TO
J. 33-79
IN T I SUPREP'IE COURT OF THE STATE OF MONTANA
IE
1983
LINDSAY DRILLING & CONTRACTING,
a Mont. corp., WESLEY LINDSAY
and TERRY LINDSAY,
Plaintiffs and Appellants,
UNITED STATES FIDELITY & GUARANTY
CO.,
Defendant and Respondent.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis & Clark,
The Honorable Gordon R. Bennett, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Keller, Reynolds, Drake, Sternhagen & Johnson;
P. Keith Keller argued, Helena, Kontana
For Respondent:
Gough, Shanahan, Johnson & Waterman; Alan L.
Joscelyn argued, Helena, nlontana
-
Submitted: December 8, 1983
Decided: January 31, 1984
Filed: bid ' q$+
.,.- --
Clerk
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.
The District Court of the First Judicial District, Lewis
and Clark County, issued a declaratory judgment holding that
United States Fidelity and Guaranty Company (USF&G) has no
obligation to defend Lindsay Drilling and Contracting
(Lindsay) in a counterclaim action filed against Lindsay by
the Seiler Partnership and Jeannie S. Mine Company. Lindsay
appeals. We reverse the judgment of the District Court.
The Seiler Partnership and Jeannie S. Mine Company
retained Linsday in 1979 and 1980 to drill test holes on
placer claims near Boulder, Montana. The economic
feasibility of mining in that area was then determined by
hand washing a core sample from each test hole to determine
the amount of gold present, compared to other soil
components.
The claim owners failed to pay Lindsay for its drilling
services, causing Lindsay to foreclose on a mechanic's lien.
The partnership and mine company thereafter filed a
counterclaim against Lindsay on June 29, 1981, alleging that:
"[Lindsay's] employees, agents or bv-standers whom
[Lindsay] allowed to be present during core
drilling and testing, fraudulently and deliberately
introduced small quantities of gold into the core
samples, or otherwise by means unknown . . .
altered the test results so as to make it appear
that the mining properties contained more minerals
than in fact existed . . .
As a direct and
proximate result, Defendants Seiler and Jeannie
suffered economic losses exceeding two million
dollars.
"3. That the economic losses suffered by Defendant
Jeannie were a direct result of misrepresentations
made by [Lindsay], and [Lindsay's] negligence in
allowing one or more individuals to interfere with
core drilling and testing which resulted in the
alteration of the test results and data, to the
economic detriment of Seiler and Jeannie."
USF&G insured Lindsay Drilling & Contracting and its
full-time employees. Therefore, Lindsay tendered defense of
the counterclaim to USF&G, which refused to accept on the
ground that the allegations of the counterclaim were not
covered by its insurance policy.
On October 21, 1981, Lindsay filed a complaint, pursuant
to the Uniform Declaratory Judgment Act, sections 27-8-101,
et seq., MCA, to determine the rights, duties and liabilities
of the parties under the insurance contract. The
declaratory judgment concluding that "the damages alleged in
the counterclaim do not fall within those risks contemplated
and insured by [USF&Gfs]policy," was then issued January 25,
1983. We view the District Court's interpretation of the
insurance policy as too restrictive.
The factual circumstances present essentially two
issues: (1) whether the insurance policy obligates USF&G to
defend Lindsay, the insured, in the counterclaim action; and
(2) whether the policy issued by USF&G provides coverage for
a resulting judgment in the counterclaim action against
Lindsay.
The second issue depends upon whether operations were
being performed by or on behalf of the insured at the time of
the injury as is hereafter discussed. This must await
determination by the jury. Therefore, we confine our holding
to the question of "obligation to defend."
A duty to defend exists if the counterclaim sets forth
facts which represent a risk covered by the terms of the
insurance policy. Atcheson v. Safeco Insurance Co. (1974),
165 Mont. 239, 245-46, 527 P.2d 549, 552. The contract's
major coverage provision and its pertinent definitions state:
"The Company will pay on behalf of the Insured all
sums which the Insured shall become legally
obligated to pay as damages because of
A. bodily injury or
B. property damage
to which this insurance applies, caused by an
occurrence, and the Company shall have the right
and duty to defend any suit against the Insured
seeking damages on account of such bodily injury or
property damage . . ..
"'occurrence' means an accident, including
continuous or repeated exposure to conditions,
which results in bodily injury or property damage
neither expected nor intended from the standpoint
of the Insured.
"'property damage' means:
"(1) physical injury to or destruction of tangible
property which occurs during the policy period,
including the loss of use thereof at any time
resulting therefrom, or
"(2) loss of use of tangible property which has
not been physically injured or destroyed provided
such loss of use is caused by an occurrence during
the policy period." (emphasis supplied)
The counterclaim alleges that Lindsay, either
intentionally or negligently, permitted someone to tamper
with the core samples, "or otherwise by means unknown . . ."
altered the test results, and that the claim owners
thereafter incurred losses in their investments as a result
of relying on the altered core samples. The policy covers
this set of alleged facts.
A covered occurrence, as defined in the policy, is one
whose consequences were neither expected nor intended by the
insured. In Northwestern National Casualty Co. v. Phalen
(1979), 182 Mont. 448, 597 P.2d 720, we held that an
insurance policy with the same definition of "occurrence"
covered an intentional act whose consequences were neither
expected nor intended. Here, the counterclaim alleges in
part that Lindsay negligently allowed bystanders to tamper
with the core samples. This scenario does not include
intended or expected consequences. Therefore the
counterclaim sets forth a covered "occurrence" as defined in
the policy, if bodily injury or property damage resulted.
The policy requires physical injury to tangible
property. Whether property is tangible or intangible
depends upon its nature and characteristics. State Board of
Equalization v. Fall (1948), 121 Mont. 280, 192 P.2d 532.
The core samples are tangible property because they are
perceptible and material. H.D. & J.K. Crosswell, Inc. v.
Jones (D.C.S.C.) (1931), 52 F.2d 880, 883.
The District Court felt that the only loss was data or
information and as such was intangible. However, there was
the direct loss of the core sample itself which certainly had
some value. The drilling expense and other inherent
production costs establish an intrinsic value in the tangible
core sample. Thus there was tangible loss.
The term injury does not necessarily contemplate harm.
Restatement of Torts 2d $7, Comment a. Rather, it can be a
physical change or alteration which is either beneficial,
detrimental or of no consequence. Restatement of Torts 2d,
$7, Comment b.
The facts set forth in the counterclaim allege that the
core samples have been physically injured. They were
physically and materially altered when they were salted with
gold. That alteration resulted in a detriment to the
partnership and mining company. The facts set forth in the
counterclaim allege "property damage" as defined in the
insurance policy and the occurrence is covered by the policy.
USF&G asserts that two of the policy's exclusions apply
and relieve the company from its defense obligation. We
disagree. The first exclusion states:
"This insurance does not apply:
* * *
"(n) to property damage to the Named Insured's
products arising out of such products or any part
of such products;"
The alleged damage to the core samples was clearly not caused
by the core samples themselves. Rather, the counterclaim
alleges that the damage was caused by either intentional or
negligent acts of Lindsay. Such acts are not covered by
exclusion (n) .
The second claimed exclusion is a broad form property
damage coverage provision which replaces the typical care,
custody and control coverage found in insurance policies. It
states in relevant part:
"This insurance does not apply:
" (w) to property damage ...
"(2) (d) to that particular part of any property,
not on premises owned by or rented to the Insured,
"(i) upon which operations are being performed by
or on behalf of the Insured at the time of the
property damage arising out of such operations, or
... I1
We interpret this language to exclude from coverage,
damage caused by Lindsay or employees during operations.
However, if the samples were salted by third parties who had
access to samples only because of Lindsay's negligence, then
the exclusion would not apply. Since the counterclaim has
alternative allegations there is still an obligation to
defend though there may not be coverage if the jury finds
Lindsay or Lindsay's employees contaminated the samples
during operations.
Finally, we find USF&G liable to Lindsay for its
attorneys fees and expenses incurred in the instant case. It
was USF&G1s wrongful refusal to defend Lindsay which led to
this action. Therefore, the insurer is liable for reasonable
attorney fees, expenses and court costs occasioned thereby.
Home Insurance Co. v. Pinski Brothers (1972), 160 Mont. 219,
500 P.2d 945.
We vacate the declaratory judgment issued against
Lindsay and remand this case to the District Court of the
First Judicial District for entry of a declaratory judgment
ordering USF&G to defend Lindsay in the suit brought against
it by the Seiler Partnership and Jeannie S. Mine Company.
The District Court shall also determine the reasonable
attorney fees, expenses and court costs of Lindsay in
bringing this action and order USF&G to pay the same.
We concur:
DAA~~.&&LCLP~
Chief Justice
Justices
Mr. Justices John C Sheehy, L. C. Gulbrandson and Fred J. Weber
.
dissent and will file written dissents later.