Opinion
Cause No. CV 05-47-M-DWM.
May 4, 2006
This matter is before the Court on the parties' motions for summary judgment and Defendant's motion, pursuant to Fed.R.Civ.P. 56(f), for more time to conduct further discovery. Upon consideration of the motions, briefs and materials filed by the parties the Court hereby enters the following:
RECOMMENDATION
1. Plaintiffs' Motion for Partial Summary Judgment Re: Breach of the Duty to Defend should be GRANTED. A declaratory judgment should be entered declaring that Defendant had a duty to defend Confluence Expeditions, L.C., and that it breached such duty.
2. Defendant's Motion for Summary Judgment should be DENIED.
3. Plaintiffs' Second Motion for Summary Judgment Re: Consequences of Breaching the Duty to Defend should be GRANTED. Judgment should be entered in favor of Plaintiffs awarding them (1) the full amount of the March 25, 2005 Judgment entered in the underlying action, subject to applicable offsets, (2) post-judgment interest from the date of the March 25, 2005 Judgment pursuant to 28 U.S.C. § 1961, and (3) Plaintiffs' costs and attorneys' fees incurred in this action.
NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy of the Findings and Recommendation of the United States Magistrate Judge upon the parties. The parties are advised that pursuant to 28 U.S.C. § 636, any objections to these findings must be filed with the Clerk of Court and copies served on opposing counsel within ten (10) days after receipt hereof, or objection is waived.
IT IS FURTHER ORDERED Defendant's Rule 56(f) Motion is DENIED as moot.
RATIONALE
I. PLAINTIFFS' ALLEGATIONSThis action arises out of injuries suffered by Plaintiffs as a consequence of an automobile accident in July 2002. Plaintiffs seek compensation from Defendant as the insurance carrier for Confluence Expeditions, L.C. (Confluence), one of the parties which has been found liable for the accident.
For their Complaint Plaintiffs allege as follows:
In May 2001, Defendant issued a commercial general liability policy to Confluence covering the period of time in which the accident occurred.
David Hanna, an employee acting within the course and scope of his employment with Confluence, was driving the vehicle involved in the accident. The accident caused serious injuries to Plaintiffs and they filed the underlying lawsuit against Mr. Hanna and Confluence to recover their damages. See Nielsen, et al. v. Hanna, et al., CV 02-196-M-DWM (filed December 4, 2002). Confluence tendered defense of that lawsuit to Defendant which Defendant declined, refusing also to indemnify Confluence. The parties subsequently settled Plaintiffs' claims stemming from the accident resulting in entry of judgment against Confluence. As part of the settlement Confluence assigned to Plaintiffs all of the rights and claims it had under Defendant's insurance policy.
In this action Plaintiffs set forth two Counts.
In Count One Plaintiffs contend Defendant breached the insurance policy by refusing to provide a defense to Confluence, that Confluence suffered damage as a consequence of that breach, and that Plaintiffs', as assignees of Confluence, are entitled to the remedies available to Confluence.
In Count Two Plaintiffs seek a declaratory judgment establishing Defendant had a duty to defend Confluence, and that it breached that duty.
II. PENDING MOTIONS
Pending before the Court are several motions. Plaintiffs first filed a summary judgment motion to establish that Defendant's insurance policy provided coverage for the liability alleged against Confluence in the underlying action, that Defendant had a duty to defend Confluence, that it breached its duty, and that such breach was unjustifiable.
In response to Plaintiffs' summary judgment motion Defendant moved pursuant to Fed.R.Civ.P. 56(f) to continue the motion to allow it to first obtain further discovery. Additionally, Defendant filed its own summary judgment motion to establish that the Confluence insurance policy does not provide coverage, that it did not breach its duty to defend, and that it is not liable for the judgment in the underlying action.
Plaintiffs then filed a second summary judgment motion regarding the consequences of Defendant's failure to defend Confluence. In that motion Plaintiffs contend Defendant is liable for the full amount of the underlying judgment, together with interest accrued. Plaintiffs also seek recovery of their attorneys' fees in this action.
III. APPLICABLE LAW — SUMMARY JUDGMENT
A party moving for summary judgment is entitled to such if the party can demonstrate "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A party is entitled to summary judgment where the documentary evidence produced by the parties permits only one conclusion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). On a motion for summary judgment, this Court must determine whether a fair-minded jury could return a verdict for the nonmoving party. Id. at 252.
IV. DISCUSSION A. Duty to Defend and Insurance Policy Interpretation
Because the jurisdiction of this court is based on diversity, the substantive law of the state of Montana is applicable.
1. Duty to Defend
An insurer has a duty to defend its insured from a risk covered by the terms of an insurance policy. Farmers Union Mutual Ins. Co. v. Staples, 90 P.3d 381, 385, ¶ 20 (Mont. 2004). See also Hudson v. Edsall v. Odyssey, 29 M.F.R. 100 (D. Mont. 2001) adopted in 30 M.F.R. 462 (D. Mont. 2002). The duty to defend is distinct from, and much broader than, the duty to indemnify. Grindheim v. Safeco Ins. Co. of America, 908 F. Supp. 794, 800 (D. Mont. 1995) (citing St. Paul Fire Marine Ins. Co. v. Thompson, 433 P.2d 795, 799 (Mont. 1967)). It is triggered merely when facts are presented, or when a complaint filed against an insured sets forth facts which, if proven, would bring an event within the province of the insurance policy's coverage. Staples, at ¶ 20. The duty can arise when the insurer receives notice of a covered risk through pleadings, discovery, or through notice of final issues declared ready for trial. Grindheim, 908 F. Supp. at 798 (recognizing that notice of a claim is sufficient if received through the institution of an action against the insured). See also Staples, at ¶ 23 (concluding duty to defend arises at the time the insurer reviews the complaint and answer). Furthermore, the obligation exists even if facts alleged in the complaint present a claim for a risk not covered by the policy if the complaint also alleges facts which, if proven, would present a risk covered by the policy. Staples, at ¶ 21.
In light of the broad duty, an insurer is prohibited from developing facts to establish the non-existence of coverage. It is, after all, the allegations of a complaint against the insured which trigger the duty to defend. If the facts of the event as pled in the complaint would expose the insured to liability covered by the policy, then the insurer must defend the insured, even if the subsequent ultimate resolution of disputed facts establishes that the event or risk is not covered by the policy. Staples, at ¶ 23.
Also, under the law of the duty to defend, the insurer is limited in its interpretation of policy coverages. "The fundamental protective purpose of an insurance policy and the obligation of the insurer to provide a defense require that coverage exclusions be narrowly construed." Staples, at ¶ 22. The duty to defend prohibits the insurer "from interpreting the allegations solely from its perspective," and it must instead construe the circumstances from the perspective of the insured. Grindheim, 908 F. Supp. at 801. Staples, at ¶ 22.
[T]o determine whether the obligation to defend was "triggered," the court must liberally construe the allegations in the complaint, resolving all doubts about the meaning of the allegations in favor of finding the obligation to defend was "triggered."Grindheim. 908 F. Supp. at 805. Staples, at ¶ 22.
The duty to defend is triggered when the insured's liability is even "potentially" within the policy's coverage. Grindheim. 908 F. Supp. at 798, 802. "Unless 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, at ¶ 22 (emphasis added). Further, if there is any dispute as to facts relevant to coverage such factual disputes must be resolved in favor of finding coverage. Staples, at ¶ 24.
If an insurer believes there is a legitimate basis for contesting coverage, the better procedure is to defend the insured under a reservation of rights and file a declaratory judgment action to resolve the coverage issue. Staples, at ¶¶ 26, 28. An insurer cannot unilaterally resolve coverage issues in its favor in lieu of a declaratory judgment when there are disputed facts relative to the existence of coverage. Staples, at ¶ 26.
I remain amazed at the number of cases that have come before this court and the state courts in Montana over the years where presumably sophisticated insurance companies have ignored this maxim of insurance law at their peril. To save the relatively minor costs of tendering a defense and commencing a dec. action, these companies have exposed themselves to risk far in excess of the policy limits at issue. The reasoning behind this is difficult to fathom.
2. Insurance Policy Interpretation
Under Montana law, insurance policy provisions are interpreted "according to their usual, common sense meaning as viewed from the perspective of a reasonable consumer of insurance products." Stutzman v. Safeco Ins. Co. of Am., 945 P.2d 32, 34 (Mont. 1997). The court must consider the policy provisions from the viewpoint of a consumer of average intelligence. Id. 945 P.2d at 36 (citing Leibrand v. Nat'l Farmers Union, 898 P.2d 1220, 1224 (Mont. 1995)). Additionally, as earlier noted, exclusions from coverage are narrowly construed. Staples, at ¶ 21.
With regard to the burden of proof under the provisions of a policy, in general the party seeking the benefit of a particular provision bears the burden of proving its application. Travelers Casualty and Surety Co. v. RIBI Immunochem Research, Inc., 108 P.3d 469, 476, ¶ 40 (Mont. 2005). The insured, therefore, has the burden of establishing coverage exists under a policy, the insurer bears the burden of establishing the application of an exclusion from coverage, and the insured bears the burden of establishing the applicability of an exception to an exclusion to establish coverage. Id.
Ultimately, "the language of an insurance contract governs its interpretation." Grindheim, 908 F. Supp. at 800. See also Stutzman, at 376, 945 P.2d at 34 (concluding that the court must enforce the insurance contract as written if its language is clear and explicit). The Court "will read the insurance policy as a whole, and will if possible, reconcile its various parts to give each meaning and effect." Farmers Alliance Mutual Ins. Co. v. Holeman, 961 P.2d 114, ¶ 25 (Mont. 1998). The Court will not give any deference to any specific clause. Id.
Finally, the interpretation of an insurance contract is a question of law for the court to resolve. Pablo v. Moore, 995 P.2d 460, 462 ¶ 12 (Mont. 2000).
B. Relevant and Undisputed Facts
On May 1, 2001, Defendant issued a commercial general liability policy to Confluence covering the period of time through May 1, 2003. (Decl. of John Hart (February 6, 2006), Ex. A; Decl. of Jeffrey Ward (March 3, 2006), Ex. 2.) The applicable coverage provision of the policy provides that Defendant
will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies.
(Defendant's Statement of Uncontested Facts (SUF), ¶ 4.) The insurance applies to "`bodily injury' [. . .] caused by an `occurrence' that takes place in the `coverage territory'[.]" ( Id.) The policy provides that Defendant has the "right and duty to defend the insured against any `suit' seeking those damages[,]" but it also states Defendant has no duty to defend the insured against any suit seeking damages to which the policy does not apply. ( Id.)
Critical to Defendant's defense in this action is an exclusionary provision in the policy, discussed in more detail below, which states as follows:
"Bodily injury" or "property damage" arising out of the ownership, maintenance, use or entrustment to others of any aircraft, "auto" or watercraft owned or operated by or rented or loaned to any insured.
(Def.'s SUF, ¶ 6.)
On July 5, 2002, David Hanna, acting within the course and scope of his employment as a member, owner and employee of Confluence, lost control of a vehicle he was driving and in which Plaintiffs were passengers. The vehicle rolled causing bodily injury to Plaintiffs. (Decl. of Jeffrey Ward (March 3, 2006), Ex. 64, ¶¶ 4-9, and 41 ( Nielsen, et al. v. Hanna, et al., CV 02-196-M-DWM, Findings of Fact and Conclusions of Law (March 25, 2005)).)
On December 4, 2002, Plaintiffs filed the underlying lawsuit against David Hanna and Confluence. As originally pled, Plaintiffs' Complaint alleged only that Mr. Hanna's negligence in operating the vehicle caused the accident. (Def.'s SUF, ¶ 26.)
Confluence contacted Defendant regarding the accident and the lawsuit. In letters dated November 13, 2002, and January 2, 2003, Defendant informed Confluence it believed the insurance policy did not provide coverage for the liability alleged from the accident. (Def.'s SUF, ¶¶ 22 and 27.) Citing to the exclusionary provision quoted above, Defendant concluded the policy excludes coverage for damages that arise out of the use of an "auto" owned or operated by an insured. (Decl. of Ward, Ex. 16 and 19.) Defendant's position was that the automobile involved in the accident was owned and operated by Mr. Hanna, Defendant's insured. ( Id.)
Gulf Insurance Company (Gulf) also insured Confluence under an automobile policy. (Def.'s SUF, ¶ 7.) Gulf appropriately defended Confluence in the underlying action, and also intervened in the action on its own behalf to challenge the existence of coverage under its policy. ( Id. ¶ 29.) Gulf argued, through its attorney Lynn Grant, that the policy did not provide coverage for Mr. Hanna's negligence, but it suggested Confluence's own liability for its own conduct could be covered under Defendant TIG's policy. ( Id. ¶ 38.)
Attorney Gary Zadick defended Confluence. (Def.'s SUF, ¶ 35.) In response to Gulf's briefing Mr. Zadick picked up on Gulf's suggestion that insurance coverage may exist for Confluence's own negligence, as opposed to Mr. Hanna's negligence, and he began exploring that possibility. ( Id. ¶ 39.) Plaintiffs' counsel, John Hart, provided Mr. Zadick with further information concerning Defendant TIG's policy. ( Id. ¶ 40.)
Plaintiffs then filed their First Amended Complaint in the underlying action. (Decl. of Hart (February 6, 2006), Ex. G.) The First Amended Complaint asserted two new causes of action against Confluence. Count Two of that pleading alleged that Confluence breached its duty to warn Plaintiffs about Mr. Hanna's poor driving record, and Count Three alleged Confluence breached its duty to prohibit Mr. Hanna from transporting Plaintiffs for Confluence. (Def.'s SUF, ¶ 42.)
Confluence provided Defendant with a copy of the First Amended Complaint, requesting that Defendant defend and indemnify it in response to the amended pleading. (Def.'s SUF, ¶ 43.) Confluence again sent letters dated April 23, 2004, May 17, 2004, and June 23, 2004, further tendering defense of the underlying action to Defendant and seeking indemnification from it. ( Id. ¶¶ 47, 50, and 53.) In its June 23, 2004 letter, Confluence advised Defendant that it would have to assume Defendant was not going to provide a defense, and that as a consequence Mr. Zadick warned Defendant that he would
take steps necessary to protect our client Confluence Expeditions which may include entry of judgment against Confluence Expeditions in exchange for a covenant protecting it from execution and an assignment of its claims against TIG to the Plaintiffs.
( Id. ¶ 53.)
Defendant responded to Confluence's inquiries with a letter dated July 6, 2004 reaffirming its November 13, 2002, and January 2, 2003 letters denying coverage. (Def.'s SUF, ¶ 54.) It concluded its letter stating "[i]f you continue to claim there is coverage under the general liability policy, please provide me with your reasoning." ( Id.)
After various proceedings in the underlying case all of the parties entered into a settlement agreement on December 17, 2004. (Def.'s SUF, ¶ 73.) The agreement, in part, provided that a hearing would be held as to Plaintiffs' damages, and that the defendants in the underlying action would "not oppose the proof offered or the damages requested, unless the proof offered or damages requested is collusive, fraudulent or improper." (Decl. of Jeffrey Ward (March 3, 2006), Ex. 60 at 4.)
Plaintiffs' counsel submitted "Findings of Facts and Conclusions of Law" to the Court in the underlying case for consideration relative to a damages hearing held before Judge Molloy on March 25, 2005. (Def.'s SUF, ¶ 79.) Plaintiffs' presented testimony and evidence in the two hour hearing in support of their damages, following which Judge Molloy signed the Findings of Facts and Conclusions of Law resulting in an award of damages to Plaintiffs in excess of $8 million. ( Id; Decl. of Ward, Ex. 64 at 43.)
C. Policy Coverage and Duty to Defend
The Court finds a claim for liability was sufficiently alleged in Count Two of the First Amended Complaint which, if proven, presented a risk covered by the policy. This particular claim alleged Confluence breached its duty to warn Plaintiffs of the hazard of riding in a vehicle driven by Mr. Hanna.
The circumstances of the underlying action and the theories pled are substantively identical to the circumstances in Pablo v. Moore, 995 P.2d 460 (Mont. 2000). In Pablo the plaintiffs, who were injured in an automobile accident caused by the defendant's employee, sued the defendant employer alleging the employer breached a duty to warn its employee of a known danger immediately prior to the accident. Id. 995 P.2d at 461, ¶ 5. Thus, plaintiffs were suing the employer for its own conduct, not the conduct of the employee. Based on a policy coverage provision in that case identical to the one in this case, the insurer conceded, and the court agreed, that such duty to warn theory of liability was covered by the policy. Id. 995 P.2d at 461 and 464, ¶¶ 6 and 24.
Although the duty to warn theory fell within the coverage provision of the policy, the insurer in Pablo argued, as Defendant TIG argues in this case, that liability was excluded from coverage based on an exclusionary provision in that policy identical to the one in this case. Pablo, 995 P.2d at 461, ¶ 7. The court, however, concluded the phrase "arising out of" the use of an automobile was ambiguous. Id. 995 P.2d at 464, ¶¶ 24 and 25. The court construed the duty to warn theory of liability pled directly against the employer for his own conduct as liability independent from the negligent employee's conduct in his use of an automobile which caused the accident. Id. The court held that the exclusion did not unambiguously exclude such independent theory of liability from coverage. Id.
The identical circumstances, policy coverage, policy exclusion provisions, and theory of liability are present in this case. Plaintiffs alleged Confluence was liable for its own failure to warn them, and under Pablo that theory presents a claim covered by the policy and not otherwise excluded by the automobile exclusion on which Defendant relies. Confluence tendered this liability claim to Defendant for defense and Defendant refused to defend. Based on Pablo, these facts, by themselves, establish Defendant breached its duty to defend Confluence.
1. Defendant's Asserted Defenses
Although all of the foregoing is sufficient to end the Court's inquiry into the issue of the breach of the duty to defend, Defendant raises several arguments, with extensive recitation of background facts, which the Court is compelled to address. Based on the foregoing law of the duty to defend, ultimately the Court concludes Defendant's arguments are either irrelevant or lack merit.
a. Automobile Exclusion
Defendant argues the underlying action is not covered by its insurance policy based on the automobile exclusion set forth above. (Def.'s Mot. for S.J. and Supporting Br. at 12.) Defendant's position is that, despite the express liability theories pled in the underlying action, the substance of those claims is nothing more than negligent entrustment which is excluded under the automobile exclusion. ( Id. at 13-14.) Defendant relies primarily on Brabeck v. Employers Mutual Casualty Co., 16 P.3d 355 (Mont. 2000) to characterize the theories pled in the underlying action as negligent entrustment which is unambiguously excluded by the automobile exclusion. However, as discussed below, the theory of liability in that case was different from what was pled in the underlying case here.
The circumstances of the Brabeck case are not substantively different from the circumstances in either Pablo or the underlying action in this case. All three cases allege liability against an employer for an automobile accident caused by an employee. The insurance policy in Brabeck contains the identical coverage and exclusionary provisions as in this case and the Pablo case. Brabeck, 16 P.3d at 357-58, ¶ 13. The key difference with the Brabeck case, however, is the theory of liability alleged against the insured in Brabeck. There the injured third party sued the employer alleging the employee's negligence caused the automobile accident, and that the employer was vicariously liable for the negligence of the employee under the doctrine of respondeat superior. Id. at 356-358, ¶¶ 5, 11 and 16. The court concluded a claim for vicarious liability yet arose out of the use of an automobile owned by an insured and constituted the employer's negligent entrustment of an auto, squarely satisfying the elements of the automobile exclusion in the policy. Id. at 358, ¶ 17. Specifically, claims alleging the employer was liable based on the negligence of its employee in the use of an automobile triggered the policy's exclusion. Id. at 358-59, ¶ 18.
By comparing Pablo with Brabeck, the controlling distinction is clear. Whereas in Brabeck the employer was allegedly liable for the employee's conduct, thereby making the negligent entrustment exclusion applicable, in Pablo the claim was that the employer was liable for its own conduct, thereby rendering the exclusion ambiguous and thus of no effect. Similar to the pleading in Pablo, the pleading at issue here involves allegations of liability against Confluence for its own conduct, not that of the employee, in failing to warn Plaintiffs of the hazard created by riding with the employee.
Based on Pablo the automobile exclusion is held to be ambiguous as a matter of law and accordingly does not bar coverage. At a minimum Pablo establishes Plaintiffs' duty to warn claim is at least "potentially" within the policy's coverage. The holding in Brabeck does not constitute an "unequivocal demonstration" that the independent duty to warn claim against Confluence is outside of the insurance policy's coverage. As previously noted, if Defendant believed it had a legitimate basis for contesting coverage, the appropriate procedure would have been to defend under a reservation of rights and file a declaratory judgment action to resolve the coverage issue.
b. Insured's Duty Under the Cooperation Clause
Defendant next argues it was relieved of its duty to defend Confluence on the basis that Confluence breached a duty to explain to it how coverage under the policy existed and why the automobile exclusion did not apply. Defendant argues the duty exists based on the cooperation clause in the policy and the implied covenant of good faith and fair dealing.
The cooperation clause states as follows:
c. You and any other involved insured must:
[. . .]
(3) Cooperate with us in the investigation or settlement of the claim or defense against the "suit"[.]
(Decl. of Jeffrey Ward (March 3, 2006), Ex. 2.)
Confluence forwarded Plaintiffs' First Amended Complaint in the underlying action to Defendant and requested that it provide a defense to those claims. (Def.'s SUF, ¶ 43.) Defendant's July 6, 2004 letter to Confluence stated it refused to defend Confluence based entirely on its November 13, 2002, and January 2, 2003 letters denying coverage in response to the original pleading filed in the underlying action, as if it had not even considered the new claims in the First Amended Complaint. ( Id. ¶ 54.) It concluded its letter stating "[i]f you continue to claim there is coverage under the general liability policy, please provide me with your reasoning." ( Id.)
Defendant argues Confluence had a duty to respond to its July 6 request for further reasoning. Instead of providing an explanation, Defendant complains Confluence consulted Plaintiffs' counsel to determine whether an explanation should be provided. (Def.'s Mot. for S.J. and Supporting Br. at 15.)
Defendant's argument fails initially on the basis that a fair reading of the language of the policy requires cooperation only with regard to the underlying claim against Confluence, not Confluence's request for a defense and coverage. As to Defendant's reliance on the covenant of good faith and fair dealing, it strikes this Court that this is the obligation is more properly imposed on Defendant in its dealing with its insured. Defendant has twisted the obligation such that its would seem to require its insured, on its own nickel, to hire legal counsel to provide the insurer with legal analysis of the facts, claims and legal theories pled, as well as an analysis of the law applicable to the coverage and exclusionary provisions of the insurer's own policy. Reading this requirement into the policy is a stretch this court is not inclined to reach. As set forth above the law regarding the duty to defend requires only that the insured present a pleading to the insurer which sets forth legal claims which, if proven, would bring the claims within the insurance policy's coverage provisions. Such circumstances are sufficient to trigger the duty to defend without any further explanation or legal analysis from the insured.
Similarly, with regard to the implied covenant of good faith and fair dealing, although the covenant may impose certain obligations on an insured, Defendant has failed to establish such covenant includes a duty imposed on an insured to explain coverage to an insurer.
c. Counsels' Joint Effort to Create First Amended Complaint
Defendant expends considerable effort setting forth the numerous facts and details surrounding the filing of Plaintiffs' First Amended Complaint in the underlying action. Viewed in Defendant's favor, the facts do show considerable joint effort between Gary Zadick, Confluence's attorney, and John Hart, Plaintiffs' attorney, in attempting to come up with a legal theory which would result in at least potential coverage under T.I.G.'s policy for Plaintiffs' injuries in the accident. (Def.'s Mot. for S.J. and Supporting Br. at 6-8; Def.'s SUF, at pp. 8-10.)
Without going into all the details of the what T.I.G. views as improper joint effort between counsel, suffice it to say the attorneys were simply doing what creative and effective attorneys should do. Mr. Hart's clients faced significant uncompensated damages, and Mr. Zadick's client faced significant uninsured liability for Mr. Hanna's negligence in causing the accident. Mr. Zadick was simply working to find insurance coverage for Confluence's liability under a liability theory suggested by Gulf Insurance Company's counsel, Lynn Grant. (Def.'s SUF, ¶ 38.) Mr. Zadick's client was Confluence, not Defendant. In the event an insurer breaches a duty to defend, the insured is then "placed at economic risk [. . . and] should be allowed to protect itself by shifting the risk to the breaching insurer without first subjecting itself to potential financial ruin." Parsons v. National Fire Ins. Co. of Hartford, Cause No. DCV-01-1148(a) (Mont. Eighth Judicial District Court, Cascade County November 8, 2004) (Order Granting Plaintiff's Motion for Summary Judgment at 8) (quoting Great Divide Ins. Co. v. Carpenter, 79 P.3d 599, 608-609 (Alaska 2003)) (hereinafter referred to as Parsons); (Decl. of John Hart (March 8, 2006), Ex. pages 77-89.)
More importantly, now is not the time to cry foul with regard to the reasons or impetus leading to the filing of the First Amended Complaint. As stated above, the duty to defend is triggered merely upon Confluence's presentation of the First Amended Complaint to it, regardless of what led up to the filing of that pleading. Defendant cannot now relieve itself of the duty to defend by simply suggesting counsel should not have made the effort to find compensation for Plaintiffs' injuries. If the challenge had merit it should have defended and argued coverage did not otherwise exist.
d. Gulf Ins. Co. was Defending Confluence
As discussed in the facts above, Gulf was providing Confluence a defense to the liability claims against it based on Mr. Hanna's negligent operation of his automobile. Defendant argues Gulf's provision of a defense relieved it of its duty to defend Confluence. (Def.'s Mot. for S.J. and Supporting Br. at 19.)
This Court has previously considered the similar issue of whether an excess insurer has a duty to defend when the primary insurer is already defending. Security National Ins. v. Wink, 33 M.F.R. 389 (D. Mont. 2005). There the Court concluded that the provision of a defense by another insurer did not relieve the excess insurer of the duty to defend. Id. 33 M.F.R. at 395-396. That another insurer provided a defense does not constitute an unequivocal demonstration that coverage does not exist under Defendant's policy. Id.
Gulf and Defendant's respective duties to defend and indemnify are independent. Gulf provided a defense in response to Plaintiffs' original pleading alleging Mr. Hanna was negligent in driving his automobile. But, Gulf's defense did not establish it would also provide coverage for liability alleged under Plaintiffs' subsequent First Amended Complaint which was not covered by Gulf's policy. Pursuant to Pablo, supra, the First Amended Complaint alleged at least one new claim covered under Defendant's policy. That new pleading independently triggered Defendant's duty to defend in accordance with Wink regardless of Gulf's involvement.
2. Summary of Coverage and Duty to Defend
Based on the foregoing, Confluence's presentation of Plaintiffs' First Amended Complaint to Defendant triggered its duty to defend Confluence. Defendant failed to provide a defense to the claims covered under its policy, and none of Defendant's contentions relieve it of the duty to defend, or excuse its failure to defend.
The Court will now consider the consequences and damages as a result of Defendant's breach of the duty to defend.
D. Consequences and Damages Caused by Defendant's Breach
Plaintiffs have moved for summary judgment as to the damages to which they are entitled as a consequence of Defendant's breach. They request (1) damages in the full amount of the judgment entered in the underlying action; (2) interest on that judgment; and (3) their attorneys' fees incurred in this action.
An insurer's unjustified failure to defend renders it liable for defense costs and judgments. Staples, at ¶¶ 20, 27; Hudson v. Edsall v. Odyssey, 30 M.F.R. 462, 466 (D. Mont. 2002). See also Mont. Code Ann. § 28-11-316 (codifying indemnitor's duty to defend and its liability for underlying recovery against indemnitee). Furthermore, if the insurer breaches the duty to defend it is estopped from further denying coverage. Staples, at ¶ 28; Grindheim, 908 F. Supp. at 798; Mattingly v. Iowa Mut. Ins. Co., 25 M.F.R. 216, 223, 234 (1999). The failure gives rise to a breach of contract action subjecting the insurer to "such damages as were the natural and ordinary consequence of the breach." Independent Milk Cream Co. v. Aetna Life Ins. Co., 68 Mont. 152, 216 P. 1109, 1110 (1923). See also Home Ins. Co. v. Pinski Bros., Inc., 160 Mont. 219, 228, 500 P.2d 945, 950 (1972). The insurer is liable for all damages the insured sustained as a result of the breach. Grindheim, 908 F. Supp. at 808 (citing Independent Milk Cream Co.). Furthermore, absent fraud, an insured's confession of judgment, or stipulation to judgment, is valid and enforceable against the insurer. Staples, at ¶¶ 31-32; Lee v. USAA Casualty Ins. Co., 86 P.3d 562, 563 and 565, ¶¶ 9 and 22; Wink, 33 M.F.R. at 396; Parsons, at 8 and 11. Additionally, it is clear a breaching insurer is liable for the full amount of damages, including those in excess of the insurance policy limits. Lee, 86 P.3d at 565, ¶ 22; Wink, 33 M.F.R. at 393, 396; Parsons, at 12; Hudson v. Edsall v. Odyssey, 29 M.F.R. 100, 118-19, 124 (D. Mont. 2001) adopted by Chief Judge Donald W. Molloy in Hudson v. Edsall v. Odyssey, 30 M.F.R. 462, 466 (D. Mont. 2002).
Other jurisdictions have expanded on the full scope of the damages for which an insurer is liable following a breach of the duty to defend. Damages that are considered as naturally flowing from a breach of the duty to defend include: (1) the amount of a judgment against the insured; (2) costs and attorney fees incurred by the insured; and (3) any additional costs established as naturally resulting from the breach. Newhouse v. Citizens Sec. Mut. Ins. Co., 176 Wis. 2d 824, 838, 501 N.W.2d 1, 6 (1993). See Home Ins. Co., supra, 160 Mont. at 227-28, 500 P.2d at 950 (awarding attorney fees, expenses, and defense costs as damages). An insurer that breaches the duty to defend is liable on the judgment against the insured. Pershing Park, 219 F.3d at 901 (applying California law). The judgment need not necessarily be rendered on a theory within the coverage of the policy, and the insured does not have to prove that the amount of the judgment would have been smaller, or that the judgment would not have occurred, but for the insurer's failure to defend. Id. at 901-02.
Other jurisdictions also support the rule in Montana that policy limits do not restrict the amount of damages recoverable by the insured for a breach of the contract, and the full amount of a judgment against the insured in excess of the policy limits is a natural and proximate result of the breach of the duty to defend. Newhouse, at 838-39, 501 N.W.2d at 7. This is so because the insurer has available to it a procedure whereby it can either bifurcate issues of coverage from issues of the insured's liability and request a stay of the liability issues, or the insurer can defend the insured under a reservation of rights. Id. at 836, 839, 501 N.W.2d at 6-7.
1. Amount of Underlying Judgment
Based on the foregoing law, Plaintiffs are entitled to recover the full amount of the underlying judgment as damages, including the amount in excess of Defendant's policy limit.
Although all of the foregoing is sufficient to establish Defendant's liability for the underlying judgment, Defendant raises additional issues the Court feels compelled to address. First, based on case law decisions from other jurisdictions Defendant argues the judgment is unreasonable as an improper product of collusion and, therefore, Plaintiffs are not entitled to recover the amount of the judgment. Second, Defendant argues that based on Gulf's provision of a defense, it's own failure to defend did not cause any damages. Finally, Defendant argues it is not liable for the judgment because Plaintiffs did not submit a settlement demand to it within its policy limits. The Court will address each of those arguments in turn.
a. Collusion
Under Montana law, the case law decisions do not impose any independent duty upon the court or the parties to consider the reasonableness of the amount of the underlying judgment entered against the insured. See Lee, 86 P.3d at 565, ¶¶ 17-22 (awarding damages in the amount of the confessed judgment without inquiring as to the reasonableness of those damages); Parsons, at 9 (noting that the Montana Supreme Court has not imposed a reasonableness requirement on consent judgments or settlements). Defendant concedes this point of Montana law, but still argues the judgment is unreasonable based on collusion. (Def.'s Opposition to Pls.' Second Mot. for S.J., at 5.) Defendant has not cited to any controlling Montana decision in which an unreasonable judgment was entered or where collusion occurred.
Defendant argues collusion bars enforcement of the underlying judgment in this case based on various case law decisions. First, in Continental Casualty Co. v. Westerfield, 961 F. Supp. 1502, 1504-05 (D.N.M. 1997) the court followed New Mexico law which required that the settlement entered without the insurer's consent or knowledge must be reasonable and entered in good faith. As described above, such requirement does not exist under Montana law.
Further, in Westerfield the court invalidated the amount of the judgment due to the absence of competing interests between the parties because the insured retained a percentage interest in the subsequent recovery against the insurer which gave the insured financial incentive not to oppose any damages sought. 961 F. Supp. at 1506, 1507-08. Here, Confluence did not retain any interest in the recovery against Defendant.
Additionally, the court in Westerfield proceeded to consider various other factors of unreasonableness as required under New Mexico law. Such consideration of the reasonableness of the damages awarded is not required under Montana law.
Second, Defendant cites to Independent School Dist. No. 197 v. Accident and Casualty Ins. of Winterthur, 525 N.W.2d 600 (Minn.App. 1995) wherein the court reviewed the validity of the insured's settlement with a third-party claimant. Again, the court in that case was bound by Minnesota law requiring that a settlement by an insured must be reasonable and prudent, and must be without fraud or collusion. Id. 525 N.W.2d at 607. The court found questions of fact on those issues to be resolved by the trier of fact. Id. at 608. Montana law does not impose those same requirements for independent review by this Court.
Finally, although in the following decisions the courts considered whether abuse, fraud, or collusion existed relative to the underlying judgment against the insured, the courts found none. National Union Fire Ins. Co. v. Lynette C., 33 Cal. Rptr. 2d 496, 506 (Cal.App. 3 Dist. 1994); Pruyn v. Agricultural Ins. Co., 42 Cal. Rptr. 2d 295, 314 (Cal.App. 2 Dist. 1995).
One final case cited by Defendant found questions of fact as to whether collusion existed. Span, Inc. v. Associated International Ins. Co., 277 Cal. Rptr. 828, 839-40 (Cal.App. 2 Dist. 1991). However, applicable California law in that case required consideration of evidence of collusion. Id.
Montana law does not require an independent review of reasonableness or collusion. Even if the Court were to consider those issues the evidence on which Defendant relies does not rise to the level of collusion. Defendant's laundry list of collusive efforts, as paraphrased by the Court, is as follows:
* the parties engaged in a joint effort to prepare and file the First Amended Complaint in the underlying action without telling Defendant about such efforts;
* Confluence refused to explain to Defendant how coverage existed under the insurance policy and it left the decision to provide such explanation up to Plaintiffs' counsel;
* the underlying settlement was arranged between the parties to the underlying action without court approval;
* nobody gave Defendant notice of the parties' settlement discussions or the subsequent damages hearing;
* the parties made no settlement demand upon Defendant;
* Defendant had no opportunity to object to the settlement, the damages hearing, or the underlying judgment;
* Confluence did not prepare any defense to the liability or to the damages, and it did not independently review and challenge the medical evidence and damages evidence;
* Confluence did not oppose the damage depositions taken;
* Confluence did not assert any viable offsets to the damages claims;
* Plaintiffs' counsel prepared the proposed Findings of Fact and Conclusions of Law and submitted them to Confluence's counsel, Gary Zadick, for his review;
* the parties left the Court with the false impression that the damages were the result of an adversarial process in that:
— none of the parties advised the Court of the settlement agreement which included a provision that Confluence would not oppose the damages asserted at the hearing in the underlying action and which included a covenant not to execute the judgment against Confluence;
— none of the parties advised the Court Confluence had not retained any expert witnesses;
— none of the parties advised the Court Confluence had not performed an independent medical or psychological exam of Plaintiffs, or that it had not analyzed Plaintiffs' future medical costs and lost wages; and
— Confluence abandoned viable defenses to liability, and the parties did not advise the Court of such abandonment;
* Plaintiffs presented only edited portions of the video depositions at the damages hearing;
* Confluence did not object to the expert witness reports offered at the damages hearing;
* Confluence did not object to Plaintiffs' presentation of damages evidence, did not conduct any cross examination, and did not present any of its own testimony or evidence; and
* the Court simply signed off on the proposed Findings of Fact and Conclusions of Law at the conclusion of the damages hearing without viewing the full deposition videos or transcripts.
To all of the above, the Court can only say, so what. What Defendant has described is nothing other than the usual custom and practice in which parties engage in Montana as a consequence of an insurer's failure to defend. Upon an insurer's failure to defend the parties are left to their own creative devices to seek available coverage, establish damages, and protect the insured from financial ruin. Wink, 33 M.F.R. at 391 (stipulation for entry of judgment); Lee, 86 P.3d at 563, ¶ 9 (confession of judgment); Staples, 90 P.3d at 387, ¶ 32 (finding confession of judgment by insured and covenant not to execute valid despite insured's agreement to change testimony); Parsons, at 8 (confession of damages in exchange for covenant not to execute). Such circumstances are not a fraud upon the court, but rather a practical resolution to an insured's potential for financial ruin. Staples, at ¶ 32. At risk of repetition ad nauseum, all of the matters about which Defendant complains could have been avoided had it fulfilled its obligation to step forward and provide Confluence with a defense in accord with the provisions of its own policy and the laws of the state of Montana. To follow the course that Defendant suggests here would have required Confluence to spend its own funds to accomplish all of the matters about which Defendant had the primary obligation.
Based on the foregoing, and based on the absence of a requirement under Montana law that this Court conduct an independent review of whether an underlying settlement or judgment is reasonable and void of collusion, the Court finds none of the arguments Defendant presents, individually or taken together, are sufficient to invalidate the underlying judgment. Defendant is obligated to pay the full amount of the judgment.
b. Gulf's Defense of Confluence
Defendant again argues that since Gulf agreed to defend Confluence through entry of the final judgment, Confluence could not have suffered any damages as a result of its failure to defend. Defendant relies on Horace Mann Ins. Co. v. Barbara B., 71 Cal. Rptr. 2d 350, 354 (Cal.App. 4 Dist. 1998) in which the court concluded one insurer's failure to defend was inconsequential because another insurer was defending. However, the facts of that case are distinguishable. In that case, the non-defending insurer was providing a defense until the trial court determined it had no duty to defend, after which it discontinued its defense. Id. Under the circumstances of that case the insured was not facing a financial risk since the other insurance company was defendant and, therefore, as a matter of causation the non-defending insurer's failure to defend did not cause any further damages. Id. In that case the defending insurer needed only to seek contribution from the non-defending insurer for the same liability. Id.
This case is different from the facts in Horace Mann. Here, the liability and potential coverage triggering Gulf's duty to defend was Confluence's liability for Mr. Hanna's negligence in the accident. Ultimately, Gulf was not obligated to indemnify Confluence for that liability.
However, Plaintiffs then filed the First Amended Complaint asserting new theories of liability. Gulf's policy does not provide coverage for those new theories including a breach of the duty to warn, although, as discussed, such theory is covered under Defendant's policy. The defending insurer in Horace Mann provided coverage for the same liability covered by the non-defending insurer, whereas Gulf's coverage did not apply to the liability covered by Defendant's policy. Therefore, as a matter of causation, Defendant's failure to defend caused damages to be imposed against Confluence which were not covered by any other insurance policy. Unlike the insurer in Horace Mann, Defendant's failure to defend here had consequences in the form of damages not covered by any other policy.
c. Settlement Demand Within Policy Limits
Defendant argues it is not liable for the full amount of damages in excess of policy limits because nobody made a settlement demand to it within its policy limits. It argues such a demand is a prerequisite to Defendant's liability for the damages in excess of its policy limits.The Court first notes Defendant's position is contrary to the law in Lee, Wink, Hudson, and Parsons discussed above. None of those cases considered whether a settlement demand within policy limits was presented to the insurer as a condition precedent to liability in excess of policy limits.
Defendant relies on several cases in support of this alleged condition of liability, none of which impose such a condition. In Gibson v. Western Fire Ins. Co., 682 P.2d 725, 738 (Mont. 1984) the court considered only an insurance company's liability for bad faith under the Montana Unfair Trade Practices Act when it declined to settle a third party's claim against its insured for an amount within its policy limits. The court was not considering the consequences of the insurer's breach of the duty to defend the insured.
Defendant also relies on Wink for the proposition that the parties must first make a settlement demand for an amount within policy limits. Although the Court in Wink addressed the matter of the insured's demand within policy limits, it did so only in the context of causation, not as a precondition to liability in excess of policy limits. There the Court found that the insurer could have avoided liability in excess of policy limits if it had not rejected the policy limits demand. As a consequence, the parties entered a stipulation for the entry of judgment in an amount that exceeded the limits of the policy. Wink, 33 M.F.R. at 396. Accordingly, the insurer's rejection of the demand caused a judgment in excess of the limits.
Similarly, in Consolidated American Ins. Co. v. Mike Soper Marine Services, 951 F.2d 186, 190 (9th Cir. 1991), on which Defendant relies, the court concluded that the insurer's rejection of a policy limits settlement constituted an assumption of the risk of a subsequent judgment in excess of the policy limits. Nothing in that case requires a demand within limits as a condition of an insurer's liability for a subsequent judgment in excess of policy limits.
On a related point, Defendant argues it is not obligated to pay damages in excess of policy limits pursuant to Lewis v. Mid-Century Ins. Co., 446 F.2d 451 (9th Cir. 1971). However, that case involved a ruling from the court that the insurer did not have a duty to indemnify in light of a valid exclusionary provision on which the insurer relied in good faith. Id. at 452. Nevertheless, the court ruled that due to an ambiguous duty to defend provision the insurer was still obligated to defend. Id. Under those circumstances the court concluded it would be "manifestly wrong" to require the insurer to pay the full amount of the judgment in excess of policy limits when the insurer relied on an exclusion which obviously protected it from a duty to indemnify. Id. In this case there is no court ruling that Defendant has no duty to indemnify Confluence.
As set forth above, the law regarding the consequences of an insurer's breach of the duty to defend clearly imposes liability on Defendant in excess of its policy limits.
2. Interest on the Underlying Judgment
Plaintiffs move for recovery of interest on the underlying Judgment pursuant to 28 U.S.C. § 1961(a) which states that "[i]nterest shall be allowed on any money judgment in a civil case recovered in a district court." Defendant simply opposes an award of interest stating the award would not be proper because the judgment is not against Defendant. (Def.'s Opposition to Pls.' Second Mot. for S.J. at 13 n. 3.)
As stated above, generally an insurer is obligated to pay such damages as were the natural and ordinary consequence of the breach of the duty to defend. The underlying judgment was entered in federal court and, therefore, 28 U.S.C. § 1961(a) automatically imposes interest on that judgment from the date of the judgment. Tinsley v. Sea-Land Corp., 979 F.2d 1382, 1384 (9th Cir. 1992). Although the underlying judgment is not entered against Defendant, having breached the duty to defend, the insurer is obligated to pay the full amount of the judgment in excess of policy limits including the interest which accrues on the underlying judgment imposed against the insured. Consolidated American Ins. Co. v. Mike Soper Marine Services, 951 F.2d 186, 191 (9th Cir. 1991).
Based on the foregoing Defendant is obligated to pay post-judgment interest which has accrued since the date of the judgment. Plaintiff's motion on this issue should be granted.
3. Plaintiffs' Attorneys Fees Incurred in this Action
Plaintiffs move for an award of their attorneys' fees incurred in pursuing this declaratory judgment action. Plaintiffs argue they are entitled to such fees pursuant to Montana's Uniform Declaratory Judgment Act at Mont. Code Ann. § 27-8-313 and Trustees of Indian University v. Buxbaum, 69 P.3d 663 (Mont. 2003). Under the Montana Uniform Declaratory Judgment Act the relevant statute provides that "[f]urther relief based on a declaratory judgment or decree may be granted whenever necessary or proper" (Mont. Code Ann. § 27-8-313), and in Buxbaum the court concluded such relief included an award of attorneys' fees. 69 P.3d at 673-674, ¶ 46.
Defendant simply opposes an award of Plaintiffs' fees on the basis it would not be equitable under the circumstances of this case. (Def.'s Opposition to Pls.' Second Mot. for S.J. at 13 n. 3.) However, Defendant provides no other substantive opposition to the motion.
Plaintiffs' motion for attorneys fees should be granted pursuant to Mont. Code Ann. § 27-8-313 and Buxbaum. Security National Ins. v. Wink, 33 M.F.R. 389, 400-402 (D. Mont. 2005). The parties have not addressed the issue of the amount of the fees to be awarded, or whether it would be based on an hourly rate or a contingency fee agreement. See id. Accordingly, those issues will have to be resolved in further proceedings in this matter.
The Court notes there is some authority for denying Plaintiffs' motion for fees under the Erie doctrine, on the grounds that this Court should apply only the substantive law of Montana, not its procedural law. Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 427 (1996). The federal Declaratory Judgment Act is a procedural device ( Guaranty National Ins. Co. v. Gates, 916 F.2d 508, 511, (9th Cir. 1990)), to be applied in a federal diversity action. Institute for Study Abroad, Inc. v. International Studies Abroad, Inc., 263 F. Supp. 2d 1154, 1156-57 (S.D. Ind. 2001). Accordingly, some courts have concluded a party's right to receive attorneys fees in connection with a declaratory judgment action in federal court based on diversity jurisdiction cannot be based on a state declaratory judgment act. 22A Am. Jur. 2d Declaratory Judgments § 270. Such state declaratory judgment acts are not substantive laws. Utica Lloyd's of Texas v. Mitchell, 138 F.3d 208, 210 (5th Cir. 1998); and Olander v. Compass Bank, 363 F.3d 560, 567-68 (5th Cir. 2004).
The public policy in Montana, however, has increasingly moved towards awarding attorney fees to insureds and claimants seeking to enforce the benefits under an insurance policy. Mountain West Farm Bureau Mut. Ins. Co. v. Brewer, 69 P.3d 652, 660 (Mont. 2003). Under Buxbaum, attorneys' fees are appropriate as necessary and proper in connection with the declaratory judgment's substantive change to the status quo. Buxbaum, 69 P.3d at 674, ¶ 45. Furthermore, this federal Court permits recovery of attorneys fees under the Federal Declaratory Judgment Act if such recovery would be in accord with state law. Iowa Mutual Ins. Co. v. Davis, 689 F. Supp. 1028, 1029 (D. Mont. 1988). Accordingly, Plaintiff's motion should be granted.
E. Defendant's Rule 56 (f) Motion to Continue
On February 3, 2006, Defendant filed a motion pursuant to Fed.R.Civ.P. 56(f) to continue briefing on Plaintiffs' January 27 motion for summary judgment. Defendant requests additional time to complete the remaining discovery scheduled to be completed by the March 24, 2006 deadline so that it could effectively and efficiently respond to Plaintiffs' summary judgment motion, and it could file its own summary judgment motion. It simply requests time to complete the scheduled depositions of the attorneys in the underlying action. (Def.'s Br. in Support at 3.)
Subsequent to Defendant's February 3 motion, Defendant took John Hart's deposition on February 21, 2006 (Decl. of Jeffrey Ward (March 3, 2006), Ex. 18), Gary Zadick's deposition on March 6, 2006 (Second Decl. of Jeffrey Ward (March 30, 2006), Ex. 77), and John Gordon's deposition on March 14, 2006 (Second Decl. of Jeffrey Ward (March 30, 2006), Ex. 79), all of which have been submitted to the Court. Defendant filed its summary judgment motion on March 7, 2006, but more importantly it filed its opposition to Plaintiff's January 27 motion on March 31, 2006, supported by the depositions of the above attorneys involved in the underlying action. Accordingly, any further continuance is not necessary and the Court finds Defendant's Rule 56(f) motion is moot and will be denied.
V. CONCLUSION
Based on the foregoing, the Court concludes Defendant had a duty to defend Confluence, but it failed to do so. As a consequence Defendant is liable for the damages requested by Plaintiffs.