Scottsdale Ins. v. Wild Horse Trading, Hart, Blanchards, and Subatch

INSURANCE: Injury to Worker Exclusion did not become part of renewed policy due to failure to provide proper notice of updating and insurer and insured “stuck their heads in the sand” as to changes in insured’s operations over several policy renewals, no affirmative misrepresentation that would preclude coverage for injured subcontractor of subcontractor… declaration of insurer’s employee stricken as undisclosed expert testimony, not lay testimony as purported… Molloy.

On 8/12/22 Steven Blanchard was picking up a load of pole bundles for Pacific Western Lumber at the Clark Fork Posts facility in Plains when a 7,000-lb bundle fell on him due to Ryan Hart’s negligent operation of a loader belonging to Wild Horse Trading. He and his wife pursued 10 claims against Wild Horse and Hart as well as Jason Subatch (one of the 2 members of Wild Horse), PacWest, Nautilus Ins., and Scottsdale Ins. Scottsdale first provided CGL coverage to Wild Horse in 2019 (the initial policy) and renewed it 10/19/20 (the First Renewed Policy) and 10/19/21 (the Second Renewed Policy). Scottsdale agreed to defend Wild Horse, Hart, and Subatch under a complete reservation of rights.

Scottsdale filed this action 5/10/23 seeking a declaratory judgment that it has no duty to defend or indemnify Wild Horse, Subatch, or Hart. The parties request summary judgment.

Scottsdale argues that there is no coverage based on the Injury to Employee and Worker Exclusion and because Wild Horse made material misrepresentations that obscured some of the business’s risk. Part B provides that the policy does not apply to “bodily injury” to (a) any contractor or subcontractor “hired or retained by or for any insured” or (b) to “any employee or anyone directly or indirectly employed by such contractor or subcontractor.” Scottsdale argues that it precludes coverage because Blanchard’s injuries arose out of his retention by PacWest. Defendants argue that it does not apply because he was not hired by Wild Horse.

Blanchard was hired as a subcontractor by PacWest to transport posts from Clark Fork Posts’ facility in Plains. Clark Fork Posts hired Wild Horse to move posts around the facility. So Wild Horse was a subcontractor for Clark Fork Posts and Blanchard was a subcontractor for PacWest. There is no contract between Wild Horse — or any other insured — and Blanchard. Thus Part B does not preclude coverage.

Scottsdale next argues that Part C precludes coverage because Blanchard is a “worker.” Defendants agree that if Part C applies, it precludes coverage, but argue that it is unenforceable because Scottsdale failed to notify Wild Horse of the change to the policy. Part C provides that there is no coverage for “bodily injury” to any “worker” — “any person performing duties directly or indirectly related to the conduct of any business, regardless of the person or organization responsible for hiring, retaining, employing, furnishing or directing the worker.”

Blanchards allege that he was performing duties directly related to the conduct of his own business and/or was indirectly performing duties related to the conduct of Clark Fork Posts’ and PacWest’s businesses. They further allege that Clark Fork Posts hired Wild Horse to “undertake work on its behalf for the purpose of loading pole bundles.” Clark Fork Posts’ and PacWest’s business interests were to get the pole bundles from the Plains facility to another facility and they hired Blanchard to do it. His work for them was therefore directly related to Wild Horse’s business, as Clark Fork Posts had hired Wild Horse. As the exclusion lays out, it is immaterial that Wild Horse was not “responsible for hiring” Blanchard. Therefore, if Part C is enforceable, it precludes coverage.

“If an insurer offers or purports to renew a policy but on less favorable terms, at a higher rate, or at a higher rating plan,” the insurer must notify the insured of the change.” MCA 33-15-1106. These changes may not “take effect” unless “the insurer has mailed or delivered notice of the new terms, rate, or rating plan to the insured at least 45 days before the expiration date.” Id. “Whether an insurer has provided adequate notice of a change in insurance coverage requires a two-step analysis.” Robertus (Mont. 2008). A court “must determine whether the policy modification constituted a change in coverage requiring notice” under the statute, then “determine whether the insurer provided adequate notice of the change in coverage.” Id. The insurer has the burden to demonstrate proper notice. Thomas (Mont. 1998). The notice requirement “does not apply if the increase in the rate or the rating plan, or both, results from a classification change based on the altered nature or extent of the risk insured against.” §33-15-1106(2).

Scottsdale argues that notice was not required because it made a “classification change based on the altered nature or extent of the risk insured against” as outlined in §33-15-1106(2) and that even if notice was required it was provided. Defendants argue that although a new classification was added, that does not absolve Scottsdale of its responsibility to notify Wild Horse of less favorable terms in a renewed policy. Defendants have the better argument.

First, the change in the policy required notice under §33-15-1106, satisfying the first prong of the Robertus test. Although both the first renewed policy and the second renewed policy included Injury to Worker exclusions, the language is different in the most recent exclusion. The first renewed policy’s Injury to Worker Exclusion only precluded coverage for a contractor or subcontractor of the insured. In the second renewed policy Scottsdale changed the definition of “worker” to preclude coverage to a much larger group. The gravity of the difference is only all too clear here. Blanchard was not a contractor or subcontractor of the insured and thus he likely would not have fallen under the old exclusion, but he is excluded under the new policy language. Thus the new exclusion changes the policy to include “less favorable terms” because fewer occurrences are covered.

Nevertheless, notice may not be required under §33-15-1106(2) because the policy also contained a new classification. On 9/3/21, before the second policy renewal, Scottsdale sent a quote and proposal via Big Sky Underwriters to producer Tiffani Sheehan. She received a 10% commission for facilitating the transaction. In addition to renewing the first renewed policy, Scottsdale added an additional classification for what it considered a new risk. Scottsdale maintains that notice was not required under §33-15-1106(2) as the rate change “results from a classification change.” However, the classification change must be “based on the altered nature or extent of the risk insured against.” Id. Thus a classification change negates an insurer’s notice requirement only if the reason for the rate increase was the classification change in the policy.

It is undisputed that a new classification was added to the policy. The Building or Premises — Bank or Office — Mercantile or Manufacturing — Other than Not-for-Profit (Lessor’s Risk Only) (Class Code 61212) was added to the second renewed policy. However, Scottsdale has not demonstrated that the increased rate “results from” that added classification. It points to emails between Sheehan and underwriter Kriss Martensen to support its argument that this classification addition was the reason for the increased cost of the policy. The conversation, which memorializes a casual conversation between insurance professionals familiar with the facts underlying the policy’s needs, may do that. However, that determination reads facts into the record. The conversation merely demonstrates that Martensen noticed that there “were some exposures that we are not rated for” and suggested covering for an additional risk. While this shows that new classifications were likely needed it does not show that this was the reason for the rate increase, especially when other changes were also made to the policy. Therefore Scottsdale was required to provide notice of the policy changes.

Because notice is required, it must be done properly. Robertus. It was not. Scottsdale insists that it notified Wild Horse’s agent Sheehan of the changes 45 days before the renewal date and Wild Horse did not object. Defendants counter that notice to Sheehan does not count as notice to Wild Horse because she is not their agent and the notice that it received was deficient. They are correct.

Although Scottsdale notified Wild Horse of some changes in the second renewed policy it failed to notify it that the new Injury to Worker Exclusion covered fewer injuries than the one in the first renewed policy. (Even if notice to Sheehan was proper, she is contracted by Scottsdale to produce the insurance for Wild Horse. Showing that she was notified does not also show that Wild Horse received proper notice.) Scottsdale sent a Premium Increase/Altered Terms document to Wild Horse 9/3/21 which notified the insured “that the rate will be increased and/or the policy coverage will be changed as follows.” Under “change description” it lists added forms but does not mention the Injury to Worker Exclusion, nor does Scottsdale mention that change in the quote sent to Sheehan the same day. Therefore it failed to provide proper notice of the updated Injury to Worker Exclusion. Because notice was required and not properly provided, the exclusion did not become part of the second renewed policy and cannot be enforced against Wild Horse.

Scottsdale next argues that Wild Horse materially misrepresented information about its business in negotiating for coverage, causing it to cover risks it did not know existed. Defendants argue that Wild Horse made no misrepresentations and even if it truthfully represented information that later became inaccurate, those representations were not material to the coverage provided. They again have the better argument.

Under MCA 33-15-403(1) “all statements and descriptions in any application for an insurance policy or in negotiations for an insurance policy by or on behalf of the insured are considered representations.” Under 403(2):

Misrepresentations, omissions, concealment of facts, and incorrect statements preclude a benefit and allow rescission under the policy or contract if:

(a) the representations are fraudulent;

(b) the representations are material either to the acceptance of the risk or to the hazard assumed by the insurer; or

(c) the insurer in good faith would either not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the same premium or rate or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise; and

(d) the questions in the application are sufficiently specific so that a reasonable person would understand the requirement to provide the particular facts and that the applicant’s response was material to the insurer’s decision to provide coverage or to determine the premium or rate to be charged for the coverage.

(The statute was revised in 2019 to include (d) after Running Wolf (Mont. 2020) concluded that the previous version had been misinterpreted for half a century. Other than Justice Rice’s concurring discussion, no other court has substantively considered this statute after the revision.) “This statute should be read in the disjunctive. Thus, a misrepresentation, omission, concealment of fact or incorrect statement will prevent recovery under an insurance policy if one of the three factors listed in subsection (2) is present.” Schneider (Mont. 1991). Fraud is not required. Id.

Parsing the arguments requires a closer look at Wild Horse’s representations. In its reservation of rights letter to Subatch, Scottsdale argues that Wild Horse misrepresented its employee count and payroll data as well as the specifics of its operations.

In the Application Information Section of its application dated 10/2/19 Wild Horse listed Subatch as owner. There is no indication that it had any other employees. The application notes a payroll of $15,700 for the excavation work, with the sole owner being the only one doing it. The parties do not dispute that these representations in the original application were accurate, but they dispute the size of Wild Horse’s workforce at the time of Blanchard’s injury.

Scottsdale argues that the “Employee details report” for Wild Horse’s business demonstrates that it had upwards of 15 employees by 8/12/22, the date of Blanchard’s injuries. While this document does not indicate how many were employed at any one time because only the “hire date” is listed, it shows that Wild Horse employed more than just 1 person. Further supporting Scottsdale’s theory that its workforce had grown substantially are the depositions of Wild Horse employees. Jason Woods said he was employed by Wild Horse for 2-1/2 years as an equipment operator and estimated that it had 12-15 employees including 3 “equipment operators.” Hart stated that Wild Horse employed him, and while he did not know how many employees it had, he knew they had at least a human resources-type professional. Thus while Wild Horse’s original representation of its employees may have been accurate, as of 8/22 it employed others in addition to Subatch.

In response to the question “does applicant lease equipment with or without operators,” Wild Horse responded “rents daily or hourly without operator.” In another section it represented that it owned “four pieces of equipment he uses for his company Wildhorse Trading Co, LLC but he was also renting them out with daily rates with no operator.” The application notes that “he is an escavator [sic] and does septic and water lines.” However, it is undisputed that by 8/22 Wild Horse was employing operators. Thus Scottsdale was not aware that it was renting out equipment with and without operators at the time it originally provided coverage.

Wild Horse’s representations in its 2019 application do not represent the work it was doing by 8/22. That does not mean they constitute a misrepresentation as a matter of law. Defendants argue that the period for which it can be held accountable for any misrepresentations is when the application was made. Scottsdale interprets Montana law differently, arguing that Wild Horse is under a continuing obligation to inform it about its business activities and can therefore be held responsible for misrepresentations throughout the coverage period. Neither argument is completely accurate but Defendants have the stronger one.

Defendants cite the unpublished Minks (Mont. 2013) which held that representations at the time of signing the lease were to be relied on even when situations drastically changed during the lease period. Scottsdale cites Gabelhausen (D.Mont. 2017) in which Mount Vernon Fire Ins. sued insured Homeowners to determine coverage when they had misrepresented their ownership interest in a property in the Virgin Islands in their application. Judge Christensen found that the insurer was not on inquiry notice of the ownership interest when it did not further investigate details of that interest.

Neither case clearly instructs whether Scottsdale had the burden to seek more information from Wild Horse or Wild Horse had the burden to update Scottsdale. Wild Horse first purchased insurance from Scottsdale in 2019 and renewed without substantively updating Scottsdale about its operations. Scottsdale argues that it attempted to get more information from Wild Horse via periodic audits that were never returned but it never stopped providing coverage. Conversely, Subatch affirms that he “articulated the nature of my business to the insurance agent I procured insurance from” and “assumed that the insurance I procured would be adequate to cover claims that arose from my business.”

Both parties stuck their heads in the sand. Scottsdale renewed its coverage for Wild Horse twice without providing another application to inquire about updates to its business; Wild Horse clearly knew its business had grown since it initially purchased coverage yet never passed that information to Scottsdale. Nevertheless, the record does not reflect that Wild Horse ever affirmatively misrepresented its activities, and Scottsdale does not demonstrate that Wild Horse’s acceptance of the renewed policies, which it chose to issue without additional information from the insured, is a misrepresentation under §33-15-403. Thus coverage is not precluded by Wild Horse’s failure to notify Scottsdale about the changes to its business.

Defendants move to strike the declaration of Karen Hanna as lay witness testimony. They argue that it is an undisclosed expert disclosure that lacks foundation and offers improper legal conclusion as to construction of the policy. They are correct.

Rule 701 allows for an opinion that is based on personal perception, is helpful, and is not based on “scientific, technical, or other specialized knowledge within the scope of Rule 702.” Rule 702 instructs that an expert witness may testify based on their “knowledge, skill, experience, training, or education” if they meet the rule’s strict requirements.

Hanna is a “Territory Director of E&S Wholesale, Contract P&C — Mountain West” at Scottsdale and declares: She is “familiar with Scottsdale classification guidelines and program ratings for its commercial general liability insurance policies.” The premiums that Wild Horse paid for the policy under the classification for Excavation coverage “was based on a payroll of $1,700, i.e., one owner, and that owner being the only person performing excavation work.” Had Wild Horse represented that it employed more people, Scottsdale would have charged a higher premium. The “post-loading work Wild Horse was performing does not come within any of the Policy’s defined classes” and had Scottsdale known about the post-loading work it would have included the class code for “Contractors Equipment Rental Program” and charged a higher premium.

Hanna’s testimony seeks to assert technical or specialized knowledge regarding Scottsdale’s policies. Her opinions are not based on her personal experience with Wild Horse’s insurance contract, but on her specialized knowledge taken from her experience as an insurance professional. Had she been personally involved with Wild Horse’s insurance policy and coverage she may have been able to proffer some of this testimony, but her declaration does not include that detail. Instead, she testified about what she would have done had the situation of the insurance contract been different — a legal conclusion not based on her personal experience. Her declaration is therefore stricken because it was not disclosed as expert testimony.

Scottsdale’s summary judgment motion is denied and Defendants’ motion is granted. The 7/8/2024 bench trial and related deadlines are vacated.

Scottsdale Ins. v. Wild Horse Trading, Hart, Blanchards, and Subatch, 45 MFR 3, 6/28/24.

Leah Handelman (Garlington, Lohn & Robinson), Missoula, for Scottsdale; Conner Bottomly & Justin Stalpes (Beck, Amsden & Stalpes), Bozeman, and Dan Spoon & Bryan Spoon (Spoon Gordon), Missoula, for Blanchards; Jenna Lyon (Reep, Bell & Jasper), Missoula, for Subatch and Wild Horse; J.R. Casillas (Datsopoulos, MacDonald & Lind), Missoula, for Hart.