Newman v. Scottsdale Insurance Co.

Newman v. Scottsdale Insurance Co., 2013 MT 125 (May 7, 2013) (5-1) (Cotter, J., for the majority; Wheat, J., dissenting)

Issue: (1) Whether the district court erred in considering inadmissible evidence and facts beyond the allegations of the complaint in determining that the insurers had a duty to defend; (2) whether the district court erred in finding a duty to defend but not applying the policy exclusions; (3) whether the district court erred in calculating and awarding attorneys’ fees to Newman; and (4) whether the district court erred in finding Montana law controls.

Short Answer: (1) Yes, but it was harmless; (2) no; (3) yes, because it should not have used the contingency fee agreement between Newman and her attorneys as a basis; and (4) no.

Affirmed in part, reversed in part and remanded

Facts: This case arises from the suicide of 16-year-old Karlye Newman, who was living at Spring Creek Lodge Academy in Thompson Falls at the time of her death in October 2004. Karlye’s mother brought suit against the school’s owner and directors, Teen Help (the marketing arm of the other defendants) and related entities. In 2010, Teen Help settled the claims against it by assigning to Newman its rights to $3 million in insurance coverage. Scottsdale provided a commercial general liability policy to Teen Help, and National Union provided an excess policy. Scottsdale refused to defend Teen Help in Newman I, arguing its policy did not cover the claim against Teen Help based on a “designated professional services” exclusion and a “designated operations” exclusion. National Union also argued that suicide is a purposeful act, not an “accident,” and was therefore not covered.

Most of the remaining defendants settled before trial, and a jury rendered a verdict for the two remaining defendants. Newman appealed (Newman I), and this Court affirmed in part reversed in part, and remanded for a new trial.

After settling with Teen Help, and while Newman I proceeded to trial, Newman filed this declaratory judgment and breach of contract action against Teen Help’s insurers.

Procedural Posture & Holding: The district court entered summary judgment for Newman on the basis that the insurers breached their duty to defend Teen Help, and held the insurers severally liable for the underlying judgment of $3 million. It also award $1.18 million in attorneys’ fees, and interest totaling $568,767. The insurers appeal, and the Court affirms in part and reverses in part.

Reasoning: (1, 2) Scottsdale does not dispute that Teen Help was an insured. The Court looks to the facts alleged in the Third Amended Complaint to determine whether they present a claim covered by the policy. Scottsdale argues the district court considered evidence that came into the record after Scottsdale rejected Teen Help’s demand. The Court agrees, but finds a duty based on the complaint, the policy, and case law.

Scottsdale argues it had no duty to defend based on two exclusions.  The Court disagrees. Exclusions must be narrowly and strictly construed, and are often challenged for ambiguity or inconsistency. Thus, the mere existence of the exclusions did not establish an “unequivocal demonstration” that the claim did not fall within the policy’s coverage. Scottsdale first argues that Teen Help’s staff rendered professional service in assisting with the placement of troubled youth into Spring Creek. But a “marketing arm” does not render professional services. Although the complaint also alleged that all defendants jointly breached some professional obligations, a duty to defend is triggered when one portion of the complaint alleges facts that, if proven, would result in coverage. Moreover, the policy does not define the terms professional, professional services, or professional exposures, rendering the coverage confusing and ambiguous.

Scottsdale next argues that the designated operations exclusion provided coverage to Teen Help’s St. George, Utah location only. But the policy does not define scheduled location, and its “coverage territory” is the U.S. Further, if the Court accepted Scottsdale’s interpretation, coverage would be illusory. This is against public policy. The district court did not err in finding Scottsdale breached its duty to defend Teen Help.

Teen Help did not notify National Union of the suit nor tender a request for defense. National Union first learned of the suit in January 2010 when Newman’s counsel sent a policy limit demand letter to the insurer, and encouraged it to participate in court-ordered mediation the following month. After reviewing the Third Amended Complaint, National Union denied coverage on several grounds.

Although an insurer has no obligation to look beyond the complaint in determining whether a claim is covered by the policy, once it does so it may not ignore the information it obtained. National Union talked to Scottsdale and its counsel, and became privy to facts beyond the allegations in the complaint. Its argument that it could reject Newman’s tender based on the absence of evidence of Scottsdale’s position is disingenuous.

The Court also rejects National Union’s argument that Kayle’s suicide was not an “occurrence” because it was not an accident. The argument overlooks the plain language of the policy, which says an occurrence must be “neither expected nor intended from the standpoint of the Insured.” Teen Help neither expected nor intended Kayle’s suicide.

Finally, National Union argues it was not timely notified of the lawsuit and therefore could not have breached its duty to defend. It did not raise this argument until more than a year after it first refused to defend or indemnify. When the insurer denies liability on some policy or coverage ground, it cannot thereafter rely on the insured’s failure to give notice as a ground for avoiding liability. National Union waived its right to rely on defects in notice.

(3) The district court awarded $1.18 million in attorneys’ fees based on the $3 million judgment in Newman I and the contingency fee agreement between Newman and her attorneys. The court considered the eight factors set forth in Stimac v. State to determine whether the contingency fee was reasonable. Scottsdale argues that Newman should allowed to recover only those fees that Teen Help would have been entitled to had it directly sued the insurers. The Court holds that Newman, as Teen Help’s assignee, should be allowed to recover fees for fees she had to pay to enforce the insurance contract. However, the district court abused its discretion in basing the fee on Newman’s contingency fee agreement in Newman I. The fee arrangement in that case does not transfer to this case. The fee award in this case must be based on the work done in this case. The Court reverses and remands for a calculation of reasonable attorneys’ fees based on the time and expenses incurred in pursuing coverage from the defendants.

(4) Scottsdale argues Utah law should apply; however, it conceded below that applicable Montana law is consistent with Utah law. It may not now challenge the district court’s determination that Montana law applied.

Justice Wheat’s Dissent: Justice Wheat dissents only from the reversal and remand of the attorney fee award. Attorneys’ fees are soundly in the district court’s discretion. The lower court held a hearing and determined a contingency basis was the proper measure. Given the deferential standard of review, Justice Wheat would affirm.