Newman v. United Fire & Casualty

INSURANCE: Only “false conflict” between Utah and Montana law as to “arising out of” in context of duty to defend, Montana law applied to CGL/umbrella policies covering Utah entity that provided services to Montana residential youth program… complaint drew causal connection between services provided from Utah and suffering/suicide of teen in Montana, insurer breached duty to defend, liable for $3 million consent judgment… Christensen.

Karlye Newman, 16, committed suicide 10/4/04 at Spring Creek Lodge in Sanders Co., a “tough love” behavior modification residential program for youth. Her mother Judith sued multiple defendants including National Contract Services in State Court for, inter alia, wrongful death/survivorship, alleging that National was one of a large web of interlocking companies run by Robert Lichfield. She alleged that National purported to provide services to Spring Creek including marketing, promotion, admissions, support, academic course routine, curriculum, manuals, and training outlines. She alleged that many of National’s services including misleading marketing, wrongful admission, poor educational services, and negligent training contributed to Karlye’s suffering and death. National was an insured under United Fire & Casualty CGL and Commercial Umbrella policies. United asserted that under the CGL Designated Premises Endorsement there was no coverage and no duty to defend. It declined to attend a mediation where National settled with Newman. The settlement awarded judgment for $3 million policy limits and assigned all of National’s 1st-party claims it might have against United to Newman. Newman, as 3rd-party beneficiary — a 1st-party insured under the assignments — sued United for breach of contract for refusing to defend and for declaratory judgment. The parties request summary judgment.

United contends that under Tucker (Mont. 2009), Utah law applies for determining liability as to breach of the duty to defend. Newman counters that the applicable general principles of insurance law are the same in Montana and therefore the Court should apply the law of the forum state. Modroo (Mont. 2008). If the laws and interests of the concerned states are not in conflict, there is a “false conflict” or no conflict at all. 15A CJS Conflict of Laws. If the laws of both states are the same or would produce the same decision, there is no real conflict. Shutts (US 1985). A false conflict exists where application of either state’s law is substantially the same. Mowrer (Mont. 1999); Modroo. United’s sole basis for asserting that there is conflict of law relates to “arising out of” in both policies. Newman contends that, absent a policy definition, the phrase is inherently ambiguous in an insurance contract under Montana law. Pablo (Mont. 2000). United contends that it is unambiguous in the insurance context under Utah law, NFU (Utah 1978). The problem is that even under United’s preferred Utah version, “arising out of” has a “very broad, general and comprehensive” meaning. Id. It is “commonly understood to mean originating from, growing out of, or flowing from,” and sufficient to show that something arises out of something else if one thing is in any way “linked to” another. Id. Under both Utah and Montana law, the exclusion must be strictly construed and in favor of the insured. The Court concludes under either interpretation of “arising out of,” the result is the same. There is only a false conflict, and the Court will apply Montana law.

United based its decision to decline to defend or indemnify National on the CGL endorsement which limited coverage to “bodily injury, property damage, and advertising injury arising out of the ownership, maintenance or use of the premises [at 158 W. 1600 S. #15, St. George, UT 84770] and operations necessary or incidental to those premises.” It provided no analysis in its letter declining a defense as to why National was not entitled to a defense under the umbrella. It continues to base its defense on the endorsement. It contends that the endorsement — “Limitation of Coverage to Designated Premises” — is not an exclusion, but “pertains to coverage.” It provides no citation for this, and the Court rejects it. It clearly serves to limit coverage, and thus constitutes an exclusion that must be strictly construed against the insurer. Leibrand (Mont. 1995). The Court must decide whether United has unequivocally demonstrated that the claim against National did not fall within the policy’s coverage, when liberally construing the allegations so that all doubt about the meaning of the allegations are resolved in favor of finding that the obligation to defend was activated, Staples (Mont. 2004), and when strictly construing all exclusions and words of limitations against the insurer regardless of whether they are ambiguous, Leibrand.

United has failed to show that it did not have a duty to defend and that it breached its duty. The complaint drew a causal connection between National’s services to Spring Creek and the damages suffered by Karlye. Even under United’s favored interpretation of “arising out of,” the complaint clearly alleged that her injuries were causally related to its “ownership, maintenance or use” of the St. George premises or “any operations necessary or incidental to” its use of the premises. For instance, its admission and promotional services provided at St. George conceivably resulted in Karlye’s admission, and its negligent training provided at St. George conceivably and indeed allegedly led to her suffering and death. Any factual disputes as to what services National actually provided to Spring Creek are immaterial at this point and at any rate must be resolved in favor of coverage. United’s contention that the policy clearly limited coverage and the duty to defend to incidents that occurred directly on the St. George premises is meritless. If, as alleged, National and Spring Creek were acting in concert for the purpose of facilitating a scheme to defraud parents and “operated, in effect, as a single business enterprise,” NFU, the allegedly tortious operations at Spring Creek were at least “incidental to” the operations in St. George. Its duty to defend under the CGL policy was triggered when the complaint alleged facts which if proven would result in coverage. When it refused to provide a defense, it breached its duty to defend. The Court need not address whether it breached its duty to defend under the umbrella, but notes that its arguments as to the umbrella are merely the same as set forth as to the CGL policy and that it fails to adequately address how its duty to defend was not triggered when the umbrella clearly provides that it had “a duty to defend any claims or suits not covered by any underlying insurance.”

Under both Utah and Montana law, the consequences of failure to defend are the same: the insurer is responsible for any judgments entered below. Speros (Utah 2004); Staples. Thus Newman is entitled to judgment in the amount of the $3 million judgment entered by the Sanders Co. Court. She is also entitled to post-judgment interest pursuant to §§ 25-9-205 & 27-1-211. (Although not raised by the parties, the Court concludes that there is no actual conflict of law as to interest, even though the post-judgment interest rate is different in Utah and Montana. Utah does not have a materially greater interest than Montana in seeking its post-judgment interest rate applied to a Montana Federal Court judgment against an Iowa corporation in favor of a Montana citizen who was injured in Montana.) Newman may file her motion for attorney fees & costs pursuant to Rule 54(d)(2).

(Newman (Mont. 2013) similarly affirmed Judge Christopher’s ruling that related entity Teen Help’s insurers Scottsdale (CGL) and National Union Fire (excess) wrongfully refused to defend Teen Help and were severally liable for the $3 million consent judgment plus $568,767 interest and attorney fees, but that she improperly awarded $1,188,399 fees based on a contingency in the underlying case since the contingency in the bad faith part did not transfer to the declaratory part, and remanded for recalculation of fees based on what Newman, as Teen Help’s assignee, would have been able to recover for her attorneys’ time & expenses in pursuing coverage. That case settled following remand. Newman does have a contingency in this case.)

Newman v. United Fire & Casualty, 41 MFR 263, 1/15/ 14.

Ann Moderie (Moderie Law Firm), Polson, Elizabeth Best (Best Law Offices), Great Falls, Lawrence Anderson, Great Falls, and Thomas Beers (Beers Law Offices), Missoula, for Newman; Dennis Clarke & Stephanie Hollar (Smith, Walsh, Clarke & Gregoire), Great Falls, for United.