No. 88-200
I N THE SUPREME COURT OF THE S T A T E O F MONTANA
DANIEL S . BURNS,
P l a i n t i f f and A p p e l l a n t ,
-vs-
UNDERWRITERS A D J U S T I N G COMPANY,
an I l l i n o i s c o r p o r a t i o n , and
C O N T I N E N T A L INSURANCE COMPANY,
a New H a m p s h i r e corporation,
D e f e n d a n t s and R e s p o n d e n t s .
A P P E A L FROM: D i s t r i c t C o u r t of t h e T h i r t e e n t h J u d i c i a l D i s t r i c t ,
I n and f o r t h e C o u n t y of Y e l l o w s t o n e ,
T h e H o n o r a b l e R o b e r t H o l m s t r o m , Judge p r e s i d i n g .
COUNSEL O F RECORD:
For A p p e l l a n t :
C a l v i n J. Stacey; K e e f e r , R o y b a l , H a n s o n & Stacey,
B i l l i n g s , Montana
For R e s p o n d e n t :
i-
tg H e r b e r t I . P i e r c e , 111; C r o w l e y , H a u g h e y , Hanson,
Toole & Dietrich, B i l l i n g s , Montana
.
L
S u b m i t t e d on B r i e f s : Aug. 4, 1988
Decided: November 17, 1988
Filed: 03
Mr. Justice R. C. McDonough delivered the Opinion of the
Court.
Appellant Burns appeals from the order of the District
Court of the Thirteenth Judicial District granting summary
judgment to respondents Underwriters Adjusting Company and
Continental Insurance Company (Underwriters and Continental).
We affirm.
The issue is whether Underwriters and Continental may be
sued for counts based on their failure to defend their
insured, Troy Zeiler. Burns sued Zeiler alleging that ~ e i l e r
negligently struck Burns. Underwriters and Continental
refused to defend the suit because their investigation
revealed that the policy excluded coverage for the injury
inflicted on Burns by Zeiler.
The facts revealed to Underwriters and Contintental
prior to the suit against Zeiler were recorded by the loh7er
court as follows:
That on or about June 24, 1985, the Defendants
received notice of the Burns claim and undertook an
investigation, including obtaining a recorded
statement from the insured, Troy Zeiler, which led
the adjuster to believe that the actions of Troy
Zeiler were not in self-defense but were
intentional; on December 4, 1985, Underwriters
Adjusting Company sent a Reservation of Rights
letter to Zeiler advising him that serious
questions existed as to the coverage; on January
13, 1986, Underwriters Adjusting Company learned
that the insured, Troy Zeiler, pled guilty to
felony aggravated assault criminal charge, arising
out of the same incident; that his sentence was
deferred for six years conditioned upon his paying
$5,554.00 for the victim's medical expenses; on
February 4 and February 11, additional Reservation
of Rights letters were sent to the insured advising
that there was no coverage for the acts of the
insured; ...
Facts in the record also reveal that prior to the filing of
the cause at issue here, Underwriters and Consolidated
informed Burns's attorney that no coverage existed. Burns
filed the claim for Zeiler's "negligence" on March 12, 1986.
Zeiler did not defend the suit, and the District Court
entered judgment for Burns. Zeiler then assigned his claims
against Underwriters and Continental to Burns, and Burns, now
assuming Zieler's rights as an insured, initiated the law
suit at issue. The policy covering Zeiler excluded from
coverage :
bodily injury or property damage that _is expected
or intended by a Covered Person except for bodily
injury or property damage that results from the
reasonable use of force to protect people or
property.
The facts showed that Zeiler intentionally struck Burns, and
that Zeiler could not claim self defense.
The District Court concluded that Underwriters and
Consolidated had no duty to defend or indemnify Zeiler. To
support its decision, the lower court cited Mutual Service
Casualty Ins. Co. v. McGehee (Mont. 1985), 711 P.2d 826, 42
St.Rep. 2038 (no duty to indemnify under similar facts and
almost identical policy language), and United States Fidelity
& Guaranty Co. v. Rae (Mont. 1984), 688 P.2d 1246, 41 St.Rep.
1857 (if insurer has no duty to indemnify the insured, there
is no duty to defend). We agree with the District Court that
no material facts exist as to the duty to indemnify. The
undisputed facts undeniably show that Zeiler intentionally
struck Burns without justification. We also agree with the
lower court that McGehee controls and mandates the conclusion
that there was no duty to defend.
Burns argues, however, that the lower court should have
applied Northwestern National Casualty Company v. Phalen
(1979), 182 Mont. 448, 597 P.2d 720, and similar cases
holding that where the pleadings allege a cause which fits
within policy coverage, a duty to defend arises. In
particular, Burns argues that because his complaint alleges
negligence, and because the policy covers negligence,
Underwriters and Continental had a duty to defend. We
disagree.
We hold here that Phalen does not cover every factual
situation arising from an insurance company's alleged failure
to defend. As argued by respondents, the proper focus of
inquiry is the acts giving rise to coverage, not the language
of the complaint. See 14 G. Couch, Couch on Insurance 2d S
51:50 (rev. ed. 1982). The cases relied on by Burns are
distinguishable from the present case in that the facts
supporting the allegations in the pleadings arguably gave
rise to coverage. See, e.g., Phalen, 597 P.2d at 726. The
facts established in this case clearly showed that the policy
excluded coverage for the injury suffered by Burns. Thus,
- controls over Phalen because Burns has been unable to
Rae
come forward with facts demonstrating that coverage arguably
existed. - 688 P.2d at 1251.
Rae,
In regard to Burns's argument that the duty to defend
was established prior to the initiation of this action, this
Court takes the opportunity to make the following
observation. Rule 11, M.R.Civ.P., requires that pleadings
meet the following requirements: they must be formed after
reasonable inquiry; they must be warranted by existing law or
a good faith argument for an extension, modification, or
reversal of existing law; and they must not be interposed for
any improper purpose. The rule that insurers may be required
to defend suits based on allegations in pleadings must be
read with the requirements of Rule 11. As stated by the
Supreme Court of Minnesota in a similar duty to defend suit:
To hold otherwise is to invite undercover deals,
lack of candor, and manipulation of the tort
pleadings as a device for involving an insurer who
could not otherwise be involved.
F. & M. State Bank v . St. Paul Fire & Marine (Minn. 1 9 7 6 1 ,
2 4 2 N.W.2d 8 4 0 , 8 4 4 n. 7 . We refuse to find the creation of
the duty on the basis of the pleadings made in this case.
Affirmed .
Justice
-
We Concur:
Justices
Mr. Justice John C. Sheehy, dissenting:
In a properly pleaded case, a trial court could have
concluded that under the facts, the injuries inflicted by
Zeiler against Burns were intentional and that therefore the
policy of insurance under which Zeiler was covered did not.
apply, because it did not cover intentional acts. The
difficulty with that concept in this case is that the
insurer, when Zeiler was sued by Rurns, unilaterally decided
that it did not have to defend Zeiler. The insurance company
made that decision in the face of the fact that the action
against Zeiler alleged that Zeiler had negligently inflicted
injuries upon Rurns. Zeiler made demand upon the insurer to
defend him in the action brought by Burns, and the insurer
refused to tender a defense. The result was that a default
judgment was entered against Zeiler on grounds that he had
negligently inflicted personal injuries upon Rurns.
Negligent injuries caused by Zeiler are covered under the
policy.
The duty of an insurance company to defend its insured
is determined by the allegations of the complaint and. the
language of the insurance policy. We said in Atcheson v.
Safeco Insurance Co. (1974), 165 Mont. 239, 527 P.26 549,
It is to the allegations of the Alaskan complaint
that we look to determine whether or not there is a
duty to defend. The appellant has a duty to defend
where the complaint sets forth facts which are a
part of the covered risk. The rule on the duty to
defend is set forth in 50 A.L.R..2d 506-7:
"Where a complaint alleges facts which represent a
risk outside the coverage of the policy but also
avers facts which, if proved, represent a risk
covered, the insurer is under a duty to defend
. . . 11
In McAlear v. St. Paul Ins. Cos. (1972), 158 Mont. 452,
493 P.2d 331, we held again that the allegations - -
of the
complaint determined whether the insurer is required to
defend the action brought against the insured. In McAlear,
however, the policy excluded from coverage injury to or
destruction of tangible property, and the complaint in
McAlear's case alleged injury to personal property which was
outside the coverage. Because the allegations of the
complaint were not sufficient to bring the complaint within
the insurance coverage, we agreed that the insurer had no
duty to defend. That case, however, should not be stretched,
nor those following it, to indicate that an insurer may make
a unilateral decision not to defend when the allegations of
the complaint against the insured, taken as a whole, are
fully within the coverage provided by the insurer.
When a complaint filed against a putative insured
contains allegations which, if sustained, would be within the
coverage, even though the company may have extrinsic evidence
that such is not the case, it does not have the right to
refuse to defend the putative insured at that point. Its
duty is to act as set forth in Aetna Casualty and Surety
Company v. Coronet Insurance Company (Ill. App. 19761, 358
.. . As shown by these cases, in Illinois, the
insurer is obligated to defend an action brought
against a putative insured where the complaint in
that action sets forth a situation which would
potentially be covered by the policy. Unless the
complaint alleges facts which, if true, would
exclude coverage, the potentiality of coverage is
present and the insurer has a duty to defend.
Underlying this rule is the principle that the duty
to defend is broader than the duty to pay. If in a
case there is a potential coverage but the insurer
believes that the insurer has a valid exclusionary
coverage defense then the insurer must:
(1) secure a declaratory judgment of its rights
while defending the potential insured under a
reservat.ion of rights, or (2) defend the potential
insured under a reservation of rights and
adjudicate its coverage in a supplemental suit.
(Citing authority.) In such a case, where the
insurer fails to take either course of action, its
failure to defend is unjustified and in a
subsequent action by the insured against the
-
insurer, it will estopped from raising
exclusionar~ defenses. (Emphasis added. )
Our prior case of Mutual Service Cas. Ins. Co. v.
McGehee (Mont. 1985), 711 P.2d 826, 42 St.Rep. 2038, is not.
applicable in this case. Mutual Service Casualty had at
least taken the proper steps of seeking a declaratory
judgment as to its duty to defend. Here, Underwriters
Adjusting Company and Continental Insurance Company took nc
such steps. The result is that this Court is in the
anomalous position of holding that the insurer had no duty to
defend, when a default judgment has been entered against its
putative insured, based on negligence.
In U.S. Fidelity and Guaranty Co. v. Rae Volunteer Fire
Company (Mont. 1984), 688 P.2d 1246, 41 St.Rep. 1857, the
insurer also properly proceeded by seeking a declaratory
judgment as to its obligations under the liability insurance
policy it had issued.
In like manner, in Reliance Ins. Co. v. Fisher and
Poeppel (1974), 164 Mont. 278, 521 P.2d 193, the insurer
brought a declaratory judgment action, where it was held that
if the insurer would have no obligation to indemnify the
insured then it had no contractual obligation to afford a
defense.
The point of these cases is that an insurer, if it has a
valid exclusionary defense based on its policy provisions,
but the allegations of the complaint against its putative
insured incl ude potentiai liabili ty , the insurer, to protect
itself, must proceed to seek a declaratory judgment or
otherwise begin a supplemental suit to determine the issue of
coverage before judgment is entered against its putative
insured, and to proceed under reservation of rights.
Our holding in Northwestern National Casualty Co. v.
Phalen (1979), 182 Mont. 448, 597 P.2d 720, is entirely
outside the issues involved in this case. In Phalen, the
insurer properly brought a declaratory judgment to determine
whether it owed the defendant coverage under its policy of
insurance. The holding in Phalen was that there was a
substantial issue as to the intention of the insured at the
time of the incident involved, and until that was determined
as a matter of fact, the insurer had a duty to not only
defend the action, but to cover the liability if the trier of
the fact brought the incident within the policy coverage.
That is not the situation facing us in this case. Here the
insurer did nothing, although demand was made upon it to
defend its insured in an action where the complaint stated
facts potentially within coverage. The decision of the
majority in this case takes Montana out of the mainstream of
American decisions on this point, that where the complaint
alleges facts potentially within the coverage, the duty of
the insured is to defend, and that if it feels its policy
does not apply, it must bring a separate or supplemental
action to determine the issue of coverage.
As to the veiled threat of imposing sanctions under Rule
11 against the plaintiff's attorney in this case, that is
unnecessary and entirely uncalled for. The plaintiff's
attorney was entitled to rely on the commonly accepted rule
of law that the failure of the liability insurer to defend a
suit against his insured would estop it from asserting any
defense as to payment based on noncoverage. It was said in
Sims v. Illinois National Casualty Co. (111. App. 1963), 193
"An insurer's duty to defend an action against the
insured is measured, in the first instance, by the
allegations in the plaintiff's pleadings, and if
such pleadings state facts bringing the injury
within the coverage of the policy, the insurer must
defend, irrespective of the insured's ultimate
liability to the plaintiff."
Thus, according to the foregoing, the generally
recognized doctrine is that the insurer is under a
duty to defend the suit against an insured where
the petition or complaint in such suit alleges a
state of facts within the coverage of the policy.
And while there is some conflict of authority, the
majority of decisions of the courts which have
passed on the question adhere to the general rule
even though the insurer's investigation discloses a
conflict between the allegations of the complaint
and the actual facts as known to or ascertainable
by the insurer.
Again, on page 129:
Thus, while the statement of the general rule in
Am.Jur.2nd Automobile Insurance Sec. 167, supra,
and the language of the court in the Rom case may
at first blush appear to be confusing, what is
really meant is that the insurer has no right to
insist that the insured be bound by the provisions
of the insurance contract inuring to its benefit,
i.e., the "Exclusions" provisions, when it has
already breached the contract by violating the
provision inuring to the benefit of the insured,
i.e., the defense provisions. In this sense, it
may properly be said to be estopped.
Under the complaint against Zeiler, the insurer had a
clear duty to defend Zeiler in the case. If it had an
exclusionary defense, it had a further clear duty to proceed
either under a reservation of rights or to seek a declaratory
judgment or a supplemental decision that no insurance
coverage was involved. This, Underwriters failed completely
to do. It made the decision, instead of a court, as to
whether its policy applied. In that situation, it is
collaterally estopped.
The reference of the majority to Rule 11, and its
application in cases where the insurer has a duty to defend,
is particularly inappropriate. The proper place, in fact
the only place, for a determination of a Rule 11 sanction is
in the original action where it is contended that the
attorney violated Rule 11. In this case, the proper place
for application of Rule 11 was in the original action, t.he
action in which the insurer deigned not to appear. Moreover,
the remedy for a violation under which Rule 11 is applicable
is an order to pay to the other party or parties the amount
of the reasonable expenses incurred because of the filing of
the pleading, including a reasonable attorney fee. Takinq
away a party's cause of action is not a remedy contemplated
by Rule 11. The resort of the majority to Rule 11 in this
case so as to justify a result contrary to all the decided
cases shows little understanding of how and when Rule 11 is
to be applied.
~-~9.1,
Justice
IL, ' I
Mr. Justice William E. Hunt, Sr.:
I concur in the dissent of Mr. Justice Sheehy.