.

¶75 Newman counters that she has a right to attorney’s fees and that her contingency

contract with her attorney is the operative contract upon which to base the amount of

fees. She asserts that the method used to calculate attorney’s fees is within the District

Court’s discretion and that the court correctly exercised its discretion by holding an

evidentiary hearing, taking expert testimony, and applying the factors set forth in Stimac.

¶76 It is undisputed that Newman, as Teen Help’s assignee, should be allowed to

recover fees for services rendered by counsel in enforcing the insurance contract, just as

first-party insured Teen Help would have been able to do had it instituted the contract and

declaratory action against Scottsdale. As we noted in Skauge v. Mountain States Tel. &

Tel. Co., 172 Mont. 521, 526, 565 P.2d 628, 631 (1977), “[w]hen there is an assignment

of an entire claim there is a complete divestment of all rights from the assignor and a

vesting of those same rights in the assignee.” As such, the District Court correctly

concluded that Newman was entitled to reasonable attorney’s fees for her declaratory

judgment action.

¶77 Where the District Court erred, and as a result abused its discretion, was when it

based the amount of the fee award on Newman’s contingency agreement executed in

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Newman I, and did so in reliance on Stimac. While it is clear that Newman incurred legal

fees under the contingency fee contract with counsel in Newman I, Newman I was a

separate tort action and the fee arrangement in that case does not transfer to this case.

Again, as Newman stepped into Teen Help’s shoes by virtue of the assignment, Newman

assumes Teen Help’s rights and nothing more. Skauge, 172 Mont. at 526, 565 P.2d at

631.

¶78 Because Teen Help as assignor had no contingency fee agreement to impose in the

declaratory action, it follows that Newman as assignee cannot impose a contingency fee

agreement in the declaratory action. Stimac is inapposite, as it analyzed the application

of a fee agreement entered for the express purpose of representation in the case before the

court, unlike the case here. Thus, it was error for the District Court to import the tort

action contingency fee agreement between Newman and her lawyers, into the declaratory

action in which Newman was acting as assignee of Teen Help’s rights.

¶79 The foregoing analysis is buttressed by Newman’s arguments on appeal. Newman

argued in her brief on appeal that the District Court based its fee award on the services

provided by her attorneys in the declaratory action, i.e., Newman II, and not the work

performed for Newman I. She stated:

The testimony at the evidentiary hearing was directed to the
attorneys’ work in the present declaratory judgment and breach of contract
case. [Newman I] was only discussed as an example of why contingency
fee agreements are reasonable and necessary in litigation.

. . .

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 Work performed in [Newman I] was not presented at the evidentiary
hearing as basis for the fee award in the present action. The District Court
clearly understood that point.

¶80 Because the District Court was tasked with determining a fee award based

exclusively on services performed in Newman II, it should not have considered

Newman’s contingency arrangement in Newman I or the factors set forth in Stimac. We

therefore reverse the amount of the attorney’s fees awarded by the District Court and

remand for a calculation of reasonable attorney’s fees based upon what Newman, as Teen

Help’s assignee, would have been able to recover for her attorney’s time and expenses

incurred in pursuing insurance coverage from the defendants. As we held in Pinski Bros.,

160 Mont. at 228, 500 P.2d at 950, the seminal decision addressing the recovery of

attorney’s fees in an action between an insurer and insured, “the wrongful acts of the

insurer . . . and its refusal to defend this action . . . constituted [a] breach[] of its

obligation and duty rendering the insurer liable for damages by way of attorney’s fees,

expenses, and court costs occasioned thereby.” See e.g. Lindsay Drilling v. U.S. Fidelity

& Guar., 208 Mont. 91, 97, 676 P.2d 203, 206 (1984); Truck Ins. Exch. v. Woldstad, 212

Mont. 418, 423, 687 P.2d 1022, 1025 (1984); Goodover v. Lindey’s Inc., 255 Mont. 430,

448, 843 P.2d 765, 776 (1992).

¶81 Did the District Court err in finding that Montana law controls?

¶82 The District Court concluded, without analysis, that Montana law controlled the

declaratory action. Urging this Court to apply the “most significant relationship” test set

forth in Tucker, ¶ 41, Scottsdale argues that the insurance policy was issued in Utah, to

residents of Utah, covering property in Utah; therefore, Utah law controls.

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¶83 Newman responds that, in this case, there is no material difference between Utah

and Montana’s principles of insurance contract interpretation; consequently, application

of Montana law should be upheld. Modroo v. Nationwide Mut. Fire. Ins. Co., 2008 MT

275, ¶ 23, 345 Mont. 262, 191 P.3d 389. Newman also argues that throughout the

District Court proceeding Scottsdale conceded that applicable Montana law was

consistent with Utah law, and that the District Court relied on Scottsdale’s concession on

this point. Newman asserts Scottsdale may not now challenge the correctness of the

District Court’s determination.

¶84 The record supports Newman’s argument. We have repeatedly held that we will

not put a district court in error for an action in which the appealing party acquiesced.

Horn v. Bull River Country Store Props., 2012 MT 245, ¶ 34, 366 Mont. 491, 288 P.3d

218. Moreover, we do not address a party’s change in legal theory on appeal nor do we

render a district court’s decision incorrect when it was not given an opportunity to correct

itself. Day v. Payne, 280 Mont. 273, 276-77, 929 P.2d 864, 866 (1996); State v. Weeks,

270 Mont. 63, 85, 891 P.2d 477, 490 (1995).

CONCLUSION

¶85 For the foregoing reasons, we affirm the District Court’s order of summary

judgment as it pertains to Scottsdale and National Union, its award of interest on the

underlying judgment, and its application of Montana law. We reverse the court’s ruling

on attorney’s fees and remand with instruction to recalculate reasonable attorney’s fees

based upon the legal services provided in Newman II.

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 /S/ PATRICIA COTTER

We Concur:

/S/ MIKE McGRATH
/S/ JIM RICE
/S/ BETH BAKER
/S/ BRIAN MORRIS

Justice Michael E Wheat dissents.

¶86 I concur with the majority opinion in all respects except the issue related to

attorney fees, and in that respect I dissent from the Court’s reversal of the District Court’s

ruling on attorney’s fees. The method of calculation of attorney’s fees is in the discretion

of the court, Tacke v. Energy West Inc., 2010 MT 39, ¶ 38, 355 Mont. 243, 227 P.3d 601,

and here the court found that the contingency fee was the proper measure based on the

amount Newman would have to compensate her attorneys, the complexity of the case, the

risk of no recovery, and the understanding that the underlying judgment presumed the

present suit. Moreover, § 25-10-301, MCA, allows the measure of attorney’s fees to be

left to either express or implied agreement, and in the absence of an agreement covering

the present case, it appears that the court implied a contingency agreement at the 1/3 rate

used by the parties in the underlying case.

¶87 The court held an evidentiary hearing on fees and determined that a contingency

basis was the proper measure of attorney’s fees based on the testimony provided and the

nature of the case. Because of the deferential standard of review and the assignment of

35
rights, I do not think that the court clearly abused its discretion by applying the same

contingency basis that Newman and her attorneys used in the underlying action.

¶88 For these reasons, I would affirm the District Court’s ruling on attorney’s fees. I

respectfully dissent from the majority’s failure to do so.

/S/ MICHAEL E WHEAT

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