In this edition of the Insurance Commando Blog we examine how federal judge Donald Molloy limited the Montana Supreme Court’s holding in Tidyman’s Management Services, Inc. v. Davis, 376 Mont. 80, 330 P.3d 1139 (2014), which we blogged about on November 8, 2014 in, Montana Insurers Beware: Deny the Duty to Defend at Your Own Risk if You Previously Acknowledged Such a Duty. In Tidyman’s, the Montana Supreme Court found an insurer liable for a $29,000,000 stipulated judgment when it acknowledged that its policy was implicated and provided a defense to its insured in a federal action, but then in a related state court action concluded that an exclusion precluded coverage and refused to defend its insured, even though it knew that the policy was still potentially implicated. In RQR Development, LLC v. Atlantic Cas. Ins. Co., 2014 WL 6997935 (D.Mont. Dec. 10, 2014), Judge Molloy clarified an insurer’s reliance on policy exclusions when denying coverage.
RQR Development (“RQR”) was the developer of a residential subdivision. RQR signed a contract with Blanchard and Weaver Development, LLC (“Blanchard & Weaver”) for general contracting services. Blanchard & Weaver, acting on behalf of RQR, then hired Mike Henning of Granite Mountain to provide excavating services for roadway improvements within the development. According to the underlying complaint, Henning represented that he had the requisite knowledge, training, and experience to perform this job. However, Granite Mountain’s work resulted in delays and construction and engineering deficiencies, and RQR eventually hired another excavator to rectify Granite Mountain’s work. RQR incurred significant expenses in repairing Granite Mountain’s deficient work. On March 2, 2011, RQR sued Granite Mountain, Blanchard & Weaver, and another engineering firm, in Missoula County district court, alleging, among other things, negligence (“the underlying action”).
Atlantic issued a CGL policy to Granite Mountain, which tendered the complaint to Atlantic for defense and indemnity. On April 14, 2011, Atlantic determined there was no coverage and declined to defend Granite Mountain. On December 5, 2013, Granite Mountain executed a confession of judgment in favor of RQR, and on December 24, 2013, the state court entered a judgment against Granite Mountain, which assigned its policy rights to RQR. RQR sued Atlantic and alleged that Atlantic breached the policy by failing to defend Granite Mountain and failing to pay RQR for Granite Mountain’s deficient work. RQR and Atlantic filed cross-motions for summary judgment. RQR argued that there was coverage for its negligence claim; Atlantic argued that there was not.[1]
RQR argued that under Tidyman’s courts do not need to analyze coverage under the policy to determine that an insurer breached its duty to defend, and Atlantic thus waived its right to argue for policy exclusions. But Judge Molloy felt that this was an overstatement of Tidyman’s. He noted that the insurer in Tidyman’s acknowledged that its policy was implicated and provided a defense to its insured in the federal action, but then, in the related state court action, concluded that an exclusion barred coverage and refused to defend, even though it was aware that the policy was potentially implicated. Judge Molloy found that Atlantic was correct in insisting that Tidyman’s, insofar as it allowed courts to ignore clear exclusions, applied only to those cases in which the insurer has taken multiple actions to “recognize” potential coverage. He pointed out that rather than do this Atlantic instead declined coverage after tender of the claim and did not thereafter change its position.
RQR also argued that Pac. Hide & Fur Depot v. Great American Ins. Co., 23 F.Supp.3d 1208 (D.Mont. May 23, 2014) required an insurer that wishes to deny coverage based on an exclusion to file a separate declaratory judgment action after defending its insured under a reservation of rights. However, Judge Molloy distinguished Pac. Hide because it was based upon the court’s determination that there was coverage under some of the policies at issue, which triggered the insurer’s duty to defend all of the claims. Additionally, Judge Molloy noted that in contrast to Atlantic, the insurer in Pac. Hide failed to unequivocally demonstrate that the claims were not covered before denying a defense. Judge Molloy found that Pac. Hide should not be interpreted as changing Montana law that insurers may rely on policy exclusions in denying coverage. See e.g., Beaverhead Co. v. Mont. Assn. of Cos. Joint Powers Ins. Auth., 335 P.3d 721, 725 (2014) (finding an insurer did not have a duty to defend when it had unequivocally demonstrated that a policy exclusion precluded coverage).
Finally, RQR relied on Newman v. Scottsdale Ins. Co., 301 P.3d 348 (2013) in arguing that Atlantic breached its duty to defend by relying on exclusions and had therefore waived its right to now argue for the exclusions. However, Judge Molloy distinguished Newman because the issue there was whether the insurer had waived its right to claim a late notice defense, which was not at issue in RQR’s lawsuit against Atlantic.
After determining that Atlantic properly relied upon policy exclusions to deny the duty to defend, Judge Molloy analyzed exclusions (j)(5), (j)(6), and (l) and found that they applied to bar coverage for RQR’s negligence claim. He therefore concluded that Atlantic had no duty to defend Granite Mountain against RQR’s negligence claim and that its denial of Granite Mountain’s claim was proper.[2]
Judge Molloy’s decision clarifies that insurers may rely upon exclusions in denying the duty to defend. However, his message to insurers is clear: do not be unequivocal in doing so. This, of course, requires insurers to carefully analyze the duty to defend before denying a claim and, more importantly, clearly state why the claim is not covered. Insurers may not equivocate or hedge when telling insureds why they are not being defended. The prudent insurer will likely file a declaratory judgment action in all but the most clear-cut application of policy exclusions. But when an insurer feels that its denial is solid and that it unequivocally informed the insured of the bases for denial, Montana law still supports an insurer’s right to deny the duty to defend without penalty.
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[1] Judge Molloy found that there was no covered “occurrence” but nevertheless examined the applicability of various policy exclusions to the extent that RQR satisfied the Insuring Agreement.
[2] He also concluded that there was no coverage for RQR’s remaining claims.
[3] Vasu would like to thank his colleagues Jeff Tindal, for previously blogging about Tidyman’s and thus providing the basis of this edition of the Insurance Commando Blog, and Mark Mills for contributing text to this entry.
