Revelation Industries, Inc. v. St. Paul Fire & Marine Insurance

April 10 2009

DA 07-0752

IN THE SUPREME COURT OF THE STATE OF MONTANA

2009 MT 123

REVELATION INDUSTRIES, INC.,
formerly known as Revelation Engineering, Inc.,

Plaintiff and Appellant,

v.

ST. PAUL FIRE & MARINE INSURANCE COMPANY,

Defendant and Appellee.

APPEAL FROM: District Court of the Eighteenth Judicial District,
In and For the County of Gallatin, Cause No. DV 2001-472
Honorable Mike Salvagni, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Robert L. Sterup (argued), Holland & Hart, LLP, Billings, Montana

For Appellee:

Guy W. Rogers (argued), Jon A. Wilson, Brown Law Firm, P.C.,
Billings, Montana

Argued and Submitted: January 14, 2009

Decided: April 10, 2009

Filed:

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

¶1 Revelation Industries (Revelation) sued its insurer, St. Paul Fire & Marine

Insurance Company (St. Paul), for refusing to defend and indemnify Revelation in a

lawsuit with Phillips Environmental Products, Inc. (Phillips). The Eighteenth Judicial

District Court ruled that St. Paul had no duty to defend Revelation. Revelation appeals.

We reverse and remand.

ISSUES

¶2 A restatement of the issues on appeal is:

¶3 Did the District Court err when it determined that St. Paul had no duty to defend

Revelation based on the contents of Phillips’ complaint?

¶4 Did the policy requirement of an “event” excuse coverage in this case?

FACTUAL AND PROCEDURAL BACKGROUND

¶5 In 1999, Revelation and Phillips entered into an oral arrangement under which

Revelation would design and develop for Phillips a specific product known as a WAG

Bag. This bag was a disposable sanitary bag to be used with Phillips’ portable

environmental toilets. Revelation, in turn, subcontracted with Manchester Packaging

Corporation (Manchester) to produce these bags in accordance with Phillips’

specifications. Notwithstanding Manchester’s written affirmation that the produced bags

met Phillips’ specifications, the bags Manchester shipped to Revelation did not contain

cornstarch as required by Phillips. Revelation, without knowledge of the bags’

nonconformity, provided them to Phillips. Phillips promptly claimed the bags did not

meet its requirements and in March 2000 terminated its relationship with Revelation.

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¶6 Over the next several months, Revelation made numerous futile attempts to meet

with Phillips in an effort to resolve Phillips’ concerns and salvage the parties’

arrangement. Finally, at a meeting of the parties on October 4, 2000, Phillips claimed to

have suffered significant damages for which it held Revelation responsible. Because St.

Paul was its insurer under a Commercial General Liability (CGL) policy, the following

day, Revelation contacted St. Paul by telephone, informed the insurer of the potential

claim, and requested coverage. St. Paul responded by memorializing the conversation in

a letter to Revelation. In this letter, St. Paul reiterated the following facts:

As I understand this matter, Revelation Engineering entered into a verbal
joint venture with Phillips Enviro to produce a field toilet. Your
responsibility was to design a biodegradable bag system for the human
waste. Your [sic] were to be paid a royalty by Phillips for your design.
You contracted the manufacture of the bag system to Manchester
Packaging Corp. Apparently, Manchester left out cornstarch as a
component of the polymer bag system. The omission was discovered by
Phillips, and they have indicated a claim against you . . . . You have
requested a written statement of claim from Phillips, which you have yet
[sic] received.

¶7 On October 20, 2000, Phillips demanded from Revelation compensation for

damages it claimed to have suffered as a result of Revelation’s failure to provide it with a

conforming product. This demand letter made no mention of Manchester’s production of

the nonconforming bags, despite Phillips’ knowledge that Revelation engaged

Manchester as its subcontractor to develop and manufacture these bags. On October 26,

Revelation’s attorney forwarded Phillips’ letter to St. Paul and again requested defense

and indemnity under the CGL policy Revelation held through St. Paul. Notably, in

November 2000, a St. Paul interoffice memorandum obtained in discovery referenced

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Manchester’s manufacture of the defective bags, but nonetheless concluded that the

damages were not the result of an “event” and that several policy exclusions applied. On

December 11, 2000, St. Paul notified Revelation in writing that various policy exclusions

applied; therefore, it would not defend and indemnify Revelation against Phillips’ claim.

¶8 In February 2001, Phillips filed a complaint against Revelation in the same district

court as that in which the present action was filed, seeking damages stemming from the

nonconforming production. Notably, the complaint did not reference Manchester’s role

in producing the WAG bags. Revelation forwarded the complaint to St. Paul. St. Paul

reviewed the complaint and again declined coverage. Revelation subsequently funded its

own defense against Phillips’ claim and, in May 2001, filed a third-party complaint

against Manchester.

¶9 In December 2001, Revelation sued St. Paul claiming that St. Paul had breached

the policy contract. The Complaint sought defense costs and indemnity. However, a

summons was not served on this Complaint until December 2002. St. Paul did not

answer the Complaint and no other filings occurred in this case until November 2004

when Revelation filed its First Amended Complaint. St. Paul subsequently filed a timely

answer in which it counterclaimed for a declaratory ruling that it was not obligated to

defend Revelation on the grounds that the CGL policy contained numerous applicable

exclusions to coverage.

¶10 During this time, Revelation continued to defend itself against Phillips’ action and

pursue its third-party action against Manchester. In September 2006, the District Court

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ruled against Phillips and in favor of Revelation, and awarded Revelation approximately

$431,000 in damages.

¶11 In May 2007, in the present case, both St. Paul and Revelation moved for

summary judgment. In its motion, Revelation argued that the exclusions cited by St. Paul

were inapplicable and that the subcontractor provision of the insurance policy rendered

coverage for the claim. St. Paul, in its reply to Revelation’s motion, restated its

“exclusions” arguments but also argued that the facts alleged in Phillips’ complaint—

specifically the absence of mention of Manchester—justified its denial of a defense and

indemnity. The District Court held a hearing on the motions in September 2007. In

December 2007, the District Court granted St. Paul’s motion, ruling that while the

insurance policy provided “coverage for a defective product manufactured by a

subcontractor such as Manchester,” because Phillips’ complaint did not include actual

reference to Manchester’s role, it did not allege facts that would give rise to insurance

coverage under Revelation’s policy with St. Paul. Consequently, it concluded that St.

Paul was not obligated to defend or indemnify Revelation for Phillips’ claims.

¶12 Revelation filed a timely appeal.

STANDARD OF REVIEW

¶13 Our standard of review in appeals from summary judgment rulings is de novo.

We review a district court’s conclusions of law to determine whether they are correct and

its findings of fact to determine whether they are clearly erroneous. Tractor &

Equipment Co. v. Zerbe Bros., 2008 MT 449, ¶ 12, 348 Mont. 30, 199 P.3d 222 (citations

omitted).

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 DISCUSSION

¶14 Did the District Court err when it determined that St. Paul had no duty to defend
Revelation based on the contents of Phillips’ complaint?

¶15 St. Paul and Revelation disputed the interpretation and application of several

provisions contained in Revelation’s CGL policy. The disputed provisions relevant to

this appeal are whether this claim constituted an “event,” and whether this claim is

excluded under the “completed work” exclusion or covered under the “subcontractor

exception” to that exclusion.

¶16 The St. Paul policy provides coverage for Revelation against bodily injury and

property damage liability that is caused by an “event.” “Event” is defined as an

“accident.” “Accident” is not defined in the policy. In addition to requiring that an

“event” occur before coverage is accepted, the policy contains several exclusions to

coverage. The relevant exclusion in this case is the “completed work” exclusion.

¶17 The “completed work” exclusion states:

We won’t cover property damage to any of your products that’s caused by
the product itself or by any of its parts.
. . .
Nor will we cover property damage to your completed work that’s caused
by the work itself or by any of its parts. But we won’t apply this exclusion
part if . . . the damaged completed work, or the completed work that causes
the property damage, was done for you by others.

This last clause is the “subcontractor exception” to the “completed work” exclusion, the

application of which is disputed in this case.

¶18 As the facts above indicate, St. Paul clearly knew that Revelation’s subcontractor,

Manchester, manufactured the defective bags that gave rise to Phillips’ claim against

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Revelation. Nonetheless, St. Paul denied coverage on several grounds including that the

subcontractor provision was inapplicable because Phillips’ complaint did not reference,

allege or suggest subcontractor involvement. The District Court determined that the

dispositive question was whether St. Paul, when evaluating its obligation to defend

Revelation, was entitled to look exclusively to the allegations of Phillips’ complaint, or

whether its was obligated to incorporate into its coverage evaluation its undisputed

knowledge that Revelation had hired a subcontractor and the subcontractor’s work had

caused Phillips’ damage.

¶19 Despite concluding that the CGL policy would cover Revelation for damages

caused by a subcontractor, the District Court held that “only the facts alleged in the

Complaint against the insured trigger the duty to defend, not any facts alleged in the

Third-Party Complaint against a third-party who is not insured under the policy.” As a

result of this legal interpretation, the court ruled that St. Paul had no duty to defend or

indemnify Revelation because Phillips’ complaint did not implicate Manchester;

therefore, the complaint did not raise the prospect of the application of the subcontractor

provision. This being so, the claims presented against Revelation in the complaint were

excluded from coverage under the policy.

¶20 Revelation argues on appeal that when an insurer has actual knowledge of a fact

that would give rise to coverage, it may not ignore such knowledge and simply look at

the contents of the complaint and deny coverage. As such, it asserts, the District Court

should have ruled that St. Paul was required to defend and indemnify Revelation against

Phillips’ claim under the subcontractor exception. In addition to relevant general contract

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and insurance contract law, Revelation relies upon a line of cases holding that an

insurer’s duty to defend can arise when the insurer receives notice of a covered risk

through “pleadings, discovery, or through notice of final issues declared ready for trial.”

Based upon these cases, Revelation maintains that the “actual facts” of this case, as

opposed to the language Phillips chose to use in its complaint, show that St. Paul had full

knowledge of Manchester’s involvement and, therefore, under the policy’s subcontractor

provision, it had a duty to defend Revelation.

¶21 St. Paul relies on a separate line of cases that specifically state that an insurer need

look only to the facts alleged in a complaint to determine whether it has a duty to defend

its insured. Acknowledging the existence of contrary caselaw, St. Paul suggests that

these contrary cases inject “confusion” into well-established caselaw and were correctly

disregarded by the District Court.

¶22 As suggested by the foregoing summary of the parties’ positions, there are cases in

our jurisprudence addressing and resolving various duty-to-defend situations, each with

its own factual anomalies. For the most part, however, these cases can be divided into

three scenarios:

 Scenario (1) the complaint clearly alleges facts that come within the coverage of
the liability policy. This scenario requires the insurer to defend its insured with no
need to look beyond the allegations in the complaint. (See e.g. Atcheson v. Safeco
Insurance Company, 165 Mont. 239, 527 P.2d 549 (1974));

 Scenario (2) the complaint alleges facts that do not come within the coverage of
the liability policy and the insurer has no knowledge of any other facts that could
result in coverage. Under these circumstances, we have held that the insurer has
no duty to defend its insured. (See e.g. McAlear v. St. Paul Insurance Companies,
158 Mont. 452, 493 P.2d 331 (1972)); and

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 Scenario (3) the complaint alleges facts that come within the coverage of the
liability policy, but the insurer knows of other actual facts that negate coverage.
This scenario relieves the insurer of its duty to defend. (See e.g. Burns v.
Underwriters Adjusting Co., 234 Mont. 508, 765 P.2d 712 (1988)).

It is apparent that none of these scenarios is identical to that presented here. In this case,

Phillips’ complaint alleged no facts that would seemingly compel coverage under the

liability policy, yet the insurer had actual knowledge of facts that could result in

coverage. In other words, this is the corollary to scenario (3). Against, this backdrop, we

turn to the parties’ arguments.

¶23 St. Paul asserts that McAlear, Atcheson, and Northwestern Nat. Cas. Co. v.

Phalen, 182 Mont. 448, 597 P.2d 720 (1979), clearly establish the rule that a “liability

insurance company has no duty to defend a suit brought by a third-party against the

insured where the petition or complaint in such suit upon its face alleges a state of facts

which fails to bring the case within the coverage of the policy.” McAlear, 158 Mont. at

456, 493 P.2d at 334.

¶24 In McAlear, McAlear, an attorney insured under a professional liability policy,

demanded that his insurer defend him against a complaint arising from the negligent

operation of his private airplane which caused damage to other airplanes. The insurer

refused on the ground that the policy did not cover this type of event. The case was

submitted on stipulated facts which included pleadings, stipulated exhibits and discovery

proceedings; as a result, there was no issue regarding the adequacy of the allegations in

the complaint for purposes of determining a duty to defend. McAlear, 158 Mont. at 453,

493 P.2d at 332-33. The question before the court was whether an insurer’s obligation to

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defend is independent from its obligation to indemnify. In other words, when it is

apparent that the allegation is not a covered event under the policy, must the insurer

nonetheless defend its insured? We ruled in McAlear that it need not. Quoting 44

Am.Jur.2d, Insurance, § 1539 (currently 44 Am.Jur.2d, Insurance, § 1400), we explained

that:

Upon the basis of the allegations of the complaint or petition, the courts
have adopted the following tests for determining whether particular
allegations require the insurer to defend the action brought against the
insured: if the complaint in the action brought against the insured upon its
face alleges facts which come within the coverage of the liability policy, the
insurer is obligated to assume the defense of the action; but if the alleged
facts fail to bring the case within the policy coverage, the insurer is free of
such obligation, at least initially. Stated differently, the insurer is under an
obligation to defend only if it could be held bound to indemnify the insured,
assuming that the injured person proved the allegations of the complaint,
regardless of the actual outcome of the case.

McAlear, 158 Mont. at 456-57, 493 P.2d at 334. This was the first time we expressly

linked the allegations in a complaint to an insurer’s duty to defend. It is important to

note, however, that the foregoing statement was made in the context of the facts of

McAlear—facts that made it unnecessary for the Court to isolate its analysis to the

allegations contained in the complaint. This case is an example of scenario (2)—the

complaint alleged negligence in private airplane operation while the policy covered

attorney professional liability. The policy clearly did not cover this event and the insurer

had no knowledge of facts that would bring the event inside the policy’s coverage. See

also Graber v. State Farm Fire and Cas. Co., 244 Mont. 265, 797 P.2d 214 (1990), in

which the Court cited the “allegations in the complaint” language from McAlear in ruling

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that the “occurrence” giving rise to the claim against the insured was not covered by the

policy, and therefore the insurer had no duty to defend.

¶25 In Atcheson, Atcheson, a taxidermist, was sued for misplacing, destroying or

mishandling a customer’s trophies. The insurer denied liability asserting that the claims

in the complaint were not covered by the policy. Citing the relevant language from the

policy, we disagreed and held that the allegations in the complaint were “within the perils

enumerated entitling [Atcheson] to a defense.” Atcheson, 165 Mont. at 247, 527 P. 2d at

553. Again, there was no reason for the Court to look beyond the four corners of the

complaint because the allegations in the complaint were clearly covered by the policy.

¶26 In Phalen, Phalen was involved in a physical altercation outside of a bar that

resulted in serious injury to another bar patron. Phalen was charged with felony

aggravated assault and pled guilty under a plea bargain. Phalen, 182 Mont. at 451-52,

597 P.2d at 721-23. The victim brought a civil suit against Phalen alleging both willful

assault and negligence. Phalen, 182 Mont. at 453, 597 P.2d at 723. In a declaratory

action, the district court granted the insurer’s motion for summary judgment ruling that

the incident, being intentional, was not a covered event and therefore the insurer had no

obligation to defend. Phalen, 182 Mont. at 454, 597 P.2d at 724. On appeal, we reversed

the district court on the ground that factual questions precluded summary judgment.

Specifically, there was a question as to whether the single blow struck by Phalen caused

the victim’s injuries, or whether the subsequent intervening act of a third person tripping

the victim and sending him crashing to the ground caused or contributed to the injuries.

In addition, the manner in which the incident occurred raised a question of fact as to

11
whether the victim’s injuries were expected or intended by Phalen. In this connection,

we stated that “the pleadings themselves, particularly count II, stated a cause which fits

within the policy coverage and in that situation, [the insurer] has a duty to extend a

defense . . . to Phalen.” Phalen, 182 Mont. at 461, 597 P.2d at 727. Based on the cases

relied upon by the Court, it would appear that the Court, in referring to “the pleadings,”

meant the complaint. See Reliance Insurance Company v. Fisher, 164 Mont. 278, 286,

521 P.2d 193, 196.

¶27 These cases illustrate that when a complaint presents allegations of events or

occurrences that are covered under the defendant’s insurance policy, the insurer must

defend its insured; conversely, if the allegations in the complaint clearly present an event

or occurrence that is not covered under the policy, the insurer may refuse to defend. The

more difficult case, such as the one before us, involves an insurer who has actual

knowledge of facts that are not included in the complaint. Under such circumstances,

may that insurer take advantage of its knowledge of facts which negate the duty to

defend? And, conversely, may the insurer ignore such facts if they would trigger an

obligation to defend? Until today, we have decided no cases that answer this second

question but at least two cases that answer the first.

¶28 In Burns, Burns was struck by Zeiler, who was insured by both Underwriters’ and

Continental Insurance Company. Burns sued Zeiler, alleging that Zeiler had negligently

struck him. Presented as a “negligence” claim in the complaint, the event would have

arguably been covered by Zeiler’s insurance. Upon receiving notice of the claim,

however, the insurers interviewed Zeiler, their insured, who disclosed categorically that

12
he intentionally struck Burns. Underwriters and Continental subsequently denied

coverage and refused to defend Zeiler because the intentional nature of the incident

placed it outside of Zeiler’s coverage. The suit ended in a default judgment against Zeiler

who then assigned any claims he may have had against his insurers to Burns. Burns, 234

Mont. at 509, 765 P.2d at 712-13. Burns sued Underwriters and Continental and the

district court concluded that, based on the insurers’ actual knowledge of the events, the

insurers correctly determined that they had no duty to indemnify or defend. We agreed,

specifically rejecting Burns’ argument that the rule in Phalen—the allegations in the

complaint alone are to be used to determine the duty to defend—applied under these

facts. Rather, we said, “the proper focus of inquiry is the acts giving rise to coverage, not

the language of the complaint.” Burns, 234 Mont. at 510, 765 P.2d at 713. Burns

squarely falls within scenario (3) above.

¶29 Another case in which the Court looked beyond the allegations in the complaint to

resolve a coverage question in favor of the insurer was New Hampshire Ins. Group v.

Strecker, 244 Mont. 478, 798 P.2d 130 (1990). In Strecker, the victim of child

molestation brought a civil action against her molester alleging “negligence.” Relying on

Burns’ holding that coverage is based upon the acts giving rise to the claims, rather than

the complaint’s language, the district court and this Court concluded that sexual

molestation could not be deemed a negligent act, and that because the policy did not

cover intentional acts, the insurer correctly denied coverage.

¶30 It was apparent to this Court in Burns and Strecker that the allegations in the

respective complaints were either incomplete or inaccurate, given the facts or questions

13
of fact presented in those cases. As a result, the Court looked beyond the allegations to

the facts known by the insurer or to the actual acts giving rise to the underlying claims.

In so doing, we agreed that the insurer had no obligation to defend its insured in those

cases. We conclude this same analysis should be utilized when the complaint does not

present a claim which on its face is covered by the policy, but the insurer nonetheless has

information that could give rise to a duty to defend and indemnify. This does not require

an insurer to seek out such information—as we have previously held, insurers that look at

facts beyond the allegations in the complaint do so at their own risk as they will be

required to defend and/or indemnify based on the information discovered. Farmers

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

insurers are not entitled to simply ignore factual information supplied to them by their

insureds but not alleged in the complaint or petition, where those facts would trigger a

duty to defend.

¶31 Since 2004, this Court has decided several duty-to-defend cases, including Staples

and Blair v. Mid-Continent Casualty Co., 2007 MT 208, 339 Mont. 8, 167 P.3d 888, both

of which were heavily relied upon by the parties and the District Court in this case. In

Staples, a dispute arose over the ownership of a horse that had escaped a pasture and was

struck by an automobile. Staples, ¶ 6. The driver sued Staples as if Staples both owned

and was pasturing the horse at the time of its escape and the accident. Staples, ¶ 9.

However, Staples, while pasturing the animal at the time of the incident, was not the

horse’s owner. Staples in turn filed a third-party complaint against Corcoran and

Christopherson, whom he believed were the joint owners of the animal. He also

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demanded a defense under Corcoran’s insurance policy which allowed for coverage of

the animal’s custodian. Staples, ¶ 10. While there was a question of fact as to whether

Corcoran was an owner of the horse at the time of the incident, the insurer nonetheless

concluded unilaterally that Corcoran did not own the horse at the time and denied defense

coverage to Staples and its insured. Staples, ¶ 11.

¶32 The District Court ruled in favor of the insurer noting that while the amended

complaint stated a claim for which the insurer was required to defend, the insurer’s

investigation informed it that Corcoran’s policy did not cover the incident. Staples, ¶ 13.

On appeal we disagreed, observing that the fact relied upon by the insurer to deny

coverage—lack of ownership by Corcoran—was a heavily disputed fact and the subject

of conflicting evidence. As we have previously held, “[u]nless there exists an

unequivocal demonstration that the claim against an insured does not fall within the

insurance policy’s coverage, an insurer has a duty to defend.” Staples, ¶ 22, citing

Insured Titles, Inc. v. McDonald, 275 Mont. 111, 116, 911 P.2d 209, 212 (1996). There

was no such “unequivocal demonstration” in Staples; rather, there was a material factual

dispute which the insurer did not have the right to unilaterally decide. Staples is therefore

distinguishable from this case because here, the insurer’s knowledge of the existence of

Revelation’s subcontractor, Manchester, is not a disputed fact.

¶33 In Blair, Blair owned several residentially-zoned acres in the Meadows West

Landowners Association subdivision (Meadows West). He began excavating gravel on

his property primarily for use in developing his own property; however, he also sold

some of the excavated gravel. Blair, ¶ 4. Meadows West sued him, seeking, among

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other things, an injunction for failing to submit required construction plans and for selling

gravel, both in violation of the restrictive covenants. Blair, ¶ 5. Blair tendered the

defense and demanded coverage under his insurance policy with Mid-Continent. Blair,

¶ 7. Mid-Continent denied coverage on the grounds that the complaint did not allege

damages stemming from bodily injury or property damage due to an “occurrence.” Blair,

¶ 10. Blair subsequently settled with Meadows West and brought a declaratory judgment

against Mid-Continent alleging that he was entitled to recover the settlement amount as

well as his attorney fees and costs. Blair, ¶ 11. The district court ruled in favor of

Mid-Continent, concluding that Blair’s admitted intentional operation of the gravel

excavation did not constitute an occurrence under Mid-Continent’s policy; therefore,

Mid-Continent was not obligated to defend or indemnify Blair. Blair, ¶ 12. On appeal,

Blair argued that the facts alleged in the complaint, if proved true, would have required

Mid-Continent to defend him; therefore the insurer and the district court erred in

analyzing what constituted an “occurrence” under the policy rather than accepting the

allegations of the complaint on their face. Blair, ¶¶ 16-17. We disagreed and held that

under the policy definition of “occurrence”—which precluded intentional acts such as

Blair’s—Mid-Continent was justified in denying coverage. Blair is therefore also

distinguishable and inapposite to the case before us.

¶34 In another recent case, Twite Fam. Part. v. Unitrin Multi Line Ins., 2008 MT 310,

346 Mont. 42, 192 P.3d 1156, the Twite family’s (the Twites) construction company built

a housing complex. Montana Fair Housing, Inc. (MFH), and its executive director,

Liston, subsequently sued the Twites alleging several counts of negligence as well as

16
statutory violations. The Twites tendered the claim to their insurer, which denied it on

the ground that the complaint did not assert any bodily injury, property damage, or

occurrence that was covered by the policy. Twite, ¶¶ 2-5. During discovery, Liston

stated that he was seeking damages for “compensable emotional harm.” The Twites

argued that based on Liston’s emotional harm claim made during discovery, the insurer

should have defended them under a “bodily injury” claim. The district court ruled in

favor of the insurer. Twites argued on appeal that their insurer should have looked

beyond the four corners of the complaint in assessing whether or not it had a duty to

defend. We stated that we would not “reach the question of whether [the insurer] had a

duty to look beyond the four corners of the complaint in assessing its duty to defend.

Even assuming that a duty to defend could arise from facts uncovered during discovery,

the facts alleged . . . do not come with [sic] the policy’s coverage.” Twite, ¶ 12. We

ruled that regardless of how or when the insurer learned of the alleged bodily injury, the

fact remained that the claimed injury did not arise from a covered “occurrence” as

required by the policy, and therefore the insurer had no obligation to defend.

¶35 We addressed the duty-to-defend issue most recently in Town of Geraldine v. Mt.

Mun. Ins. Authority, 2008 MT 411, 347 Mont. 267, 198 P.3d 796. The Town of

Geraldine (the Town) hired AK Drilling to construct a well. The Town’s mayor

subsequently asked AK to perform work outside of the scope of the original contract.

Once the work was done, the Town refused to pay for the extra work. AK sued the Town

for breach of contract, negligent misrepresentation and constructive fraud. Town of

Geraldine, ¶ 3. The Town tendered the claim to its insurer, MMIA, which denied

17
coverage because the allegations triggered exclusions, including a breach of contract

exclusion, under the insurance policy. The Town sued MMIA and both parties moved for

summary judgment. The district court granted MMIA’s motion and denied the Town’s.

Town of Geraldine, ¶¶ 5-6. On appeal, the Town argued that MMIA had the duty to

defend it because AK’s complaint made assertions involving personal injury and public

official’s errors that were essentially negligence, not breach of contract, claims. We

affirmed the district court and concluded that the assertions in AK’s complaint included

breach of contract claims and other claims that were expressly excluded under the

Town’s policy; therefore, MMIA had the right to deny a defense. We also explained that

“it is the acts giving rise to the complaint which form the basis for coverage, not the

complaint’s legal theories or conclusory language.” Town of Geraldine, ¶ 24. The Town

of Geraldine is another distinguishable case in which the allegations in the complaint do

not give rise to coverage under the provisions of the insurance policy.

¶36 Finally, we turn to Farmers Union Mut. Ins. Co. v. Rumph, 2007 MT 249, 339

Mont. 251, 170 P.3d 934, a case upon which St. Paul heavily relies. This case arose out

of a complaint filed by the family of a young man named Christian Nielsen who as a

passenger was severely injured in a 4 a.m. one-vehicle accident. He and his family sued

the young driver of the pickup truck, Alex Rumph, as well as Alex’s father and his

father’s auto repair business. Among other things, the complaint alleged that Alex was

intoxicated when the accident occurred, and that he had previously rendered the seat belts

in the truck inoperable, exacerbating the injuries. The direct actions against Alex were

resolved via settlement. Neither the complaint nor the amended complaint raised facts

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tending to implicate the auto repair business, and the garage’s insurer FUMIC denied

coverage. Subsequently, the plaintiff’s attorney asserted he had learned after the

complaint was filed that the seat belts may have been disabled in the father’s auto repair

garage, and that Alex’s pickup had been previously used for garage-related errands.

Based upon these allegations, FUMIC accepted the garage’s defense under a reservation

of rights and sought declaratory relief. Such relief was granted and Rumph, as owner of

the garage, appealed. We affirmed.

¶37 On appeal, Rumph argued that the amended complaint, “when considered

‘together with’ or ‘coupled with’ the facts [the plaintiff’s attorney] later supplied to

FUMIC’s counsel” established that the disabling of the seat belts was indeed a “garage

operation.” Rumph, ¶ 17. We disagreed, noting that the amended complaint made no

reference to the garage or the disabling of the seat belts in the garage, and that FUMIC

was not obligated to look outside the complaint to determine if there was coverage.

Rumph, ¶ 18. Thus, we affirmed the district court.

¶38 St. Paul argues that Rumph is dispositive of the instant case. We disagree for two

reasons. First, Rumph was a declaratory action case, undertaken after FUMIC accepted

the defense under a reservation of rights and sought declaratory relief, a course not

pursued by St Paul here. Second, unlike in Rumph, St. Paul undeniably had knowledge

of Manchester’s responsibility for Phillips’ damage before Phillips’ complaint was even

filed, and no facts in this regard were at all disputed. Thus, St. Paul had no need to look

outside the complaint—it knew when the complaint was filed the true state of the facts.

For these reasons, we conclude Rumph is inapposite.

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¶39 Based on the foregoing, including our cases holding that an insurer may deny

coverage based on knowledge of facts obtained from outside the complaint, we conclude

that the converse also holds: An insurer cannot ignore knowledge of facts that may give

rise to coverage under the policy simply because the complaint—which is, after all,

drafted by a claimant over whose draftsmanship the insured has no control—does not

allege these facts of which the insurer has knowledge. Under such circumstances, the

insurer must defend. It may commence a defense under a reservation of rights while

conducting an investigation, and it may commence a declaratory action, as FUMIC did in

Rumph. It may not, however, ignore information in its possession that may give rise to

coverage simply because the complaint fails to recite it, and thereupon refuse to defend.

¶40 As noted above, the District Court first determined that the subcontractor

provision in the policy provided coverage for the defective product manufactured by

Manchester; but it then denied coverage based on the allegations of the complaint. We

agree with the court’s initial determination but disagree with the latter. We therefore

hold that the subcontractor exception to the policy exclusion applicable to “covered

work” obligated St. Paul to defend Revelation in the suit with Phillips.

¶41 Did the policy requirement of an “event” preclude coverage in this case?

¶42 As noted above, both parties acknowledge that the District Court did not rule on

this issue. Revelation requests that we rule, as a matter of law, that applicability of the

subcontractor provision in the policy automatically satisfies the “event” requirement of

the policy. St. Paul asks that we hold that the “event” requirement was not satisfied in

20
this case, and also argues that coverage was excluded under both the “impaired product”

and the “product recall” exclusions.

¶43 As stated above, the St. Paul policy provides for coverage for an “event” which is

defined as an “accident,” and “accident” is not defined in the policy. Additionally, the

policy contains an exclusion that allows St. Paul to deny coverage for property damage to

Revelation’s products that is caused by the product itself. The example provided in the

policy indicates that an insured that manufactures air conditioners which contain several

moving parts that tend to break down will not be covered for any property damage caused

by the broken part or the air conditioner as a whole. The exception to this exclusion,

however, is the subcontractor provision—in other words, the policy will cover property

damage to an insured’s products or completed work if “the damaged completed work, or

the completed work that causes the property damage, was done for [the insured] by

others.”

¶44 Revelation argues that any ambiguity in the policy, such as may arise due to the

absence of a definition of “accident,” must be construed against the insurer. It also

maintains that a narrow interpretation of “event” or “occurrence” such as St. Paul urges

would render a subcontractor exception to the “your work” or “completed work”

exclusion worthless. It asserts that the subcontractor exception demonstrates the insurer’s

intention to cover damages caused by a subcontractor’s work, and to conclude that

subcontractor-caused damage is not an “event” would render the exception wholly

“superfluous and meaningless.”

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¶45 St. Paul counters that faulty workmanship is not an “accident”; therefore,

Revelation’s claim did not satisfy the policy’s “event” requirement and is not covered by

the policy. It continues that an “exception to an exclusion” does not give rise to coverage

where none exists under the terms of the policy.

¶46 Under Montana law, any ambiguities in contracts are construed against the insurer.

Additionally, “exclusions from coverage will be narrowly and strictly construed because

they are contrary to the fundamental protective purpose of an insurance policy.”

Wellcome v. Home Ins. Co., 257 Mont. 354, 356-57, 849 P.2d 190, 192 (1993) (citations

omitted). While both parties primarily cite extra-jurisdictional cases to support their

arguments, we are persuaded by those cases that provide coverage under similar

circumstances. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex.),

in which, as part of a comprehensive discussion of standard-form CGL policy revisions

vis-à-vis the subcontractor exception to the “your work” exclusion, the court stated that

“when a general contractor becomes liable for damage to work performed by a

subcontractor—or for damage to the general contractor’s own work arising out of a

subcontractor’s work—the subcontractor exception preserves coverage that the ‘your-

work’ exclusion would otherwise negate.” Lamar, 242 S.W.3d at 11.

¶47 Moreover, we conclude that St. Paul’s own example of coverage under the

subcontractor exception underscores its coverage obligation here. St. Paul’s policy

explains:

You construct a building as a general contractor. Some of the work is done
by you while the rest is done for you by subcontractors. The building is
accepted by the owner. If it’s damaged by a fire caused by electrical wiring

22
 installed by a subcontractor, we won’t apply the exclusion. However, if the
wiring was installed by you, we’ll apply the exclusion to property damage
to your completed work done by you.

Presumably, if a general contractor filed a claim under the circumstances in the above

example for damages caused by the subcontractor’s work, St. Paul would not deny it on

the ground that it was not an “event.” We see no substantive distinction between the

example above and the present case. Manchester, Revelation’s subcontractor, provided a

faulty product which was passed on to and accepted by Phillips before the defect was

discovered. Under such circumstances, the policy provides coverage for this

subcontractor-caused damage. St. Paul had a duty to defend Revelation and to indemnify

it.

¶48 Finally, we decline to address St. Paul’s request that we hold that the “impaired

product” and “product recall” exclusions apply. Revelation did not appeal the District

Court’s failure to rule on these exclusions, nor did St. Paul cross-appeal it; therefore, it

has waived the right to present these claims for resolution on appeal. Udelhoven v. Mont.

Dept. of Pub. HHS (In re McGurran), 2003 MT 145, ¶ 18, 316 Mont. 188, 70 P.3d 734.

CONCLUSION

¶49 For the foregoing reasons, we reverse and remand to the District Court for further

proceedings consistent with this Opinion.

/S/ PATRICIA COTTER

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We concur:

/S/ MIKE McGRATH
/S/ JAMES C. NELSON
/S/ JOHN WARNER
/S/ W. WILLIAM LEAPHART
/S/ BRIAN MORRIS

Justice Jim Rice, dissenting.

¶50 I dissent. Respectfully, I believe this decision will bring confusion to the

determination of an insurer’s duty to defend, an area of the law which is now clear. I

begin with a discussion of the Court’s Opinion to point out what are, in my view, flaws in

the reasoning and adverse consequences of the new rules. I end by proposing a means to

resolve cases such as this one which adheres to the clear precedent we have provided

since Staples.

¶51 The Court holds that when a filed complaint does not present a claim covered by

an insurance policy, the insurer must nonetheless defend if it has other “information that

could give rise” to a duty to defend and indemnify. Opinion, ¶ 30. The Court further

explains that:

This does not require an insurer to seek out such information—as we have
previously held, insurers that look at facts beyond the allegations in the
complaint do so at their own risk as they will be required to defend and/or
indemnify based on the information discovered. Farmers Union Mut. Ins.
Co. v. Staples, 2004 MT 108, 321 Mont. 99, 90 P.3d 381.

¶52 However, the Court’s position that it is “not requir[ing] an insurer to seek out such

information” is not plausible. Insurers must seek out information to fulfill their

24
obligation under the Unfair Trade Practices Act to conduct a reasonable investigation.

See § 33-18-201(4), MCA (insurers may not “refuse to pay claims without conducting a

reasonable investigation”); Lorang v. Fortis Ins. Co., 2008 MT 252, ¶ 86, 345 Mont. 12,

192 P.3d 186 (“As we have previously observed, the UTPA is designed to protect

claimants against insurers who would deny a claim without first conducting a reasonable

investigation.”). In Shilhanek v. D-2 Trucking, Inc., 2003 MT 122, ¶ 37, 315 Mont. 519,

70 P.3d 721, we reversed a summary judgment entered in favor of an insurer on a claim

of failing to reasonably investigate under § 33-18-201(4), MCA, on the simple ground the

insurer was alleged to have failed to obtain a police report about the subject accident.

Insurers have an obligation to seek out information, and I believe this decision will add

confusion to the law by stating they do not. Further, the Court’s statement that insurers

will be required “to defend and/or indemnify based on the information discovered”

outside the complaint could likewise create a strange incentive for insurers to avoid

knowledge of the facts—one which would be inconsistent with the requirements of the

UTPA.

¶53 Staples was an important holding in which we took pains to clarify that an

insurer’s duty to defend was based upon the pleadings, and we have since consistently

followed that decision. I believe the Opinion’s survey of thirty years of cases and the

classification into three scenarios overlooks the corrective course we chartered in Staples.

We provided clear rules, explaining that “[t]he 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” and that “[t]he duty to defend arises when a

25
complaint against an insured alleges facts, which if proven, would result in coverage.”

Staples, ¶¶ 20-21 (citations omitted). We further instructed that “[t]he insurer is under a

duty to construe the factual assertions from the perspective of the insured rather than

solely from the insurer’s own perspective,” that “a court must liberally construe

allegations in a complaint so that all doubts about the meaning of the allegations are

resolved in favor of finding that the obligation to defend was activated,” and that

“[u]nless there exists an unequivocal demonstration that the claim against an insured does

not fall within the insurance policy’s coverage, an insurer has a duty to defend.” Staples,

¶ 22. By my count, in the five years since Staples was decided, it has been cited in our

cases for these principles 16 times. The three case scenarios offered by the Court, and on

which it bases its decision, have not occurred since Staples, most notably Burns and

Strecker, which excused insurers from the duty to defend on the basis of information

outside the complaint. It is this approach about which we cautioned in Staples, holding

that such a strategy is pursued at the insurer’s risk. The Court uses Burns and Strecker as

the reason a new corresponding rule must be created requiring insurers to accept the duty

to defend on the basis of outside information. See Opinion, ¶ 30 (“We conclude this

same analysis should be utilized when the complaint does not present a claim which on

its face is covered by the policy, but the insurer nonetheless has information which could

give rise to a duty to defend . . . .”). However, this is a “straw man” analysis. Staples has

relegated Burns and Strecker to the ash heap. As noted by counsel during oral

arguments, no longer will insurers look outside the complaint to deny coverage, as

Staples has made it entirely too risky to do so.

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¶54 The Court purports to distinguish Staples on the ground that Staples involved a

disputed fact (the ownership of the horse), whereas the critical fact here (Manchester’s

involvement) was undisputed. See Opinion, ¶ 32. With all respect, I believe the Court

does a disservice by uprooting established rules governing the insurer’s duty to defend

based upon whether or not facts in a particular case are disputed. Disputed facts are to be

resolved in favor of coverage, but that is not the question. The question is to what source

an insurer should look to determine whether a claim asserted against the insured comes

under the policy’s coverage. I submit that source should be the pleadings.

¶55 Beyond our precedent for that rule, this is common sense. Pleadings contain the

actual claims brought against the insured. Communications, reports, investigations, other

extra-litigation materials—even discovery—do not. A claimant can only obtain

judgment against the insured for what is claimed in the pleadings. An insurer may be

aware, from its investigation, of many facts which could support various claims against

the insured. However, if those claims are not actually brought, why should the insurer be

required to defend against them? Although the Court here is concerned that a complaint

is drafted by the claimant, over whom the insured has no control, see Opinion, ¶ 39, this

is the inherent nature of all litigation. A claimant is entitled to draft his own complaint,

and he may or may not draft it in a manner that triggers coverage. That reality should not

dictate the rules governing an insurer’s duty to defend. As the Court notes, we have long

understood that “if the alleged facts fail to bring the case within the policy coverage, the

insurer is free of such obligation [to defend], at least initially. Stated differently, the

insurer is under an obligation to defend only if it could be held bound to indemnify the

27
insured, assuming that the injured person proved the allegations of the complaint,

regardless of the actual outcome of the case.” McAlear, 158 Mont. at 457, 493 P.2d at

334 (emphasis added). Here, consistent with McAlear, St. Paul was initially free of the

obligation to defend because the complaint did not assert a claim based upon

Manchester’s involvement.

¶56 The Court’s determination to create new rules is driven by the apparent inequity it

sees in St. Paul having “actual knowledge of the facts” giving rise to coverage, but which

were not pled in the complaint. Opinion, ¶ 27. The solution I would offer for that

problem is below, but I would first note that the Court’s approach creates for every case a

“what did they know and when did they know it” inquiry to determine the insurer’s duty

to defend, essentially requiring an insurer to defend every case until it obtains a judgment

to the contrary in a separate declaratory action. This is evident by the Court’s

distinguishing of our decision in Rumph. The Court reasons that “unlike in Rumph, St.

Paul undeniably had knowledge of Manchester’s responsibility for Phillips’ damage

before Phillips’ Complaint was ever filed . . . .” Opinion, ¶ 38 (emphasis in original).

Abandoning the certainty of the rules we crafted in Staples in favor of such factual

hairsplitting, inevitably spurring additional litigation, should give us pause.

¶57 I believe there is a solution for cases such as this which would continue to honor

our recent precedent. First, I would retain our rules governing the duty to defend, stated

best in Staples, clarifying only that an insurer must initially decide its duty to defend from

the pleadings—construed, as we have held, in favor of the insured. Staples commonly

referred to the “complaint,” but claims can also rise in later pleadings, such as here,

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where the Manchester claim arose in a third party complaint. After the initial complaint,

if further pleadings are filed, these also must be submitted to the insurer to determine

whether it has a duty to defend thereunder. This would constitute the “initial”

determination. McAlear, 158 Mont. at 457, 493 P.2d at 334. Then, if either side wants

the coverage question to be determined by a court on the basis of information outside the

pleadings—either the insured, who wants to establish coverage by additional information,

or the insurer, who wants the absence of coverage declared by additional information—

they can initiate a separate declaratory action to do so, and a court can decide the

coverage question based upon the discovery conducted in that action. This was the very

approach pursued in Rumph, a post-Staples case.

¶58 In this case, it is undisputed that St. Paul did know of facts that could trigger

coverage with regard to Manchester’s involvement. However, conspicuously absent from

the Court’s opinion is any indication that St. Paul was advised or informed that a claim

alleging Manchester’s involvement had been filed in any pleading in the lawsuit. In oral

argument, St. Paul stated they were never advised of the third party complaint which

Revelation had filed against Manchester. I assume the Court has chosen to be silent on

the issue because, without notification that a claim involving Manchester had been pled, a

duty to defend by St. Paul would not have arisen under our recent jurisprudence.

Because Revelation did not establish that it notified St. Paul that a pleading alleging

Manchester’s involvement was filed in the underlying lawsuit, which Revelation litigated

to a conclusion, Revelation should not be allowed to escape what has been our recently

clear rule, that the duty to defend is triggered by the pleadings. Instead, the Court is

29
holding St. Paul responsible for failing to anticipate that this Court would deviate from

our recently clear jurisprudence.

¶59 I would affirm.

/S/ JIM RICE

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