No Duty to Indemnify Where No Duty to Defend

Tred R. Eyerly | Insurance Law Hawaii

    The Montana Supreme Court held that because there was no duty to defend the insureds’ intentional acts, the insurer had no duty to defend. Farmers Ins. Exch. v. Wessel, 2020 Mont. LEXIS 2617 (Mont. Dec. 22, 2020).

    The insureds’ property was accessed by Turk Road. Turk Road was also used by the neighbors to access their land. The insureds asked for permission to snowmobile across the neighbors’ property. Permission was denied because the property was in a conservation easement which prohibited motorised used. The insureds’ thereafter retaliated by not allowing the neighbors to use Turk Road. The neighbors then purchased an easement from another landowners to construct  a new driveway which did not traverse the insureds’ property. The insureds built snow berms and gates, felled trees, and created other obstacles to prevent the neighbors from using the new driveway. Physical threats were also made by the insureds.

    The neighbors sued the insureds for declaratory and injunctive relief. The complaint alleged that the insureds’ acts were intentional and purposeful.

    Farmers defended, but sued for a declaratory judgment on coverage. Farmers argued there was no “occurrence” because there was nothing accidental about the insureds’ conduct. The Montana Supreme Court affirmed the district court’s granting summary judgment agains the insureds on the duty to defend. 

    The district court also determined it was premature to decided whether Farmers had a duty to indemnify. The Supreme Court reversed. There was no coverage under the policy to give rise to a duty to defend. A conclusion that there was no duty to defend compelled the conclusion that there was no duty to indemnify.

Roof Matching in Montana

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | December 13, 2017

We received a request for a blog related to decisions on roof matching under homeowner’s policies of insurance. In 1997 the Insurance Commissioner’s Office of Montana took a position on roof matching under the contractual duty to make a policyholder “whole” again, and the query was whether Montana had case law or statutory provisions at this time that codifies that practice.

On August 20, 2003, John Morrison, Commissioner of Insurance, issued a Memorandum on replacing damaged roof materials, stating it was the continuing position of the agency that under a ‘make whole’ provision in any insurance contract, damaged roof materials must be replaced with similar quality, kind, texture and colored materials such that there is a reasonable match with any existing materials, and if materials that meet that criteria were not available, the existing materials must be replaced to match the new materials.

On July 6, 2009, Monica J. Lindeen, the Insurance Commissioner, issued an Advisory Memorandum on the replacement of damaged building materials, addressed to “All Licensed Insurers Authorized to Write Property/Casualty Insurance; All Insurance Producers Authorized to Sell, Solicit, or Negotiate Property; Casualty Insurance And Insurance Adjusters,” stating:

It is the position of this agency when a loss requires replacement of building materials that the materials must be replaced with similar quality, kind, texture, and colored materials such that there is a reasonable match with any existing materials. In the event that materials which meet these criteria are not available, the existing materials must be replaced to achieve a match. This applies to interior and exterior losses.

Other than these two additional Insurance bulletins, I was unable to find a codification of this premise in Montana Legislature or insurance code.

Montana Supreme Court Holds that a Waiver of Consequential Damages and a Partial Limitation of Liability in a Design Contract are not Contrary to Montana Law

Emily D. Anderson | Constructlaw | November 30, 2017

Zirkelbach Constr., Inc. v. DOWL, LLC, 2017 Mont. Lexis 591 (Mont., Sept. 26, 2017)

In interpreting a state statute which makes contractual limitations on a party’s liability unenforceable in certain instances, the Supreme Court of Montana recently upheld the validity of a contract provision in a professional services agreement between a general contractor and a designer in which the parties waived consequential damages against each other and limited the liability of the designer to $50,000.00.

Zirkelbach Constr., Inc. (“Zirkelbach”) and DOWL, LLC (“DOWL”) entered into a professional services agreement (the “Agreement”), whereby DOWL agreed to provide design work to Zirkelbach, a general contractor, for the construction of a FedEx Ground facility in Billings, Montana.  The original contract price was $122,967, but was adjusted to approximately $665,000 after the parties made several addenda to the Agreement to account for additional services.

The Agreement contained a provision (the “limitation of liability clause”) – which the parties did not renegotiate when they modified the Agreement through addenda – in which the parties agreed to waive against each other “any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, or resulting from, or in any way related to the Project,” and also agreed that DOWL’s total liability to Zirkelbach under the Agreement “shall be limited to $50,000.”

After Zirkelbach brought suit against DOWL asserting claims of negligence and breach of contract in the amount of $1,218,197.93 for problems allegedly caused directly by DOWL’s design plans, DOWL filed a motion for partial summary judgment arguing that DOWL could not be liable to Zirkelbach in any amount exceeding $50,000 due to the limitation of liability clause. The District Court granted DOWL’s motion and Zirkelbach appealed.

On appeal, Zirkelbach argued that the limitation of liability clause was unenforceable as against public policy under Section 28-2-702, MCA, which provides:

All contracts that have for their object, directly or indirectly, to exempt anyone from responsibility for the person’s own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law.

The Supreme Court disagreed.  In holding that the limitation of liability clause was valid under § 28-2-702, the Supreme Court emphasized the importance of the freedom of parties to mutually agree to the terms governing their private conduct, provided those terms do not conflict with public laws, and emphasized that Zirkelbach and DOWL were two experienced, sophisticated business entities with equal bargaining power.  The Court relied on case law in both Montana and California, which has an identical statute, in concluding that “it would be difficult to imagine a situation where a contract between relatively equal business entitles would be able to meet the required characteristics of a transaction that implicated public interest.”

Additionally, the Court noted that the limitation of liability clause only capped damages and did not exempt DOWL from all liability under the Agreement, as the Court had previously held that § 28-2-702, is not violated when business entities contractually limit liability, but do not eliminate liability entirely, or when a limitation of liability applies only to a narrow type of damages, but not all damages.  DOWL remained exposed to liability on the negligence claim asserted by Zirkelbach and for $50,000 under the Agreement.

Finally, the Court rejected Zirkelbach’s argument that the $50,000 limitation of liability indirectly exculpated DOWL from liability because it was a nominal amount compared to DOWL’s total adjusted fee.  The Court pointed out that the limitation was a much larger percentage of DOWL’s fee before the parties modified the Agreement to add additional services by addenda, and stressed that it would not “allow Zirkelbach to avoid a term of the contract simply because it [had] become more burdensome due to its own failure to renegotiate.”  Each time the Agreement was modified, Zirkelbach had an opportunity to renegotiate the cap on liability, but did not.

Accordingly, the Supreme Court affirmed the grant of summary judgment in DOWL’s favor.

Calculating Actual Cash Value, Part 26: Montana

Shane Smith | Property Insurance Coverage Law Blog | July 5, 2017

In Montana, a jury may consider all relevant evidence when determining the actual cash value of the property damaged or destroyed.1 Under the broad evidence rule, the trier of fact “may consider any evidence logically tending to the formation of a correct estimate of the value of the insured property at the time of the loss.”2

Where a policy limits the insurer’s liability to the actual cash value at the time of the loss, what constitutes actual cash value depends upon the nature of the property insured, its condition, and other circumstances existing at the time of loss.3

Depreciation because of age should be considered in determining the actual cash value of a building partially destroyed by fire.4

However, although not expressly rejecting the use of depreciation based on the age of a building partially destroyed by fire in arriving at its sound value before the fire, the court in McIntosh v. Hartford Fire Insurance Company,5 did not use a depreciation percentage in further determining the amount of liability of the defendant insurance companies. The record showed that the buildings had been insured under policies which provided “against all direct loss or damage by fire. . .” and also that the company “shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper deduction for depreciation however caused, and shall in no event exceed what it would then cost the insured to repair or replace the same with material of like kind and quality.” The insurance companies argued that where the buildings had depreciated 48%, the cost of repairing them using new materials should likewise be depreciated by the same percentage in fixing the amount of liability of the companies. The court held that under the state statute, Mont. Code Ann. § 33-24-101, where there was no valuation in the policy, the measure of indemnity in insurance against fire is the expense, at the time that the loss is payable, of replacing the thing lost or injured, in the condition in which it was at the time of injury, and that since no valuation of the property insured was included in any of the policies the statute was incorporated into them. The court reversed and remanded with directions to enter judgment against the insurance companies for an amount equal to the full cost of repairing the building using new materials where necessary to restore it to the condition it was in before the fire.
1 CQI, Inc. v. Mountain W. Farm Bureau Ins. Co., No. CV 08-134-BLG-CSO, 2010 WL 2943143, at *2 (D. Mont. July 21, 2010).
2 Id.citing Interstate Gourmet Coffee Roasters, Inc. v. Seaco Ins. Co., 59 Mass. App. Ct. 78, 794 N.E.2d 607, 611 (Mass. App. Ct. 2003).
3 Century Corp. v. Phoenix of Hartford, 157 Mont. 16, 482 P.2d 1020 (1971).
4 Lee v. Providence Washington Ins. Co., 82 Mont. 264, 266 P. 640 (1928).
5 McIntosh v Hartford Fire Ins. Co., 106 Mont. 434, 78 P.2d 82 (1938).

“Occurrence” May Include Intentional Acts In Montana

Tred R. Eyerly | Insurance Law Hawaii | June 15, 2016

The Montana Supreme Court found that policy language defining “accidents may include intentional acts.” Employers Mut. Cas. Co. v. Fisher Builders, Inc., 2016 Mont. LEXIS 269 (Mont. Sup. Ct. April 19, 2016).

Jerry and Karen Slack hired Fisher Builders to build a remodeled home located on the site of their home at Flathead Lake. The existing home was an aged vacation home. The County zoning regulations required the remodeled home to incorporate the existing structure. The permit issued to the Slacks required the existing deck to remain unchanged.

Fisher elevated the existing home structure on steel beams to pour a new foundation. Fisher began to dismantle the walls while the structure was resting on the beams, and found an infestation of carpenter ants. The ant-infested planks were cut out, apparently in order to salvage what usable materials he could from the remaining structure. The ant-infested boards were subsequently burned. Eventually, the deck collapsed.

The County visited the site and issued a cease and desist order. The construction permit was revoked because the existing structure had been destroyed. The Slacks appealed the revocation of their construction permit and eventually reached a settlement with the County that allowed them to construct a home, albeit a smaller one than had been previously approved.

The Slacks sued Fisher. Employers Mutual Casualty Company (EMC), Fisher’s insurer, defended under a reservation of rights. EMC also filed a declaratory judgment action, alleging there was no coverage. Fisher assigned his claims under the EMC policy to the Slacks. The trial court granted EMC’s motion for summary judgment, concluding that Fisher’s conduct was intentional and did fit within the meaning of “occurrence” under the policy.

The Montana Supreme Court reversed. Whether the insured intended or expected the injury stemming from an intentional act was an objective inquiry. The policy language defining “accidents” could include intentional acts if the damages were not objectively intended or expected by the insured.

Further, there were issues of genuine material fact. The Slacks contested the trial court’s determination that Fisher left parts of the home and deck unsupported, causing the deck to collapse, that Fisher “destroyed” the original structure by dismantling the walls, and that Fisher failed to retain a sufficient portion of the original structure in order to maintain the non-conforming use status. Therefore, further proceedings were necessary to resolve factual issues related to application of the coverage provisions of the policy.