Herron v. Schutz Foss Architects

96-308

No. 96-308

IN THE SUPREME COURT OF THE STATE OF MONTANA

1997

DAVID HERRON and VIVIENNE
HERRON,

Plaintiffs and Appellants,

v.

SCHUTZ FOSS ARCHITECTS,
JERRY SCHUTZ, and CONTINENTAL
CASUALTY COMPANY,

Defendants and Respondents.

APPEAL FROM: District Court of the Twelfth Judicial District,
In and for the County of Liberty,
The Honorable John Warner, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

William D. Jacobsen, Thompson & Jacobsen, Great
Falls, Montana; Channing J. Hartelius, Hartelius,
Ferguson, Baker & Kazda, Great Falls, Montana

For Respondents:

Guy W. Rogers, Tiffany B. Lonnevik, Brown, Gerbase,
Cebull, Fulton, Harman & Ross, Billings, Montana
(Continental Casualty Company); Paul D. Miller,
Holland & Hart, Billings, Montana (Schutz Foss
Architects and Jerry Schutz)

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Submitted on Briefs: October 24, 1996

Decided: March 25, 1997
Filed:

__________________________________________
Clerk

Justice James C. Nelson delivered the Opinion of the Court.

This is an action for declaratory judgment on issues
concerning the limits of liability coverage available under a
claims-made insurance policy. The District Court for the Twelfth
Judicial District, Liberty County, entered Summary Judgment in
favor of the insurer, Continental Casualty Company (Continental),
and against the plaintiffs, David and Vivienne Herron (the
Herrons). The Herrons appeal. We affirm.
We address the following issues on appeal:
1. Did the District Court err in granting Continental's
Motion for Summary Judgment on the issue of which policy applies to
the Herrons' claims?
2. Did the District Court err in granting Continental's
Motion for Summary Judgment on the issue of the general limits of
liability applicable to the Herrons' claims?
3. Did the District Court err in granting Continental's
Motion for Summary Judgment on the issue of the specific limits of
liability applicable to the Herrons' claims?
Factual and Procedural Background
During 1990 and 1991, Jerry Schutz and Schutz-Foss Architects
(Schutz) designed an addition to and were remodeling the Liberty
County Hospital and Nursing Home (the Hospital) in Chester,
Montana. David Herron was the maintenance supervisor at the
Hospital. On October 30, 1991, Herron was performing a maintenance
check on the roof of the Hospital when he slipped on some ice and
fell, injuring himself.
On January 22, 1992, Herron wrote Schutz to express his
concerns about the unsafe method required to access the roof. In
a list of complaints about the building, Herron referenced his
fall, stating that "I have discovered this unsafe condition myself
having slipped off this area, injuring my back." In his letter,
Herron made no demand for money or otherwise indicate that he
intended to hold Schutz responsible for his damages, nor did he

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request that Schutz contact his insurance carrier.
On July 12, 1993, Herron's attorney, Channing Hartelius
(Hartelius), wrote a letter to Schutz stating that his office
represented Herron as to the October 30, 1991 accident. Hartelius
requested that Schutz contact his malpractice insurance carrier and
ask them to contact Hartelius' office immediately to discuss "this
claim."
Mary Schutz forwarded Hartelius' letter to Baker Insurance
(Baker), their local claims adjuster, on July 14, 1993. Baker
completed a General Liability Notice of Occurrence/Claim form that
same day. The form indicated that no claim had been made prior to
Hartelius' letter. The form also indicated that the policy
governing Herron's claim was the policy in effect from March 1,
1993, to March 1, 1994. The form listed the "Date/Time of
Occurrence" as July 12, 1993, the same date noted as the "Date of
Claim."
Baker subsequently forwarded the claim to Cindy Michel
(Michel), Professional Liability Claim Specialist, at Continental.
Continental had insured the architectural firm for professional
liability since March 1, 1986. The policy also covered Jerry
Schutz, individually, to the extent he acted as an agent of the
firm. The policy issued to the firm was renewed on an annual
basis, with the policy period running from March 1st of each year
to March 1st of the following year.
Until the 1994-1995 policy year, the policy carried liability
limits of $100,000. These were aggregate limits applicable to all
claims made during the policy year. In other words, there was only
$100,000 available to satisfy all claims made during a policy year,
not $100,000 for each separate claim. Beginning with the 1994-1995
policy year, Schutz purchased increased coverage, upping the
policy's aggregate limits to $1,000,000 for claims made during that
policy year.
Michel completed a Claim Coding Form on August 6, 1993. On
September 9, 1993, Michel wrote Hartelius requesting his theory of
liability regarding the architectural design of the Hospital along
with documentation of Herron's injuries and any medical treatment
he may have received.
On October 7, 1993, Hartelius responded by letter to Michel's
request. He alleged that Schutz was negligent when he breached his
duty of ordinary care as an architect. Hartelius asserted that
Schutz knew or should have known that "his design of the roof and
accessibility to the penthouse were negligent."
Michel wrote Hartelius on February 8, 1994, denying liability
and declining to make an offer for Herron's claim. On October 19,
1994, Herron and his wife filed a personal injury and loss of
consortium action against Schutz alleging numerous deficiencies in
the design and construction of certain aspects of the Hospital's
roof.

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The dispute eventually centered on which policy covered the
Herrons' claims and, consequently, which limits of liability
applied. The Herrons filed a Complaint for Declaratory Judgment on
June 9, 1995, requesting that the District Court resolve the
disputed issues. Continental filed a Motion for Summary Judgment
on January 24, 1996, arguing that the applicable policy was the one
in effect from March 1, 1993, to March 1, 1994, under which the
policy limits were $100,000, but, after factoring in payments made
on other claims during that policy year, the remaining limits were
only $20,742.94. The Herrons filed a Motion for Summary Judgment
on February 7, 1996, contending that the applicable policy was the
one in effect from March 1, 1994, to March 1, 1995, under which the
policy limits were $1,000,000.
Both motions were argued on March 18, 1996. On April 19,
1996, the District Court granted Continental's motion ruling that
the 1993-1994 policy applied and that the Herrons' claims are
subject to the remaining policy limits of $20,742.94 for the 1993-
1994 policy year. The Herrons appeal.
Standard of Review
Our standard in reviewing a grant of summary judgment is the
same as that initially used by the district court. Dagel v.
Farmers Ins. (1995), 273 Mont. 402, 405, 903 P.2d 1359, 1361
(citing Youngblood v. American States Ins. Co. (1993), 262 Mont.
391, 394, 866 P.2d 203, 204). Summary judgment is proper when
there is no genuine issue as to any material fact and the moving
party is entitled to judgment as a matter of law. Rule 56(c),
M.R.Civ.P.; Dagel, 903 P.2d at 1361.
In Montana, the interpretation of an insurance contract is a
question of law. Dagel, 903 P.2d at 1361 (citing Wellcome v. Home
Ins. Co. (1993), 257 Mont. 354, 356, 849 P.2d 190, 192). We review
a district court's conclusions of law to determine if the court's
interpretation of the law is correct. Dagel, 903 P.2d at 1361
(citing Nimmick v. State Farm Mut. Auto. Ins. Co. (1995), 270 Mont.
315, 319, 891 P.2d 1154, 1156).
Issue 1.

Did the District Court err in granting Continental's
Motion for Summary Judgment on the issue of which policy
applies to the Herrons' claims?

The District Court determined that the July 12, 1993 letter
from Hartelius to Schutz constituted a claim. Hence, the court
granted Continental's Motion for Summary Judgment concluding that
the 1993-1994 policy, along with that policy's limits of liability,
which had been diminished to $20,742.94, applied to the Herrons'
claims.
The Herrons contend that the 1994-1995 policy, along with that
policy's $1,000,000 limits of liability, apply in this case because

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they did not make a claim until they filed their personal injury
and loss of consortium action against Schutz on October 19, 1994.
The Herrons maintain that the July 12, 1993 letter was not a claim
because it did not make a "demand for money or services" as the
term "claim" is defined in the policy. Furthermore, they contend
that if the July 12, 1993 letter is considered a claim, then the
January 22, 1992 letter from Herron to Schutz must also be
considered a claim, thereby implicating the 1991-1992 policy with
its $100,000 limits of liability undiminished by any prior claims.
The term "claim" is defined at section IV of the policy as
"the receipt of a demand for money or services, naming you and
alleging a wrongful act." The Herrons maintain that Hartelius'
letter merely informed Schutz that Hartelius was representing
Herron with regard to the accident and asked Schutz to contact its
malpractice carrier. They assert that no demand of any kind was
set forth as required by the policy.
The Herrons argue that the language in the policy is
ambiguous, thus Montana law requires that the terms of the policy
be construed liberally in favor of the insured and strictly against
the insurer. However, it is not the policy language that is
ambiguous, it is the wording of the July 12th letter. As the
District Court stated in its Order on Motions for Summary Judgment,
"[t]he rule that an insurance policy is to be construed against the
insurance company does not carry over to construction of
correspondence from a claimant's lawyer." If the language in an
insurance policy is clear and explicit, the policy governs. See
28-3-401, MCA.
The question here is whether the July 12th letter constituted
a "demand for money or services" as required by the policy. In the
only Montana case that discusses what constitutes the making of a
claim under a claims-made insurance policy, Walker v. Larson
(1986), 223 Mont. 333, 727 P.2d 1321, this Court held that the
letters in question did constitute a claim although the policy in
that case, unlike the policy in the instant case, failed to define
a claim.
The Herrons cite to a New York case, In Re Ambassador Group,
Inc. Litigation (E.D.N.Y. 1993), 830 F.Supp. 147, to support their
contention that the July 12th letter was not a "demand for money or
services." In Ambassador, the policy at issue did not define the
term "claim" and the court in that case held that neither of the
two letters in question constituted a claim as that term is
normally viewed. Notwithstanding, Ambassador is distinguishable
from the instant case in that the holding in Ambassador was based
on the notice provisions in the policy. The policy characterized
the reporting of a "claim" to the insurer as giving notice and the
reporting of a "claim" directly to the directors and officers as
the making of a claim. Thus the letters in question, because they
were sent to the insurer, did not constitute a claim.

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While the authority on this issue is divided, we conclude that
the better reasoned authority holds that letters, like the one in
the instant case, are claims. In Berry v. St. Paul Fire & Marine
Ins. Co. (8th Cir. 1995), 70 F.3d 981, the Eighth Circuit Court of
Appeals ruled that a letter asking the company to forward
information to its insurance carrier qualified as a claim even
though it lacked a request for damages in a specific dollar amount.
There the policy defined a claim as a "demand in which damages are
alleged." The court in that case stated:
True, the letter does not request payment of a specific
dollar amount, but sometimes complaints in actions
actually filed in Court don't either, so this omission
does not seem inconsistent with the letter's being
treated as a "claim." Treating the letter as other than
a claim, it seems to us, requires a tortured construction
of its text.

Berry, 70 F.3d at 982.

Furthermore, in Rentmeester v. Wisconsin Lawyers Mut.
(Wis.App. 1991), 473 N.W.2d 160, a case involving the same insurer,
Continental, and the same definition of a claim as in the case
before us on appeal, the Court of Appeals of Wisconsin held that a
letter from the claimant's attorney requesting the insured to
contact his insurance carrier was a claim even though the letter
did not contain a specific request for damages. The Wisconsin
court stated:
[The] letter could only mean that the Rentmeesters
planned to seek relief from Hinkfuss if they lost on
appeal. Moreover, not only did [the plaintiff's
attorney] term his demand "a claim," this is the precise
construction that Hinkfuss gave the letter.

Rentmeester, 473 N.W.2d at 163.
The Herrons contend that Continental's argument in the instant
case that the letter is a claim shows that the policy is ambiguous
because Continental's argument is exactly opposite to its argument
in Rentmeester. On the contrary, as the District Court stated in
its order, Continental's assertions in Rentmeester do not bind it
here, "[i]t is the result, not the argument, that has precedential
value." Continental asserts in its brief on appeal that it is not
unusual for a party to take a different position in one case than
it did in a previous case and that this is particularly appropriate
where the court in an earlier case rejects the party's argument.
Continental contends that since the Wisconsin court struck down
Continental's coverage argument in Rentmeester, it is only proper
that Continental accept the law set forth in that case and adopt it
as its position here.

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The Herrons maintain that the July 12th letter only implies
that a claim will be forthcoming at some point in the future. They
assert that they did not make a claim until they filed their
personal injury and loss of consortium action on October 19, 1994.
Contrary to the Herrons' assertions, filing the action was not
sufficient to bring the claim within the 1994-1995 policy year.
The policy states that coverage exists during that period when a
claim is first made against the company. Filing the complaint was
simply the continued pursuit of David Herron's claim originally
asserted in July 1993.
Where the alleged tortfeasor has reasonably been put on notice
by the injured party that he intends to hold the tortfeasor
responsible for his damages, it would, indeed, be anomalous to hold
that a claim is, nevertheless, not made until a suit is actually
filed. To do so would encourage litigation as opposed to
negotiation and settlement. And, to the extent that the tortfeasor
had a claims-made policy in force when he was notified, but did not
have such insurance in force when the lawsuit was filed--perhaps a
year or more later--then coverage would be frustrated altogether to
the detriment of both the injured party and the tortfeasor.
Furthermore, 25-4-311, MCA, mandates that in actions for the
recovery of money or damages for personal injury or wrongful death,
the amount of damages sought may not be stated in the claim for
relief. Thus, under the Herrons' interpretation of the policy
language, their complaint, because it did not state a specific
dollar amount, could not be considered a claim either.
Even though there was no request for a specific dollar amount
in the July 12th letter, the text on its face indicates that the
Herrons were seeking compensatory payment, otherwise, there would
be no reason for Schutz to contact his insurance carrier. As the
District Court pointed out in its order, "[w]hy else would a
plaintiff's lawyer write to an alleged tort-feasor, ask him to
contact his insurance carrier and say a claim exists, other than to
make a demand for money damages."
Moreover, both sides treated the matter as a claim for money
damages. In addition to initially labeling the Herrons' demand as
a "claim," Hartelius referenced Continental's claim number in
subsequent correspondence. Mary Schutz, believing the July 12th
letter to be a claim, forwarded it to Baker on July 14, 1993. A
notice-of-claim form was completed that same day and forwarded to
Continental. Michel acknowledged the new claim by letter dated
August 10, 1993, and addressed to Mary Schutz. On August 30, 1993,
Hartelius provided additional information regarding the claim to
Baker. Thereafter, Michel sent a letter to Hartelius requesting
additional documentation regarding Schutz's alleged liability and
Herron's injuries. Hartelius responded to this request by letter
dated October 7, 1993, in which he included Herron's medical
records and gave detailed accusations of Schutz's negligence.

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Nevertheless, Continental denied the claim on February 8, 1994.
Taking into consideration Hartelius' letters of July 12th, August
30th, and October 7th, all of which were written and sent during
the 1993-1994 policy year, clearly a claim was made.
The Herrons argue that if we hold that the July 12, 1993
letter from Hartelius to Schutz constitutes a claim, then we must
also hold that the January 22, 1992 letter from Herron to Schutz
constitutes a claim, thus implicating the 1991-1992 policy.
However, the January 22, 1992 letter did not direct Schutz to
contact his insurer carrier, nor did it indicate in anyway that the
Herrons intended to hold Schutz responsible for David Herron's
injuries. Thus the letter does not reasonably fit within the
policy definition of a claim. The reason for the January 22nd
letter was simply to point out defects Herron perceived in the
design and construction of the Hospital. It neither stated nor
implied any other purpose.
Accordingly, we hold that the District Court was correct in
concluding that the July 12, 1993 letter from Hartelius to Schutz
was a claim under the policy and that the 1993-1994 policy applies
to the Herrons' claims.
Issue 2.

Did the District Court err in granting Continental's
Motion for Summary Judgment on the issue of the general
limits of liability applicable to the Herrons' claims?

The Herrons argue that under the 1994-1995 policy, the
$1,000,000 limits of liability apply to their claims. They
maintain that the endorsement in the 1994-1995 policy restricting
coverage to a maximum of $100,000 when a claim is made prior to
March 1, 1994, or when the policy holder had knowledge prior to
that time of a wrongful act or circumstance which might result in
a claim, is ambiguous and violates the reasonable expectations
doctrine as well as public policy. However, since we have already
determined that the 1993-1994 policy applies to the Herrons' claims
rather than the 1994-1995 policy, we need not decide this issue.
Issue 3.

Did the District Court err in granting Continental's
Motion for Summary Judgment on the issue of the specific
limits of liability applicable to the Herrons' claims?

The District Court concluded that the Herrons' claims are
subject to the remaining policy limits of $20,742.94 for the 1993-
1994 policy year. The Herrons argue to the contrary, contending
that regardless of when their claim was made, they are entitled to
the liability limits in effect at the time of the wrongful act and
those limits have not been diminished by payments on other claims.

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The Herrons maintain that because the stated limits in effect
during the 1993-1994 policy year and the stated limits in effect at
the time of the wrongful act are identical and since the policy
fails to define which set of limits will apply in that event, under
the accepted rules of policy construction, the limits which provide
the greatest degree of coverage--the undiminished limits in effect
at the time of the wrongful act--must apply. They base their
contention on the provision at section III(A)(1) of the policy,
which provides:
Our obligation to pay is further limited to:
a. the amount of the limit of liability in effect
at the time of the actual or alleged
wrongful act, or
b. the amount stated as the limit of liability for
this policy term,
whichever is less.

The Herrons maintain that, because the two limits are equal, this
language in the policy creates an ambiguity and any ambiguity must
be construed in their favor.
Contrary to the Herrons' assertions, we perceive no ambiguity
in the policy language. The Herrons fail to note the policy
language immediately preceding the policy provision cited by them,
which states:
The limit of liability shown on the Declarations is the
maximum we will pay for any one or more claim [sic] made
during this policy term. This limit applies as excess
over any deductible amount.

It is clear from this language in the policy that the maximum limit
of liability for all claims made in any policy period is the
purchased coverage, which in this case was $100,000. Continental
then further limits its liability, in the provision cited by the
Herrons, for acts which occurred before the policy period to the
amount of insurance in effect at the time of the act. This
prevents an insured who has a potential liability from increasing
the limits before the claim is actually made.
Since Continental has limited its coverage for all claims made
during the policy year to $100,000 and since it has already paid
out nearly $80,000 on prior claims during the 1993-1994 year, the
Herrons are limited to the remaining policy limits of $20,742.94
for the 1993-1994 policy year. We agree with the District Court
that it is troubling that the amount of insurance coverage is
limited here just because the claim happened to be made at an
inopportune time, but, this is a problem that occurs with claims-
made policies. However, as the District Court stated, "[e]ven
insurance companies have the right to rely on the clear language of
their policies."

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Accordingly, we hold that the District Court did not err in
granting Continental's Motion for Summary Judgment on the issue of
the specific limits of liability applicable to the Herrons' claims.
Affirmed.
/S/ JAMES C. NELSON

We Concur:

/S/ J. A. TURNAGE

/S/ WILLIAM E. HUNT, SR.

/S/ KARLA M. GRAY

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