State Farm v. Schwan

State Farm v. Schwan, 2013 MT 216 (Aug. 6, 2013) (5-0) (Rice. J.)

Issue: Whether the district court properly concluded that State Farm breached its duty to defend.

Short Answer: No.

Facts: In June 2004, Whitney Schwan was a passenger in a car driven by Travis Turner and owned by Travis’s mother. Travis lost control and the car left the road and rolled. Both Travis and Whitney were killed.

Travis’s parents had an auto liability policy and a homeowners policy, the first with State Farm Auto and the second with State Farm Fire. Travis’s license was suspended at the time of the accident because of traffic violations, and he was expressly excluded from coverage under the auto policy. Schwans sued Travis’s estate and the Turners in 2007, alleging negligence, negligent entrustment, providing Travis with alcohol, and failing to warn Whitney of Travis’s poor driving record.

State Farm Auto retained Billings attorney Cal Stacey to defend the Turners. Several months later, Stacey advised State Farm Fire’s in-house counsel that Schwans had demanded the policy limits under both policies. Although the homeowners policy generally excluded auto coverage, Schwans contended coverage was triggered under Pablo v. Moore, 2000 MT 48, by their claims other than negligent operation of a vehicle.

State Farm Fire acknowledged a potential duty to defend under the homeowners policy and confirmed with Stacey that he was defending the Turners on all claims. Stacey advised that additional counsel was not necessary.  State Farm Fire sent a letter to Turners stating its understanding that Turners were not tendering defense of the lawsuit to State Farm Fire at this time. State Farm Fire maintained contact with State Farm Auto and Stacey throughout the litigation. State Farm Fire’s in-house counsel  advised Stacey that if State Farm Auto’s defense of the Turners terminated for any reason, State Farm Fire would assume responsibility for Stacey’s continued defense.

Shortly after, in January 2008, State Farm Fire filed a declaratory judgment action seeking a declaration that it did not owe a duty to defend or indemnify the Turners under the homeowners policy. State Farm Fire retained Michael Young, an attorney chosen by Turners, to defend Turners in the dec action.

A mandatory mediation was held in September 2008. Stacey attended with the Turners. Michael Young attended, as did State Farm Fire’s in-house counsel, Bauer. Mediation concluded with a consent judgment against the Turners for $750,000 and assignment of all of Turners’ right and claims under the homeowners policy to Schwans, who agreed not to execute against Turners. The district court entered judgment pursuant to these terms.

Procedural Posture & Holding: Schwans replaced Turners in the declaratory action and filed a counterclaim alleging State Farm Fire breached its duty to defend by not retaining counsel for Turners in the underlying action. The district court granted summary judgment to Schwans on this claim because State Farm Fire did not retain separate counsel or pay for any of Stacey’s fees. Having found State Farm Fire breached its duty to defend, the court held State Farm Fire was estopped from denying coverage and was liable for the full amount of the stipulated judgment, $750,000, as well as Schwans’ attorney fees and costs. State Farm Fire appeals, and the Supreme Court reverses and remands.

Reasoning: State Farm has never taken the position that it did not have its own obligation to defend the Turners. The issue is whether its actions fulfilled that duty. An insurer must defend all counts in a complaint as long as one count potentially triggers coverage. Cal Stacey represented Turners against all of Schwans’ claims. Turners were fully defended, but that in itself does not necessarily mean State Farm Fire’s duty to defend was fulfilled. However, the facts show that State Farm Fire “gave the necessary substance to the duty to defend.” There is no bright-line rule requiring co-insurers to hire separate counsel, and no requirement that the insurer pay some portion of the attorney’s fees.