Unpublished Disposition, 919 F.2d 145 (9th Cir. 1985)

MEMORANDUM^* 

St. Paul Fire and Marine Insurance Co. ("St. Paul") timely appeals the district court's judgment in favor of the appellees. The district court held that the insurance policy St. Paul issued to defendant Russell Peterson covered the property and personal injury claims asserted by defendant Evonne Mihelic ("Mihelic"). Mihelic's claims arose from a snowmobile collision between her and Douglas Peterson. We affirm in part and reverse in part.

* In 1985, St. Paul issued an Agri-Business insurance policy to Russell Peterson and the 40 Bar Ranch. The policy provided three separate types of coverage: Farm Property Protection, Farm Liability Protection, and Auto Liability Protection.

On February 18, 1985, Douglas Peterson was involved in a snowmobile collision with Mihelic, who was allegedly injured as a result. At the time of the accident, Peterson was using a ranch snowmobile to participate in a "poker run." He was on a public road covered with several feet of snow, accessible only by snowmobiles and similar vehicles.

Mihelic filed a complaint seeking damages from Douglas Peterson for negligence and from Russell Peterson for negligent entrustment. The Petersons tendered defense of the complaint to St. Paul under the Agri-Business policy. St. Paul denied coverage but provided a defense to the Petersons under a specific reservation of rights. Subsequently, St. Paul brought this action seeking a declaratory judgment that it did not have an obligation to either defend or indemnify the Petersons.

The district court ruled that because the Farm and the Auto Liability sections contained ambiguous phrases, the policy must be construed against the insurer to allow coverage. The court also concluded that even if the policy is not ambiguous the reasonable expectations of the Petersons mandated coverage. Moreover, the court held that Mihelic's negligent entrustment claim is covered by the policy. Finally, the court refused to award attorney's fees to the Petersons because there was no evidence that St. Paul acted in bad faith in bringing the declaratory judgment action.

On appeal, St. Paul insists that the relevant sections of the policy unambiguously exclude coverage for Mihelic's claims. On cross-appeal, the Petersons argue that the district court erred in refusing to grant their request for attorney's fees.

We affirm that the Farm Liability section does provide coverage for Mihelic's claims. However, we reverse the district court's ruling that the Auto Liability section provides coverage. In addition, we affirm the district court's rulings that the policy provides coverage for Mihelic's claim of negligent entrustment and that appellees are not entitled to attorney's fees.

II

Since this is a diversity case, we will apply the substantive laws of Montana, the state in which the district court sat. See Farmers Alliance Mutual Ins. Co. v. Miller, 869 F.2d 509, 511 (9th Cir. 1989) (citing Erie R.R. v. Tompkins, 304 U.S. 64 (1938)). Although choice of law rules are substantive, see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941), we may safely apply Montana insurance law, as both sides appear to concede its applicability.

Under Montana law, an ambiguous provision in an insurance policy will be construed against the insurer's interpretation and in favor of the insured's interpretation. Bauer Ranch v. Mountain W. Farm Bureau Mutual Ins. Co., 695 P.2d 1307, 1309 (Mont.1985). A provision is ambiguous "when different persons looking at it in the light of its purpose cannot agree upon its meaning." In fact, "strict construction in favor of the insured applies particularly to exclusionary clauses." Taylor-McDonnell Constr. Co. v. Commercial Union Ins. Co., 744 P.2d 892, 894 (Mont.1987)

Although Montana law mandates that an insurance contract be interpreted in its entirety¹  the Agri-Business policy should not be considered as a whole. The policy provides coverage for three distinct risks: Farm Property, Farm Liability, and Auto Liability. These are in separately paginated forms containing their own definitions of identical phrases. Peterson had chosen these three coverages from a lengthy list of insurance options. In short, this policy is not an organic document but a series of separate policies that Peterson chose according to his needs. Since the sections of this policy insure distinct risks, there is no reason to assume that terms will be used consistently in all the sections. Accordingly, we consider each section separately from the others in our analysis.

* We affirm the district court's ruling that the Farm Liability Protection section provides coverage for Mihelic's claims. This section purports to "protect against liability claims from [the insured's] personal activities or farming operations." It contains an auto exclusion which states that the insurance company will not cover any injury or damage caused by a recreational vehicle that occurs away from the "described location."²  Although the policy specifically defines the term "recreational vehicles" to include snowmobiles,³  St. Paul admits that the Farm Liability Protection section of the policy does not define the phrase "described location." This is doubly troubling, for not only is the phrase "described location" vague, but the word "described" in effect promises that a description is provided elsewhere in this section of the policy. Nonetheless, St. Paul insists that the commonsensical meaning of "described location" includes only the contours of the 40 Bar Ranch.⁴ 

Yet we believe there are two ways of interpreting this phrase. "Described location" might mean just the confines of the ranch or it might include areas outside the ranch.⁵  After all, the Farm Liability section is supposed to cover farming operations and the Petersons perform ranching operations outside the ranch. Indeed, the district court made a factual finding that the "ranching operation of the 40 Bar Ranch take the Petersons and their employees into numerous areas of Beaverhead county and onto property which is not owned by the Petersons." Thus, it is possible to interpret the phrase "described location" in this section of the policy as including much of Beaverhead county instead of just the confines of the ranch. Because of the ambiguity of this phrase, we construe the section in favor of the insured. Consequently, the snowmobile collision which occurred outside the ranch is covered by the policy.⁶ 

B

The district court erred in ruling that there is coverage under the Automobile Liability Protection section because it incorrectly concluded that the term "snowmobile" is an ambiguous phrase. In fact, under this section, it is clear that a snowmobile is considered "mobile equipment" and is thus subject to exclusion.

The Auto Liability section is designed "to protect against liability claims involving covered autos." The policy language in dispute reads as follows:

Autos are cars, trucks, trailers, semi-trailers and other land vehicles designed for travel on public roads, but not mobile equipment unless it's carried or towed by a covered auto.

Mobile equipment means the following types of land vehicles:

* Those that don't have to be licensed.

* Those designed for use mainly off public roads.

Several factors support the conclusion that this section unambiguously considers snowmobiles to be mobile equipment not subject to coverage. First, as a matter of Montana law, a snowmobile does not need to be licensed. See Montana Code Ann. Sec. 23-2-601(10). Second, Montana statutory law suggests that snowmobiles are not designed primarily for use on public roads. In fact, snowmobiles are described as "designed primarily for travel on snow or ice." Id. Third, the common and nontechnical reading of the term "snowmobile," see Bauer Ranch, 695 P.2d at 1309, supports the conclusion that a snowmobile is designed primarily for use on snow. See The Random House College Dictionary 1245 (rev.ed. 1980) (defining snowmobile as "a vehicle adapted for traveling on or through snow"). Whether there is a road underneath the snow would appear to be wholly irrelevant. The fact that snowmobiles can travel over roads does not mean that snowmobiles were designed primarily for use on public roads.⁷ 

Hence, the Auto Liability Protection section of the policy is not ambiguous. Snowmobiles are mobile equipment under this section and are therefore denied coverage.

III

Since we have already decided that Mihelic's claim is covered by the Farm Liability Protection section, we do not need to discuss whether the so-called reasonable expectation doctrine necessitates coverage.

IV

We affirm the district court's conclusion that the policy provides coverage for Mihelic's claim of negligent entrustment. Negligent entrustment is itself a claim based on negligent conduct, which the policy clearly covers. St. Paul attempts to show that appellee Mihelic provided no evidence of negligent entrustment in the state court trial and that the only evidence upon which the district court could have based its ruling was the bare allegations of the complaint. St. Paul completely misunderstands the nature of this declaratory judgment, however. This action has nothing to do with whether Mihelic could properly prove anything, let alone negligent entrustment in the state trial. Instead, the district court's order properly focused on whether the instant policy provides coverage for the type of claims at issue in the state tort trial. Whether the Petersons are actually liable is a completely separate question to be answered by the state court. Burns v. Underwriters Adjusting Co., 765 P.2d 712, 713 (Mont.1988), in which the court held that mere allegations contained in a pleading are insufficient to invoke coverage under an insurance policy, is completely inapposite because it deals not with a declaratory judgment action but with an actual suit on the merits.

V

In addition, we affirm the district court's decision denying attorney's fees to the Petersons. We apply Montana law on this question. See Shakey's Inc. v. Covalt, 704 F.2d 426, 435 (9th Cir. 1983). Montana cases consistently have stressed that wrongful conduct on the insurer's part must be found before attorney's fees can be granted in a declaratory judgment action. See Truck Ins. Exch. v. Woldstad, 687 P.2d 1022, 1025 (Mont.1984); Lindsay Drilling & Contracting v. United States Fidelity & Guar. Co., 676 P.2d 203, 206 (Mont.1984); Home Ins. Co. v. Pinski Bros. Inc., 500 P.2d 945 (Mont.1972). On the basis of these cases, a federal district court in our circuit has predicted that the Montana Supreme Court would not extend the Pinski Bros. rationale to cases where the insurer prosecutes the declaratory judgment in good faith. See Iowa Mutual Ins. Co. v. Davis, 689 F. Supp. 1028, 1030-32 (D. Mont. 1988). The court specifically noted that an insurer who provides the insured a defense under a reservation of rights would not be acting in bad faith. See id. at 1031. We agree with this analysis; consequently, because St. Paul provided a defense under a reservation of rights, and because the Petersons have failed to present independent evidence of bad faith, we agree with the district court that attorney's fees cannot be awarded to the Petersons.

III

AFFIRMED in part and REVERSED in part.

WALLACE, Circuit Judge, concurring and dissenting:

I concur in parts IIB and V of the majority disposition. Because I conclude, unlike the majority, that there is no coverage for the accident under the Farm Liability section, I dissent.

It seems strange that a policy covering a farm operation could be stretched to cover a racing accident caused by a recreation vehicle (a snowmobile) far from the farm. Indeed, I see no reason to depart from that common sense result because of the alleged ambiguities in this policy.

The majority recognizes that ordinarily the Montana court would consider this as one policy and construe it in its entirety. Majority at 4, n. 1. I see no reason to trifurcate what was obviously meant to be one Agri-Business policy. The term "described location" is clearly defined in the farm property section to include only ranch property. Thus, if the Agri-Business policy is read in its entirety, the snowmobile accident occurring off the ranch would not be covered. I would so construe it.

This result is consistent with the application for the insurance. The application lists the "premises" as a ranch and describes the "farm and residence." No doubt it does not say specifically what "described location" is--but it appears to me to be obvious. Indeed, the application demonstrates an intent not to cover "Snowmobiles."

I, therefore, would need to reach the application of the reasonable expectation doctrine, but would conclude that this doctrine does not provide coverage. The record does not support, in my mind, that the insured reasonably expected the Agri-Business farm policy to cover a snowmobile race far from the farm.