PRODUCT LIABILITY: Parameters set/proposed for retrial of Mazda passive seat belt case following reversal of defense verdict. . . Molloy.

Incarnacion Speaks was a passenger in a 1994 Mazda Protégé when a vehicle struck it nearly head-on. Speaks, 39, suffered lacerations to her pancreas and duodenum. She was 4 feet 9 inches and 110 lbs. She maintains that she was properly wearing the manual lap belt buckled and automatic shoulder belt over her shoulder and that the Protégé’s passive restraint system fails to properly restrain people of small stature. Mazda contended that the shoulder belt was routed under her arm instead of over her shoulder as designed, and that is what caused her injuries. A Missoula jury found that at the time of sale the Protégé was not in a defective condition because of its design, either because it was dangerous to an extent beyond that anticipated by the ordinary user, or because a safer alternative design should have been used. (MLW 10/17/15). The 9th Circuit reversed, holding that Judge Christensen abused his discretion by instructing the jury that it could only consider evidence of shoulder belt misuse to determine the cause of Speaks’s injuries without also explaining that foreseeable misuse is not a defense to a strict product liability claim under Montana law. (MLW 7/29/17).

For what seemingly should be a simple case, the odyssey of this litigation, past & future, has become increasingly complex. Much of the complexity is due to the pleadings — or lack of them — as they related to Montana product liability law; some complexity arises because of strategic & tactical maneuvers by one or the other parties. The lack of diligence as it relates to disclosing expert opinions before the last trial and after appeal reflects not only practical problems, but adds to making a simple case complex. A footnote in the 9th Circuit Memorandum Disposition suggests that certain evidence may be admissible in the retrial when the proof suggested is what caused the defense verdict to be reversed. Here is the problem: We are asking 7 lay people to decide if the design of the Mazda seat restraint system is defective. Montana law puts the question of misuse and/or negligence by the plaintiff off limits as it does with the defense of “safe as used,” a species of misuse. Yet the defense of “causation” still seems viable under the 9th Circuit disposition. The confusion for the jury will be trying to sort out whether the design of the seat belt is defective because of “fit” while ignoring Plaintiff’s conduct in positioning it or in how her body was positioned, which ostensibly goes to the question of “fit.” In reality, such proof raises defenses that are not viable under Montana law, the plaintiff’s misuse, negligence, or failure to use the belt as intended so it would be safe as used. There is a very narrow line of evidence, proof, and argument that fits the interstice of Montana law that does not conflate defect and cause regarding design of the system.

At the pretrial conference 5/3/18 the Court and parties discussed this Court’s previous ruling regarding misuse evidence and the 9th Circuit’s disposition. Based on that discussion and further review of Montana product liability law, the law described below will govern trial.

To recover, Speaks must prove: (1) at the time of sale, the Protégé’s front passenger restraint system was in a defective condition because of its design and (2) that design caused her injuries. See MPI2d 7.02 (2003). She is arguing design defect on 2 fronts: that the “fit” of the belt improperly loads the body and that Mazda failed to design out or guard against dangers associated with routing the belt under the arm. (Her “fit” argument alleges both that the design failed to perform as safely as an ordinary consumer would have expected and a safer alternative design should have been used.) Mazda is arguing that the design of its front passenger restraint system is not defective because it properly loads the body (“fit”) and Mazda designed out and guarded against foreseeable misuse, such as routing the belt under the arm. However, it further argues that even if the design of the “fit” is defective, the “fit” did not cause Speaks’s injuries — her body position did. It is this final point that causes consternation. Because misuse is not a defense in the case, Mazda cannot argue that the front passenger restraint system is not defective because of how Speaks wore it. To do so would improperly interject negligence and fault into this strict liability action.

Kenser (Mont. 2014) addressed a product liability claim against a company that repackaged and distributed a liquid acrylic nail product. The company presented evidence & testimony that the product was “safe as used, when skin contact is avoided.” The plaintiff countered that this “impermissibly injects the concept of ‘misuse’ to the jury.” The Court agreed, noting that such evidence “was confusing” and violated the summary judgment for the plaintiff on the affirmative defense of misuse. Lutz (Mont. 1994) similarly restricted evidence related to causation on the grounds that it would impermissibly “interject negligence concepts into a strict liability setting.” It emphasized that “in product liability actions, [a court’s] analysis focuses on the condition of the product — not the conduct of the [parties].”

Potential evidence, testimony, or argument about Speaks’s body position raises the same concern as in Kenser and Lutz. The argument that the design of Mazda’s front passenger restraint system is not defective because of how Speaks used it is analogous to the “safe as used” argument rejected in Kenser.Thus her body position is not relevant to — nor can it be considered in the jury’s determination of — defect. Accordingly, Mazda may only argue or present evidence as to her body position for the exceedingly narrow purpose of showing that the alleged defective “fit” did not cause her injuries. But even if it is successful in that argument, it must then show that it designed out or guarded against defects associated with routing the belt under the arm; and, if it failed to do so, its failure was not a substantial factor in causing her injuries.

The following hypothetical may assist in arriving at a common understanding of the legal framework at trial. If the jury finds:

a. The design of the fit of the seatbelt is defective, Speaks was wearing the belt over her shoulder, and the fit of the belt caused her injury.

Mazda is liable.

b. The design of the fit of the seatbelt is defective, Speaks had it routed under her arm, and the fit of the belt did not cause her injury. Mazda did not adequately design out or guard against her foreseeable use of the belt under her arm and the belt routed under her arm caused her injury.

Mazda is liable.

c. The design of the fit of the seatbelt is defective, Speaks had it routed under her arm, and the fit of the belt did not cause her injury. Mazda adequately designed out or guarded against her foreseeable use of the belt under her arm, and the belt routed under her arm caused her injury.

Mazda is not liable.

d. The design of the fit of the seatbelt is not defective and Speaks was wearing it over her shoulder and the fit caused her injury.

Mazda is not liable.

e. The design of the fit of the seatbelt is not defective and Speaks was wearing it under her arm. Mazda did not adequately design out or guard against her foreseeable use of the belt under her arm, and the belt routed under her arm caused her injury.

Mazda is liable.

f. The design of the fit of the seatbelt is not defective and Speaks was wearing it under her arm. Mazda adequately designed out or guarded against her foreseeable use of the belt under her arm, and the belt routed under her arm caused her injury.

Mazda is not liable.

This analysis is consistent with the PTO positions: “Speaks can argue that the ‘fit’ of the seatbelt was defective when worn over the shoulder. Mazda can argue that the shoulder belt was routed under Speaks’ arm during the accident to undercut the causation part of this ‘fit’ argument.” “Mazda cannot argue, however, as it did at the first trial, that it is not liable simply because the seat belt was routed under the arm. Mazda has a duty to design out or guard against defects related to such use.” Ultimately, Speaks has the burden to prove both defect and causation. But, as Mazda recognized at the conference, its ability to defend in this type of action is severely circumscribed by Montana law.

One possible way to prevent misuse, negligence, and fault associated with Speaks’s body position from being improperly interjected would be to bifurcate defect and cause. Rule 42(b). During the “defect” part of the trial, evidence & argument as to her body position would be excluded. Only if the jury returned a verdict finding that the design was defective would evidence & argument be presented as to cause, which could then include evidence & testimony as to her body positioning. The parties are to file a notice as to their positions on bifurcation by 5/11/18.

Warnings are off the table. Speaks is not alleging failure to warn and Mazda cannot rely on its warning as to obviate its duty to design out or guard against defects associated with foreseeable misuse. Lutz. Speaks may open the door for warnings if she makes such argument as “Mazda did nothing to make the restraint system safer.” Any further discussion of the “design hierarchy” will depend on the proof presented at trial subject to the limitations of the expert disclosures.

Mazda may not present testimony or evidence regarding compliance with federal law & regulations.

Given the position of the parties and further scrutiny of the case, the Court will not give its proposed prefatory remark. However, it will be necessary to introduce the jury to the concept of product liability, which will be achieved at least in part during the Court-conducted voir dire.

Speaks v. Mazda, 44 MFR 187, 5/10/18.

Dennis Conner & Keith Marr (Conner & Marr), Great Falls, Robert Palmer (PalmerOliver), Springfield, Missouri, and Steve Fletcher (Fletch Law Office), Missoula, for Speaks; David Stone (Bowman & Brooke), Plano, Tex., Michael Carey (Bowman & Brooke), Minneapolis, and Ronald Bender (Worden Thane), Missoula, for Mazda.

INSURANCE: Policy arbitration clause unenforceable after insurer breached duty to defend & indemnify transportation company officers resulting in $3,121,758.45 consent judgment in favor of risk retention group. . . Christensen.

American Trucking & Transportation Ins. is a risk retention group in Missoula which offers benefits not generally available on the open market in exchange for heightened duties. Gorman Group is a transportation, shipping, and logistics company and was holding company for subsidiaries including Tango Transport. Tango was the principal operating entity for Gorman’s trucking operations. In 2010 Gorman became a shareholder of ATTIC, and both Gorman and Tango became ATTIC insureds. The Insureds nominated Gorman’s Senior VP and General Counsel Ralph Nelson to be their representative to the ATTIC Board of Directors, and ATTIC required that at least 1 board meeting be held in Montana.

ATTIC issued a policy 10/1/10 which provided coverage to the Insureds and other affiliates with commercial trucking, property, and PI liability with a $5 million per occurrence limit and $350,000 deductible. Tango made all premium payments, paid claims, paid defense costs of claims it handled, and reimbursed ATTIC on claims it paid. ATTIC provided coverage and issued policies to the Insureds 2010-14. Nelson handled intake, investigation, and resolution of claims in which the Insureds anticipated ultimate exposure would fall below $175,000. Robert Gorman Sr. and Dan Dooley, as restructuring agent of Tango, were allegedly advised and aware of the status of the claims process.

Tango began experiencing financial difficulties in 2014. However, Nelson informed ATTIC that the Insureds were refinancing their debts. By 9/15 the Insureds were unable to meet their financial obligations to ATTIC, and Dooley advised that Tango was going to sell its equipment or cease operations. ATTIC took over all liability claims that were within Tango’s deductible under the ATTIC policies, and all other open but unpaid claims. ATTIC alleges that it then became clear that the Insureds had failed to satisfy their obligations under the ATTIC Shareholders Agreement and Bylaws, misrepresented their liabilities, and were negligent in handling the claims. On 9/20/15 ATTIC and the Insureds agreed to extend the policy for 45 days to allow the Insureds time to transfer their operating equipment to Celadon. The Insureds paid a flat rate for coverage and transferred funds to ATTIC to pay unpaid claims. By 10/15 the Insureds had informed ATTIC and their creditors that they planned to liquidate their remaining assets, and in 4/16 Tango filed Ch. 11. As of 12/1/16 ATTIC had filed 2 unsecured claims in ED Texas Bankruptcy Court, which determined that ATTIC could proceed against the non-debtors for civil damages. ATTIC alleges 10 counts against Dooley: (I) breach of contract, (II) breach of fiduciary duty, (III) negligent misrepresentation, (IV) fraud, (V) constructive fraud, (VI) negligence, (VII) negligence per se, (VIII) acts in concert, (IX) civil conspiracy, (X) piercing the corporate veil. In 7/17 the Court denied Dooley’s motion to dismiss as to personal jurisdiction and Counts III, IV, V, VI, VIII, and IX, and dismissed I, II, VII, and X as to Dooley. On 7/20/17, ATTIC joined Westchester Surplus Lines Ins. as a Defendant in relation to a Directors & Officers policy issued to Gorman Group. As a result of Westchester’s refusal to defend & indemnify Gorman officers including Ralph Nelson, Bobby Gorman, and Robert Gorman Sr. (the Westchester Insureds), these individuals agreed to settle with ATTIC which included a stipulated judgment in favor of ATTIC in the amount of $3,121,758.45 in exchange for a release of all claims. In Count XI of the amended complaint, ATTIC seeks a declaration of Westchester’s obligations under its policy and the settlement agreement and a declaration that Westchester is liable for the stipulated judgment. Westchester moves to compel arbitration under its policy. Dooley moves to amend his answer to include cross claims against Westchester.

A valid arbitration clause exists. It binds the parties to arbitrate any unresolved dispute at the request of either party. The “controversy” relates to terms of the Westchester Policy and whether Westchester is obligated to provide the Insureds a defense and indemnify them for the amount in the stipulated judgment. The only question remaining is whether the arbitration clause is binding or whether Westchester’s refusal to provide a defense at the outset renders it unenforceable.

Westchester argues that because the arbitration clause is valid, the right to arbitrate under the FAA is not abrogated by Montana law. ATTIC counters that due to Westchester’s refusal to offer the Insureds a defense, Montana law renders the arbitration provision unenforceable. Both rely on Tidyman’s I(Mont. 2014) (a “duty to defend arises when a complaint against an insured alleges facts which, if proved, would result in coverage”). Westchester argues that the Creditor’s Exclusion is the kind of “unequivocal” basis for denial of coverage that an insurer may assert for declining to defend an insured because ATTIC was a creditor in the Tango bankruptcy and thus coverage under the policy was never implicated. ATTIC responds that when Westchester disclaimed coverage and took no steps to discern its duties to defend or indemnify — by filing a declaratory action — Westchester forfeited its rights to rely on the policy and any defenses therein. It also argues that because the complaint includes claims against the insureds that are not excluded by the Creditor’s Exclusion — such as fraud, misrepresentation, and negligence — there is still arguably coverage for a majority of the claims and Westchester therefore breached its duty to defend by precluding coverage as a whole. It next argues that because it is not a creditor as contemplated in the Creditor Exclusion, there was a genuine dispute as to coverage at the outset when Westchester’s insureds asked it to defend them, and therefore it is estopped from relying on the arbitration provision. It argues that a valid agreement to arbitrate does not exist because ATTIC is not an “Insured” under terms of the policy and was merely assigned the rights of the Insureds post-breach of the contract. And it contends that even if ATTIC was an Insured, the contract is a contract of adhesion because it was non-negotiable when it was presented to Gorman, and thus compelling arbitration in New York would be unjust.

Westchester cannot unequivocally demonstrate that ATTIC’s claims against its insureds were completely precluded from coverage. The parties do not dispute that some of the Complaint allegations are covered as occurrences. Schwan (Mont. 2013) (“Montana follows what other courts have termed the ‘mixed-action’ rule, which requires an insurer to defend all counts in a complaint so long as one count potentially triggers coverage, even if the remaining counts would not be covered.”) While ATTIC does admit to holding 2 unsecured claims in the bankruptcy case, after a cursory review of the policy the Court cannot unequivocally conclude that it qualifies as a “Creditor” under the policy. In fact, the parties dispute the definition of “Creditor” under the policy, establishing that there was a dispute as to coverage at the outset when the Westchester Insureds asked it to provide a defense.

However, at this point it is not necessary to make a determination as to coverage and whether the exclusion applies. What is mandated by Tidyman’s I is that Westchester should have initially offered a defense to its Insureds under reservation and then filed a declaratory action as to coverage. Because it failed to provide a defense, Montana law is clear that it has lost its right to invoke insurance contract defenses including the right to arbitrate. Indep. Milk & Cream (Mont. 1923); Freyer (Mont. 2013); Tidyman’s I (“It is well-established that where an insurer refuses to defend a claim and does so unjustifiably, the insurer is estopped from denying coverage and becomes liable for defense costs and judgments.”). Therefore, Westchester cannot now claim that the arbitration clause is mandatory under terms of the policy after it breached its duty to defend. The arbitration clause is unenforceable.

Dooley’s motion to file an amended answer to include cross claims against Westchester to determine its obligations to defend & indemnify him is granted.

American Trucking & Transportation Ins. v. Nelson, Gorman Sr., Bobby Gorman, Dooley, and Westchester Surplus Lines Ins., 44 MFR 186, 4/20/18.

Philip Condra & Rachel Parkin (Milodragovich Dale Steinbrenner), Missoula, for ATTIC; Brian Smith (Garlington, Lohn & Robinson), Missoula, for Nelson and Gormans; Kenneth Ulrich & Meredith Kirschenbaum (Goldberg Kohn), Chicago, and Reid Perkins (Worden Thane), Missoula, for Dooley; Bryan Campbell & Richard Mason (Cozen O’Connor), Seattle, for Westchester.

INSURANCE: Fact issues to be developed at trial preclude summary judgment as to coverage of neighbor harassment/nuisance claims. . . insurer following prudent course by defending under reservation while pursuing dec action. . . Christensen.

Christina & Jeff Vlieland are neighbors of Randy Self & Tina Roberts on 4th St. West, Hungry Horse. Self-Roberts allege that since Vlielands moved in in 6/11 they have harassed, disrupted, and interfered with their enjoyment of life — Vlielands played loud music and directed noise at their residence and poisoned their dog, Jeff Vlieland pointed a pistol at Randy, Jeff Vlieland tried to run Tina off the road, Vlielands threw rocks at their residence, and Vlielands increased the height of their fence to block Self-Roberts’s view. These allegations form the basis for Self-Roberts’s claims of nuisance, IIED, and assault in their 11th Judicial Dist. Court complaint. Vlielands tendered the complaint to American Reliable and requested defense & indemnification under their Comprehensive Manufactured Home Policy. American provided a defense under reservation and filed this declaratory action seeking summary judgment that the conduct does not qualify as an “occurrence” and that even if it does, 5 exclusions preclude coverage. Vlielands counter that American’s duty to indemnify is not ripe, but that should the Court decide the issue, the complaint alleges an “occurrence” and the exclusions are inapplicable. They also assert affirmative defenses that American breached its obligation to defend & indemnify by seeking a declaration as to their obligation to indemnify. Trial in the underlying complaint is set for the term beginning 6/18/18.

American’s motion is not ripe & justiciable as to its duty to indemnify Vlielands. The complaint allegations are unresolved in a State Court matter where no facts have been established that actually create liability for Vlielands. Further, although the alleged intentional acts trigger a duty to defend, the duty to indemnify cannot be determined until the underlying allegations are proven or established. However, the Court will address the arguments as to coverage.

American argues that the complaint does not allege an “occurrence,” which is necessary to trigger a duty to indemnify. A nuisance action in Montana may be based on conduct that is “intentional, negligent, reckless, or ultrahazardous.” Martin (Mont. 2012). The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results . . . in: ‘bodily injury’ or ‘property damage.’” Fisher Building (Mont. 2016) held that an “accident” may include intentional acts as long as the consequences are not objectively intended or expected from the insured’s standpoint. Walden (9th Cir. 2017) relied on Fisher in finding that the “intentional acts” exclusion did not preclude coverage because coverage may still exist if the intentional acts caused unintended or unexpected consequences to the victim. It held that under Montana law, an “occurrence” necessary to trigger coverage does not exist if the act itself was intentional and the consequence or resulting harm was intended or expected from the actor’s standpoint. Whether the complaint allegations implicate an “occurrence” presents a material fact issue. There are facts to be resolved at trial as to whether Vlielands’ actions constituted negligent or intentional conduct. Although the acts are alleged as claims of IIED, they are also alleged in a claim of nuisance, which may be premised on negligent conduct. Additionally, it is not plain from the face of the pleadings that the consequences of Vlielands’ alleged acts were objectively intended or expected. Therefore an issue of fact remains as to whether the acts trigger an “occurrence,” which precludes summary judgment at this time.

If it is established at trial that Vlielands committed intentional acts with expected or intended consequences, coverage would be precluded under the plain & unequivocal policy language. Further, Self-Roberts allege acts that could constitute some form of illegal activity under the policy and therefore would be barred from coverage. Finally, they allege IIED and assault claims that would be barred as assault and emotional abuse under the policy.

In the complaint there are claims of intentional acts and nuisance. Under Montana law, proving nuisance does not require an intentional act and includes negligent conduct. Pursuant to Fisher and Walden, the “Intentional Acts Exclusion” and “Expected or Intended Exclusion” do not preclude coverage if there is a possibility that the conduct had unintended & unexpected consequences to the victim. The parties dispute whether Vlielands’ actions were negligent or intentional, which presents factual issues to be resolved at trial. If it is determined that they engaged in solely intentional conduct, a determination would have to be made whether the consequences of that conduct were unintended or unforseen. Therefore summary judgment is not proper on these exclusions.

American argues that the policy excludes coverage for punitive or exemplary damages. Self-Roberts allege that they are entitled to punitives. MCA 33-15-317 (2017) recognizes that coverage does not extend to punitive or exemplary damages unless expressly included by policy. The policy excludes indemnification for punitives, but because the issue of whether there is an “occurrence” cannot be resolved at this time, American’s duty to defend Vlielands is ongoing.

Vlielands assert that American breached its duty to defend & indemnify by seeking a declaration as to its obligation to indemnify. It is undisputed that American is following the prudent course recommended by the Montana Supreme Court by defending under reservation while pursuing this declaratory action and therefore has not breached its duty to defend. Thus the Court will strike this affirmative defense.

American Reliable Ins. v. Vlieland, Self, and Roberts, 44 MFR 185, 3/30/18.

Liesel Shoquist & Michael Bybee (Milodragovich Dale Steinbrenner), Missoula, for American; Kris McLean (McLean Law Firm), Florence, for Defendants.

INSURANCE: Fact issues to be resolved at trial preclude summary judgment as to coverage of alleged sexual assault by FWS officer of allegedly sleeping FWS employee at overnight stay in FWS cabin while on work trip. . . insurer has duty to defend officer. . . Christensen.

Lawrence Lockard was a FWS Regional Field Dive Officer. FWS employee Karen Nelson accompanied him 9/8/15 to Quartz Lake in Glacier Park to collect trout information. The trip entailed an overnight stay in a remote cabin, and they slept in adjacent beds. She alleged that he knew she had taken sleep medication, waited for her to fall asleep, and sexually assaulted her, causing anxiety, embarrassment, humiliation, insomnia, nightmares, and emotional trauma. She sued him in 9/15 alleging that he negligently proceeded with a sexual advance without her permission. Lockard tendered the complaint to American Reliable and requested a defense and indemnification under an “occurrence”-based homeowner’s policy which provides coverage for bodily injury and property damage. American filed this declaratory action and seeks summary judgment that the conduct does not qualify as an “occurrence” and that 5 exclusions further preclude coverage.

American relies on Strecker (Mont. 1990) for the proposition that all acts of sexual assault and molestation are not “accidental.” Nelson claims that because her complaint alleges negligence, it is covered. The policy defines “occurrence” as:

. . . an accident, including continuous or repeated exposure to substantially the same harmful conditions, which results . . . in:

a. “bodily injury”; or

b. “property damage”.

American claims that pursuant to Strecker, allegations of negligence and “alleged theories of negligence in the underlying complaint, both these theories are necessarily based upon the numerous acts of molestation which cannot be deemed negligent acts.” Thus while negligence commonly triggers coverage under a policy, if the negligent act is based on an inherently intentional act, coverage does not exist. Lockard contends that under Fisher Building (Mont. 2016), an “accident” may include intentional acts as long as the consequences are not objectively intended or expected from the standpoint of the insured. Fisher instructs that an intentional act may constitute an “occurrence” because the consequences may not have been intended or expected by the actor. Walden (9th Cir. 2017) relied on Fisher in finding that the “intentional acts” exclusion did not preclude coverage because coverage may still exist if the intentional acts caused unintended or unexpected consequences to the victim. Unlike Strecker where the accused admitted sexually assaulting his daughter for 10 years and knew he had a problem, there is a factual dispute as to whether Lockard’s actions were negligent or intentional. If the Court were to find at trial that the act was intentional, it must also weigh the evidence and determine whether his intentional conduct produced unintended and unexpected consequences to Nelson and, if so, the extent of damages. Therefore, the underlying complaint alleges an “occurrence” under the policy.

Pursuant to Fisher and Walden, the “Expected or Intended Injury” exclusion is not triggered if there is a possibility that the conduct had unintended & unexpected consequences to the victim. The parties dispute whether Lockard’s actions were negligent or intentional, which presents a fact question to be resolved at trial. If the Court finds the acts to be intentional in nature, Nelson claims that the consequences or resulting harm could not have been intended or expected from Lockard’s standpoint and coverage would apply. Fisher specified that intentional acts do not necessarily preclude coverage if there were unintended and unexpected consequences of the intentional acts. Because there is a fact question as to whether Lockard’s actions were negligent or intentional, and, if intentional, whether he could have expected or intended that Nelson would be retaliated against or otherwise subjected to a hostile work environment by her co-workers as a result of his conduct, summary judgment is not proper.

American contends that the complaint also alleges that Lockard “assaulted” Nelson, which is precluded under the Assault & Battery Exclusion. The policy does not define “assault” or “battery.” Nelson contends that a plain meaning includes that the acts be violent and successive. Lockard argues that even if his conduct qualified as an assault it would only be negligent assault because he believed the sexual encounter to be consensual. He also claims that because Nelson seeks recovery based on the after effects — when Lockard conveyed to others that the interaction was consensual which caused her to be subjected to a hostile work environment and retaliation — his communications to others within FWS would be covered because his statements are not an “assault.” There is a material fact issue as to which acts — the sexual conduct and/or the statements by Lockard to co-workers — caused Nelson damages. If the Court finds that the sexual conduct caused her damages, it must determine whether his conduct that evening was negligent or intentional. Further, viewing the evidence in the light most favorable to Nelson and Lockard, if the Court finds at trial that the sexual act was an intentional assault, it would need to determine if there were unintended or unforeseen consequences and, if so, the extent of damages.

“Sexual abuse” and “sexual molestation” are not defined. Nelson argues that the sexual abuse exclusion is to be narrowly construed and that as a reasonable insurance consumer, Lockard would not qualify his actions as “sexual abuse” or “sexual molestation,” and that their ordinary meanings have an intent element while the complaint alleges negligence. Lockard similarly argues that the complaint alleges that the alleged sexual advance was itself negligent, which would not qualify as sexual molestation, and that it references alleged statements or inferences by him to others as to the consensual nature of the interaction, which if proven, represent a covered risk. Similar to the analysis as to the assault exclusion, there is a material fact issue as to whether Lockard’s conduct in the cabin was negligent or intentional and whether it qualifies as “sexual molestation” under the policy. If it is found to be an intentional molestation, this exclusion should be construed in accordance with Fisher, and the Court would need to determine if there are unintended or unexpected consequences. The evidence produced by the parties presents many different conclusions as to whether his actions were intentional or qualify as an “assault” or “sexual molestation.”

American alleges that Lockard was engaged in an occupation at the time of the alleged conduct and the policy excludes coverage for bodily injury arising out of or in connection with a business. Nelson argues that even though the conduct occurred during an overnight stay in an FWS cabin, his actions had nothing to do with the dive trip or his capacity as an FWS employee. Lockard argues that although the complaint implies that the alleged assault occurred while he was acting within his trade or occupation, it also states that it did not occur until after a period of relaxation, dinner, and the parties had retired to sleep, which would be covered. In Reliance Ins. v. Fisher (Mont. 1974), which American relies on, a teacher struck another teacher at school. They were working at the school within school hours while the claimant was disciplining a student from his class. The Montana Supreme Court found that the altercation was “clearly connected with and related to school activities” and thus the business exclusion applied. To the contrary, Nelson contends that in Syth (19th Judicial Dist. 1998), Judge Prezeau found that “‘business’ is an activity, not in the physical location where an activity occurred.” Syths operated a saloon on their residential property. Mrs. Syth was awakened by a noise over the intercom from the saloon and Mr. Syth got out of bed and saw a figure moving in the saloon. He proceeded toward the saloon with a rifle, but forgot to put in his hearing aids which left him completely deaf. Mrs. Syth called police. The officer saw Mr. Syth standing outside the saloon with his rifle. Due to Syth’s hearing difficulties, confusion occurred and they exchanged shots and Syth was killed. Prezeau found that while the intruder was likely attracted to the saloon because of the nature of its use, Syth’s activities had nothing to do with operating the bar and thus the business exclusion did not apply. Fact issues exist as to whether Lockard was within course & scope of his employment when the alleged conduct occurred. Because it occurred at night after a period of relaxation, a fact finder could conclude that although the events occurred inside an FWS cabin, he was not engaged in his occupation. This a fact-intensive inquiry for trial.

American contends that the Punitive Damages Exclusion precludes coverage for any claim of punitive or exemplary damages. It relies on MCA 33-15-317(1) (“Insurance coverage does not extend to punitive or exemplary damages unless expressly included by the contract of insurance.”) Lockard contends that even if the policy does not allow payment of punitives, if any part of the complaint alleges facts which, if proven, would result in coverage, American has a duty to defend the entire complaint. The policy excludes indemnification for punitives. However, it does require a defense for claims that may be covered. Because there are claims that qualify as an “occurrence,” American has a duty to defend Lockard in the complaint.

American’s motion for summary judgment is denied. Bench trial is set for 5/21/18.

American Reliable Ins. v. Lockard and Nelson, 44 MFR 184, 1/2/18.

Matthew Gallinger & Tyler Dugger (Tolliver Law Firm), Billings, for American; Paul Sandry (Johnson, Berg & Saxby), Kalispell, for Lockard; Saidee Johnston & Terry MacDonald (Joyce & MacDonald), Butte, for Nelson.

NEGLIGENT SPOLIATION: Claim that insurer had duty to retain salvage death vehicle in anticipation of potential tie rod suit against manufacturer rejected under Montana (not ND) law. . . Cavan.

Thomas Underberg (“TJ”) was killed in an MVA in North Dakota in 11/6/12 while driving a Dodge Ram owned by Cross Petroleum Services, a Montana corporation. Chaney’s Towing took it to a Williston storage yard. EMC, an Iowa insurer licensed in Montana, insured the pickup. Neither TJ nor his Estate were named insureds. ND-based adjuster Kathy VanBrocklin adjusted the 1st- and 3rd-party claims. On 11/8 she contacted Cross to explain the claim procedure when there is a total loss and noted, according to the photos, that it did not appear that the pickup had any salvage value. On 11/12 she emailed Gregg Cross that she had “talked to Chaney’s Towing and they will dispose the truck.” On 11/9 EMC received the ND Highway Patrol report which stated that the pickup crossed the centerline on a curve and side-swiped an oncoming semi. EMC’s claims notes indicate that on 11/20 VanBrocklin spoke with semi driver Jason Kusmenko. She obtained his recorded statement in which he stated that it appeared that TJ was looking at his hands or something in his hands and that they made eye contact, and Kusmenko moved as far right as he could but the pickup was almost all the way into his lane. VanBrocklin noted that marks left at the scene confirmed his account. She told him that she could not accept liability at that time because the investigation was ongoing. On 11/27 she explained to PR Donna Underberg the available benefits that could cover what work comp did not and gave Underberg her phone number to call if she had any questions. She did not discuss retention or disposal of the pickup. There is no indication that Donna or Mark Underberg or the Estate ever contacted EMC regarding it.

On 11/30 EMC obtained a Carfax report that indicated no outstanding manufacturer recalls or prior accidents. Also on 11/30, Cross Petroleum decided to let EMC take the pickup, and transferred salvage title in exchange for its cash value. It did not ask EMC to hold or retain it. A claims note indicated “salvage was disposed of by the adjuster.” On 12/3 EMC received a full investigative file from the Highway Patrol. VanBrocklin also spoke to Trooper Brett Mlyner. It was determined that TJ crossed the centerline and hit the semi on the sleeper and then down the side of the cab and trailer. The pickup did not leave marks on the pavement pre-crash, indicating that TJ took no evasive action. It was noted that there was no solid evidence that he was texting and no indication of alcohol or drugs. Mlynar’s report stated that Kusmenko was not sure if TJ had anything in his hand, but that he said he was looking at his left hand as if he was holding a phone. He also stated that he made “eyeball to eyeball” contact with TJ and thought he would steer to the right but he never did.

Also on 12/3/12 EMC found that TJ was 100% at fault and contacted Kusmenko and accepted liability. On 4/3/14 — 16 months later — Greg Cross contacted VanBrocklin because he had received a letter from Underberg’s attorney asking about the pickup. He reported that TJ’s parents had located a safety recall for the steering. The attorney wanted to know where the salvage was sold. VanBrocklin stated that EMC had Chaney’s dispose of it and that it would have been crushed. On 6/16/15, Greg Cross again spoke with VanBrocklin because he had been contacted by Chrysler. He asked for a letter confirming that the pickup had been disposed of, which VanBrocklin provided the same day.

On 10/23/15 — almost 3 years after the MVA — Underberg sued Chrysler and Truck Supplies in Montana State Court claiming product liability against Chrysler and negligence against Chrysler and Truck Supplies. She alleged that known design defects in the steering linkage of Dodge Rams left the outer tie rod susceptible to fracture and loss of control, which caused TJ to lose control and crash, and that Truck Supplies negligently performed service and inspection on the pickup. The underlying litigation was dismissed with prejudice in 10/16 following settlement. Underberg filed this action against EMC 11/5/15 asserting a claim for spoliation. She admits that no one contacted EMC on behalf of the Estate regarding the pickup “at any time within one year of the accident.” It is also undisputed that she did not give notice to EMC to preserve or hold the pickup. She nevertheless asserts that EMC had notice of safety recalls regarding Rams and knew or should have known of the potential for a civil action. She references the “L16 Recall” which indicated that potential tie rod failure could result in loss of directional stability in the left front wheel and instructed dealers to measure tie rod angles. If they were 5 degrees or less, the left tie rod did not need to be replaced. The pickup was inspected by HKT Motors 12/16/11. The invoice indicated that the tie rods were within the L16 Recall spec and did not need to be replaced. Underberg disputes accuracy of the measurements and the propriety of Chrysler’s replacement specs. Chrysler issued N49 Recall 11/6/13 — a year after the MVA and disposal of the pickup — which concerned failure of the left tie rod assembly on certain Rams.

EMC requests summary judgment on choice of law and duty & causation.

Choice of law. EMC argues that ND law should govern the substantive issues. Underberg contends that Montana law applies. Because 3rd-party spoliation is not currently a recognized cause in ND, Simpson (ND 2005), Underberg’s claim may be subject to dismissal under ND law, while her claim is allowed in Montana, Oliver (Mont. 1999). On balance, Restatement of Conflicts of Laws §6 and §145 factors weigh in favor of application of Montana law to this case. EMC’s motion for summary judgment as to choice of law is denied.

Duty & causation. Underberg has not alleged any facts that would support a finding of duty to preserve the pickup under the Oliver (Mont. 1999) factors adopted from Johnson (Cal. Ct. App. 1998). She does not allege — and there is no evidence to suggest — that EMC voluntarily undertook to preserve the pickup or agreed to preserve it, and she admits that EMC was not asked to preserve it. Indeed, EMC was not contacted regarding it until over a year after the MVA. There is also no allegation that it had a duty to preserve it on the basis of a contract, statute, or regulation. She nevertheless asserts that it had a duty to preserve it on the basis of a “special circumstance/relationship.” She asserts that EMC — as a sophisticated insurer — should have foreseen that a suit would be brought, including a product liability suit, because it knew or should have known that Rams had been recalled for defective left outer tie rods and that the consequence of the defect was a loss of directional control. Johnson held that “a duty may also be based on some other contractual foundation, or on a statute, a regulation (for example, record-retention statutes and regulations), or some other analogous special relationship.” The special relationship Underberg urges the Court to adopt is not analogous to a relationship based on a contract, statute, or regulation. Nor has she produced any evidence that EMC had notice of a potential suit against Chrysler. EMC received a Carfax report that indicated no open recalls on the pickup, which the record suggests was accurate. Although the L16 Recall had been announced, the pickup had been serviced by HKT and passed the manufacturer-approved inspection for the L16 Recall prior to the MVA. It is also undisputed that Underberg did not notify EMC about any potential claim based on a recall or any other defect. Even assuming that “it was well known that certain Dodge Ram trucks, specifically the left outer tie rods, were defective,” and that this general knowledge should be imputed to EMC, she has shown — at most — potential constructive notice of a need to preserve evidence. However, as the weight of authority makes clear, constructive notice of a potential suit is insufficient to trigger a duty to preserve evidence. Although the MSC has not expressly addressed constructive notice and the tort of spoliation, several courts around the country have. The case relied on in Oliver to establish parameters of a duty to preserve held that “constructive notice of a need to preserve is not enough to create a duty to preserve.” Johnson (that the insurer knew or should have known that there was a seat belt malfunction showed only constructive notice of a potential claim, which was not sufficient to create a duty to preserve evidence, since “every accident involving personal injury or property damage has the potential to be a lawsuit”). Underberg essentially argues that EMC was too quick to dispose of the pickup, but she waited well over a year to let it know that she had any interest in it. The practical result of her theory would have required EMC to hold the pickup indefinitely or at least until the statute of limitations expired on her potential claim against Chrysler. The Court is not aware of any authority which would require an insurer to store a salvage vehicle until the statute runs out on any imaginable claim. Summary judgment for EMC on duty & causation.

Underberg v. Employers Mutual Casualty, 44 MFR 183, 3/20/18.

Joseph Cook & James Ragain (Ragain & Cook), Billings, and Philip McGrady (McGrady Law), Whitefish, for Underberg; James Zadick & Gary Zadick (Ugrin Alexander Zadick), Great Falls, for EMC.