MCALEAR v ST PAUL INS COS
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No. 12113 I N T E SUPREME C U T O THE STATE O MONTANA H OR F F 1972 ALLEN L McALEAR, . P l a i n t i f f and Respondent, SAINT PAUL INSURANCE COMPANIES, a Corporation, Defendant and Appellant. D i s t r i c t Court of t h e Fourteenth J u d i c i a l D i s t r i c t , Honorable N t A l l e n , Judge p r e s i d i n g a . Appeal from: Counsel o f Record : For Appellant : P a t r i c k F Hooks argued, Townsend, Montana. w w Glenn F Kenney appeared, Helena, Montana. For Respondent: A l l e n L. McAlear argued, Bozeman, Montana. Submitted: Decided: Filed : 1]fi~q 3 7 * . 1972 January 12, 1972 JPN 3 11972 Mr. Justice Frank I. Haswell delivered the Opinion of the Court. In a declaratory judgment action involving an attorney's professional liability insurance policy, the district court held the insurer liable for the cost of its insured's defense against a third-party property damage action based upon a collision caused by the insured's runaway airplane. From this final judgment, the insurer appeals. The single controlling issue upon appeal is whether the insurer is liable for the costs of such defense incurred by its insured. The district court held the insurer liable. We reverse. The facts in this case are uncontradicted as the case was submitted on the basis of an agreed statement of fact which included the pleadings, stipulated exhibits, and discovery proceedings. On November 14, 1969, plaintiff Allen F. McAlear, a Bozeman attorney, purchased a professional liability policy from defendant, Saint Paul Insurance Companies, containing the following insuring agreement and exclusions: "Insuring Agreements "Coverage A - Professional Liability "To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages arising out of the performance of professional services for others in the Insured's capacity as a lawyer and caused by the Insured or any other person for whose acts the Insured is legally liable (the performance of professional services shall be deemed to include the Insured's acts as an administrator, conservator, executor, guardian, trustee or in any similar fiduciary capacity, but only to the extent for which in the usual attorneyclient relationship the Insured would be legally responsible as attorney for a fiduciary) and t h e Company s h a l l have t h e r i g h t and d u t y t o d e f e n d i n h i s name and b e h a l f any s u i t a g a i n s t t h e I n s u r e d a l l e g i n g damages, even i f such s u i t i s g r o u n d l e s s , f a l s e o r f r a u d u l e n t ; b u t t h e Company s h a l l have t h e r i g h t t o make such i n v e s t i g a t i o n and n e g o t i a t i o n o f any claim o r s u i t a s may be deemed e x p e d i e n t by t h e Company. The Company, however, s h a l l n o t make s e t t l e m e n t or compromise any claim or s u i t without t h e w r i t t e n consent of t h e Insured." The " E x c l u s i o n s " s e c t i o n of t h e p o l i c y s p e c i f i c a l l y provides : "Coverage A d o e s n o t a p p l y : " ( 3 ) t o b o d i l y i n j u r y t o , or s i c k n e s s , d i s e a s e or d e a t h o f any p e r s o n , o r t o i n j u r y t o o r d e s t r u c t i o n of any t a n g i b l e p r o p e r t y , i n c l u d i n g t h e l o s s of u s e t h e r e o f . " During t h e p o l i c y p e r i o d McAlear f l e w t o S a l t Lake C i t y w i t h a c l i e n t , Robert S. Beck. Beck had c o n t a c t e d McAlear re- g a r d i n g t h e p u r c h a s e o f a t r a i l e r and it was n e c e s s a r y f o r them t o go t o S a l t Lake C i t y t o o b t a i n f i n a n c i n g from a p r i v a t e i n d i vidual. A s t h e sellers w e r e i n s o l v e n t it w a s n e c e s s a r y t o com- p l e t e t h e t r a n s a c t i o n and g e t t h e t i t l e r e c o r d e d b e f o r e l i e n s could be recorded a g a i n s t t h e s e l l e r ' s e q u i t y i n t h e trailer. Beck and McAlear had flown t o S a l t Lake C i t y on March 20, 1969, i n McAlear's p l a n e f o r t h i s purpose. b u s i n e s s on March 2 1 and 2 2 . They t r a n s a c t e d t h e i r A t a b o u t 6:00 a.m. on March 2 3 , w h i l e p r e p a r i n g t o r e t u r n t o Bozeman, McALear was engaged i n a p r e f l i g h t inspection of h i s plane. H e manually t u r n e d o v e r t h e p r o p e l l o r w h i l e t h e i g n i t i o n was i n t h e "on" p o s i t i o n . This caused t h e p i l o t l e s s a i r p l a n e t o a c c e l e r a t e down t h e ramp and crash i n t o three other airplanes. On May 21, 1970, an action was filed in the United States District Court in Utah by Gordon S. Burchett, the owner of one of the damaged planes. The Burchett action sought damages a- gainst McAlear for his alleged negligence and sought recovery of repair costs, depreciation and loss of use of Burchett's airplane. McAlear's professional liability policy with his insurer, Saint Paul Insurance Companies, is the sole basis for his claim in the instant declaratory judgment action. Paul that it He demanded of Saint defend him in the Burchett action. Saint Paul denied this demand on the basis that his policy afforded no coverage and accordingly it owed him no duty to defend. McAlear then hired his own attorney to defend in the Burchett action. Thereafter McAlear brought the instant declaratory judgment action against Saint Paul seeking a judgment holding it* liable for the reasonable costs of his defense. The case was filed in the district court of Meagher County and submitted to the district court, sitting without a jury, for decision on the basis of an agreed statement of facts. The district court on July 2, 1971 entered an "Order", in effect the judgment, providin material part: "IT IS HEREBY ORDERED, ADJUDGED AND DECREED, that the Plaintiff recover for his cost of defense in the suit brought against him. "It appears to the Court that the policy was carelessly written, and since this is the fault of the insurance company, they should pay for their own carelessness, because certainly the duty to defend is not limited to the liability of the policy." Following d e n i a l of i n s u r e r ' s motion t h a t t h e c o u r t e n t e r w r i t t e n f i n d i n g s of f a c t and c o n c l u s i o n s s f l a w , t h e insurer appeals, The t h r u s t of i n s u r e r ' s p o s i t i o n i n t h e i n s t a n t case i s t h a t i t s d u t y t o d e f e n d i s l i m i t e d t o claims a g a i n s t t h e insured w i t h i n t h e coverage of t h e p o l i c y . The i n s u r e r con- t e n d s t h a t where, a s h e r e , t h e r e i s no p r i m a r y i n d e m n i t y c o v e r a g e f o r t h e B u r c h e t t a c c i d e n t , it h a s no d u t y t o d e f e n d . Insurer p o i n t s o u t t h a t t h e b a s i c i n s u r i n g agreement i n t h e p o l i c y (Covera g e A ) , p r o p e r l y c o n s t r u e d , s o l i m i t s t h e d u t y t o d e f e n d and t h a t t h e p o l i c y c o n t a i n s a n e x p r e s s e x c l u s i o n of p r o p e r t y dama g e claims ( E x c l u s i o n 3 ) . On t h e o t h e r hand, t h e g i s t of t h e i n s u r e d ' s p o s i t i o n i s t h a t t h e d u t y t o d e f e n d i s c o n t r a c t u a l and where, as h e r e , t h e d u t y t o d e f e n d i s u n r e s t r i c t e d by t h e terms of t h e p o l i c y , t h e duty t o defend is n o t l i m i t e d t o t h e primary indemnity coverage of t h e policy. According t o t h e i n s u r e d , t h e d u t y t o d e f e n d i n t h e i n s t a n t c a s e i s e n t i r e l y i n d e p e n d e n t of t h e p r i m a r y i n demnity c o v e r a g e o f t h e p o l i c y . Thus, t h e i n s u r e d a r g u e s , where t h e B u r c h e t t c o m p l a i n t f a l l s w i t h i n t h e s c o p e of t h e " d u t y t o defend" provision i n t h e p o l i c y , t h e i n s u r e r i s o b l i g a t e d t o defend without regard t o t h e primary indemnity coverage a f f o r d ed by t h e p o l i c y . A s a c o r o l l a r y t o t h i s argument, t h e i n s u r e d i n s i s t s t h a t t h e e x c l u s i o n o f p r o p e r t y damage c l a i m s from t h e primary indemnity c o v e r a g e a f f o r d e d by t h e p o l i c y i n no way l i m i t s t h e duty of t h e i n s u r e r t o defend. O r d i n a r i l y a l i a b i l i t y i n s u r e r has no d u t y t o d e f e n d an a c t i o n a g a i n s t t h e i n s u r e d when t h e c l a i m o r c o m p l a i n t d o e s n o t f a l l w i t h i n t h e c o v e r a g e of t h e l i a b i l i t y p o l i c y . I f the i n s u r e r would have no o b l i g a t i o n t o indemnify t h e i n s u r e d s h o u l d t h e c o m p l a i n a n t r e c o v e r , t h e n t h e r e i s no c o n t r a c t u r a l o b l i g a t i o n t o afford a defense. This general r u l e i s s u c c i n c t l y s t a t e d i n 50 ALR2d a t page 472, a s f o l l o w s : " * * * a l i a b i l i t y i n s u r a n c e company h a s no d u t y t o defend a s u i t b r o u g h t by a t h i r d p a r t y a g a i n s t t h e i n s u r e d where t h e p e t i t i o n o r c o m p l a i n t i n s u c h s u i t upon i t s f a c e a l l e g e s a s t a t e of f a c t s which f a i l s t o b r i n g t h e case w i t h i n t h e c o v e r a g e o f t h e p o l i c y . Cons e q u e n t l y t h e company i s n o t r e q u i r e d t o d e f e n d i f it would n o t be bound t o indemnify t h e i n s u r e d even though t h e c l a i m a g a i n s t him should p r e v a i l i n t h a t action." To l i k e e f f e c t see 49 ALR2d 703; 1 1 4 U . o f Pa. Law Review.734, "The I n s u r e r ' s Duty t o Defend Under a L i a b i l i t y I n s u r a n c e P o l i c y " pp. 747-749, 757; 7A Appleman I n s . L. & P., S 4685, pp. 462, 471. The a l l e g a t i o n s i n t h e c o m p l a i n t a g a i n s t t h e i n s u r e d d e t e r m i n e whether t h e r e i s c o v e r a g e under t h e p o l i c y . e r a l r u l e i s w e l l s t a t e d i n 4 4 AmJur 23, I n s u r a n c e , s T h i s gen1539; "Upon t h e b a s i s o f t h e a l l e g a t i o n s of t h e c o m p l a i n t o r p e t i t i o n , t h e c o u r t s have a d o p t e d t h e following tests f o r determining whether particular allegations require the insurer t o defend t h e a c t i o n brought a g a i n s t t h e insured: i f t h e complaint i n t h e a c t i o n brought a g a i n s t t h e i n s u r e d upon i t s f a c e a l l e g e s f a c t s which come w i t h i n t h e c o v e r a g e of t h e l i a b i l i t y p o l i c y , t h e i n s u r e r i s o b l i g a t e d t o assume t h e d e f e n s e of t h e a c t i o n ; b u t i f t h e a l l e g e d f a c t s f a i l t o bring t h e case within t h e p o l i c y coverage, t h e i n s u r e r i s f r e e of such o b l i g a t i o n , a t least i n i t i a l l y . Stated d i f f e r e n t l y , t h e i n s u r e r i s u n d e r an o b l i g a t i o n t o d e f e n d o n l y i f it c o u l d b e h e l d bound t o indemnify t h e i n s u r e d , assuming t h a t t h e i n j u r e d p e r s o n proved t h e a l l e g a t i o n s of t h e c o m p l a i n t , r e g a r d l e s s of t h e a c t u a l outcome of t h e case. * * * " Measuring t h e B u r c h e t t c l a i m a g a i n s t t h e p o l i c y prov i s i o n s h e r e , i t i s clear t h a t B u r c h e t t ' s a c t i o n i s a p r o p e r t y damage c l a i m s e e k i n g money damages f o r M c A l e a r ' s a l l e g e d negl i g e n c e i n damaging B u r c h e t t ' s p l a n e , d e p r e c i a t i o n i n i t s v a l u e , and l o s s o f i t s u s e . The p o l i c y e x p r e s s l y e x c l u d e s from cover- a g e " i n j u r y t o o r d e s t r u c t i o n of any t a n g i b l e p r o p e r t y , i n c l u d i n g t h e l o s s of use thereof". Under such c i r c u m s t a n c e s t h e r e i s no d u t y t o defend, a s h a s been w e l l e x p r e s s e d by t h e Michigan Supreme C o u r t i n Duval v . Aetna C a s u a l t y & Surety Co., 3 0 4 Mich. "The i n s u r e r i s n o t r e q u i r e d t o d e f e n d t h e i n s u r e d a g a i n s t claims e x p r e s s l y excluded from coverage i n t h e p o l i c y , The e x c e p t i o n i n t h e p o l i c y i s a p a r t o f t h e c o n t r a c t between t h e p a r t i e s . The d u t y o f t h e i n s u r a n c e company t o defend was n o t i n d e p e n d e n t o f t h e d u t y t o pay damages, i f any, The two p r o v i s i o n s a r e not separable." However, McAlear c o n t e n d s t h a t t h e "duty t o d e f e n d " prov i s i o n of h i s p o l i c y i s u n i q u e , t h e r e b y t a k i n g h i s case o u t s i d e t h e s c o p e of t h e g e n e r a l r u l e . He points out t h a t the basic in- s u r i n g agreement, Coverage A , p r o v i d e s i n material p a r t " t h e company s h a l l have t h e * * * duty t o defend * * * any s u i t a g a i n s t t h e I n s u r e d a l l e g i n g damages, even i f s u c h s u i t i s g r o u n d l e s s , false o r fraudulent", H e f u r t h e r c o n t e n d s t h i s p r o v i s i o n con- s t i t u t e s a n u n r e s t r i c t e d c o n t r a c t u a l o b l i g a t i o n on t h e p a r t of t h e i n s u r e r t o d e f e n d w i t h o u t r e g a r d t o t h e primary indemnity coverage a f f o r d e d by t h e p o l i c y . M c A l e a r c o n t e n d s t h a t because such language n e i t h e r r e f e r s t o n o r r e s t r i c t s t h e d u t y t o d e f e n d t o damage a c t i o n s w i t h i n t h e coverage o f t h e p o l i c y , any s u i t f o r damages within the scope of the "duty to defend" provisions of the policy imposes such duty on the insurer. For emphasis, he points out that under coverage B in the policy (not purchased by the insured in the instant case) the duty to defend is restricted by the following language: " * * * the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless * * *". Regarding interpretation of the terms of the policy here, the insured insists that an insurance policy differs from an ordinary contract between two persons in that there is no true negotiation and bargaining between the insurer and the insured in arriving at the terms of an insurance policy; that the terms of the policy are standardized by the insurer and offered to the insured on a "take-it-or-leave-it" basis; and that the insured really has nothing to say about the policy terms because of his lack of any real bargaining power with the insurer. The insured here reminds us that because of such circumstances existing in non-negotiated "adhesion" contracts such as insurance policies, a11 doubts as to the meaning of the terms in the policy must be resolved in favor of the insured and against the insurer. We recognize this principle of interpretation of "adhesion" contracts as expressed by the California Supreme Court in Gray v, Zurich Insurance Company, 65 C.2d 263, 419 P.2d 168, 171: "Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which t h e p a r t i e s e x p e c t e d from them, t h e y have a l s o a p p l i e d t h e d o c t r i n e of t h e a d h e s i o n c o n t r a c t t o knsurance p o l i c i e s , h o l d i n g t h a t i n view of t h e d i s p a r a t e b a r g a i n i n g s t a t u s of t h e p a r t i e s w e must a s c e r t a i n t h a t meaning o f t h e c o n t r a c t which t h e i n s u r e d would reasona b l y e x p e c t . " (EmpHasis added. ) The Montana Supreme C o u r t h a s p r e v i o u s l y r e c o g n i z e d t h i s same t e s t i n t h e f o l l o w i n g language from S t . P a u l F i r e & Marine I n s . Co. v. Thompson, 150 Mont. 1 8 2 , 187, 433 P.2d 795: "Again l o o k i n g t o t h e Kansas r u l e which w e have a d o p t e d , w e f i n d t h a t , ' t h e t e s t i s n o t what t h e i n s u r e r i n t e n d e d t h e words of t h e p o l i c y t o mean b u t what a r e a s o n a b l e p e r s o n i n t h e p o s i t i o n of an i n s u r e d would u n d e r s t a n d them t o mean. ' " Applying t h i s t e s t t o t h e i n s t a n t c a s e , would a reasona b l e lawyer e x p e c t t h a t h i s p r o f e s s i o n a l l i a b i l i t y p o l i c y o b l i g a t e d h i s i n s u r e r t o defend him a g a i n s t damage s u i t s e x p r e s s l y excluded from t h e primary indemnity coverage of t h e p o l i c y ? Or p u t a n o t h e r way, would a r e a s o n a b l e lawyer u n d e r s t a n d t h a t h i s p r o f e s s i o n a l l i a b i l i t y p o l i c y obligated h i s i n s u r e r t o defend him a g a i n s t a l l damage s u i t s of whatever n a t u r e ? W e hold t h a t a r e a s o n a b l e lawyer would no more u n d e r s t a n d t h a t h i s p r o f e s s i o n a l m a l p r a c t i c e p o l i c y o b l i g a t e d h i s i n s u r e r t o defend him a g a i n s t damage c l a i m s a r i s i n g o u t of an a i r p l a n e a c c i d e n t t h a n a g a i n s t damages a r i s i n g o u t o f a n a s s a u l t , an automobile a c c i d e n t , o r a f a l l on t h e s t e p s o f h i s r e s i d e n c e . Both McAlear and t h e d i s t r i c t c o u r t r e l y h e a v i l y upon t h e h o l d i n g of t h i s C o u r t i n Thompson f o r t h e p r o p o s i t i o n t h a t t h e d u t y t o defend i s b r o a d e r t h a n t h e primary indemnity coverage under an i n s u r a n c e p o l i c y . There w e s a i d a t p. 188, "'"The principle that 'the duty to defend is broader than the duty to pay' is now beyond cavil." The agreement to defend is not a covenant subordinate to or dependent on the agreement to indemnify; it is distinct from, different from, independent of, and broader than the insurer's promise to pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages because of bodily injury. There is no language in the policy making the defense covenant dependent on the amount of liability for bodily injury. The defense covenant is clear, positive and unambiguous, and should be accorded its plain and ordinary meaning.' Comunale v. Traders & Gen. Ins. Co., 321 P.2d 768, 773, (Cal.App.) " Thompson is clearly distinguishable and must be construed in the light of the facts of that case. There the insured carried an automobile liability policy with State Farm Mutual Insurance Company. In prior litigation State Farm had paid the limits of the policy on a judgment against Thompson and argued that it had no further duty to defend Thompson. We held otherwise. The distinction is that in Thompson the claim against the insured was clearly within the primary indemnity coverage of his policy, while here Burchett's claim is clearly outside the primary indemnity coverage. In Thompson the insurer urged that it was relieved of its duty to defend because of payment of the liability limits, whereas in the instant case there can never be any obligation on the part of the insurer to pay any judgment in the Burchett action. Additionally, in Thompson, the duty to defend was contained in one portion of the policy, while the duty to pay was contained in another; here the duty to defend and the duty to pay are all included in one sentence. Thus, Thompson is no authority for the proposition that an insurer's duty to defend extends to cases outside the primary indemnity coverage of the policy. For the foregoing reasons the judgment of the district court is reversed and the cause dismissed. Associate Justice
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