Swank Enterprises v. All Purpose Services

• Citation: 154 P.3d 52,2007 MT 57
• Decision Date: 05 March 2007
• Docket Number: No. DA 06-0143.,DA 06-0143.
• Parties: SWANK ENTERPRISES, INC., and St. Paul Fire and Marine Insurance Company, Plaintiffs, Respondents and Cross-Appellants, v. ALL PURPOSE SERVICES, LTD., and Continental Western Insurance Company, Defendants and Appellants.
• Court: United States State Supreme Court of Montana

154 P.3d 52

2007 MT 57

SWANK ENTERPRISES, INC., and St. Paul Fire and Marine Insurance Company, Plaintiffs, Respondents and Cross-Appellants, v. ALL PURPOSE SERVICES, LTD., and Continental Western Insurance Company, Defendants and Appellants.

No. DA 06-0143.

Supreme Court of Montana.

Submitted on Briefs January 4, 2007.

Decided March 5, 2007.

For Appellants: Karl K. Rudbach; Kaufman, Vidal, Hileman & Ramlow Kalispell, Montana.

For Respondents: Todd A. Hammer, Angela K. Jacobs; Hammer, Hewitt & Jacobs, Kalispell, Montana.

Justice W. WILLIAM LEAPHARTdelivered the Opinion of the Court.

¶1 Plaintiffs Swank Enterprises, Inc. (Swank) and St. Paul Insurance Company (St.Paul) filed a declaratory action seeking affirmation that defendant Continental Western Insurance Company (Continental) had a duty to defend Swank and was thus liable for the settlement paid to the City of Libby on Swank's behalf by St. Paul. Continental denied the allegation, claiming that the policy's provisions excluded coverage for Swank, an additional insured. The District Court, concluding that the policy did provide coverage for Swank, entered summary judgment against Continental for the settlement amount plus attorney fees. We affirm in part, reverse in part, and remand for further proceedings.

¶2 Continental raises three issues on direct appeal:

¶3 I. Did the District Court err in concluding that the 1997 policy was the applicable policy?

¶4 II. Did the District court err in concluding that the policy exclusions, all of which addressed the "named insured," did not apply to Swank, an "additional insured?"

¶5 III. Did the District Court err by holding Continental liable for the entire settlement amount, as opposed to a pro-rated amount with St. Paul?

¶6 Additionally, Swank raises the following issue on cross-appeal:

¶7 IV. Did the District Court err by not awarding prejudgment interest?

BACKGROUND

¶8 In November of 1996, Swank and the City of Libby entered into a contract for the construction of a water treatment plant. Swank subsequently entered into a subcontract with All Purpose Services (All Purpose) to paint the filter tanks and pipes at the treatment plant. The contract between Swank and All Purpose called for All Purpose to designate Swank as an additional insured on All Purpose's commercial general liability insurance. Continental provided this insurance to All Purpose under two policies, both of which listed Swank as an additional insured. One policy was in effect from January 25, 1997 to January 25, 1998 (the 1997 policy), and the second was in effect from January 25, 1998 to January 25, 1999 (the 1998 policy).

¶9 All Purpose selected the paint and painted the tanks and pipes from December 1997 to early February 1998. After All Purpose finished the job it was discovered that All Purpose had used an improper type of paint. The treatment plant's tanks and pipes were stripped and repainted and the treatment plant was shut down for the duration of the repair work. The City of Libby consequently sued Swank for the costs associated with repainting the pipes, alleging that: (1) Swank, as the general contractor, acted negligently by failing to properly coordinate the work of All Purpose, by not ensuring that All Purpose was using the correct type of paint and by not stopping All Purpose's work; and (2) Swank was vicariously liable for All Purpose's negligence.

¶10 Swank tendered defense of the City of Libby's claim to Continental based on Swank's status as an additional insured and made a demand upon Continental for indemnity. Continental refused to defend or indemnify Swank, citing to exclusions (j), (k), (l), and (m) of its policy with All Purpose as support for its position that the policy did not provide coverage to Swank for the City of Libby's claim. Swank then tendered the City of Libby's claim its own insurer, St. Paul. St. Paul reached a settlement with the City of Libby, and issued a payment of $120,102.42 to the City of Libby on December 7, 2000. St. Paul issued an additional and final payment to the City of Libby for $27,899.35 on December 21, 2000, for a total settlement of $148,001.77.

¶11 Swank and St. Paul then brought a declaratory action against Continental and a claim seeking indemnification against All Purpose. Continental initially defended its position that no coverage existed based strictly on the exclusions contained in the 1997 policy. In fact, when Swank requested a copy of the applicable policy, Continental provided it with a copy of the 1997 policy. However, by the time Continental submitted its summary judgment motion and accompanying brief it was no longer relying on the terms of the 1997 policy, but on the 1998 policy, and was implicitly arguing that the 1998 policy applied and that the exclusions in that policy precluded coverage for the City of Libby's claims against Swank. Swank responded that, because the improper paint was applied during the coverage period of the 1997 policy, that policy and its exclusions apply. Swank also argued that the exclusions in the 1997 policy apply only to the "named insured," All Purpose, and not to Swank, as an "additional insured." The District Court agreed with Swank, and concluded that Continental is liable for the settlement amount as well as costs and attorney fees, but that prejudgment interest is not appropriate because the amount of liability was in controversy and therefore uncertain until the court entered judgment.

¶12 Continental appeals the District Court's grant of summary judgment for Swank and Swank cross-appeals the court's denial of prejudgment interest.

STANDARD OF REVIEW

¶13 We review a district court's grant of summary judgment de novo. Montana Mountain Products v. Curl, 2005 MT 102, ¶ 8, 327 Mont. 7, ¶ 8, 112 P.3d 979, ¶ 8 (citations omitted). The district court must decide whether there exists any genuine issue of material fact. If none exists, the district court must then decide whether to grant the motion as a matter of law. Montana Mountain Products, ¶ 8 (citations omitted).

¶14 We review a district court's decision to grant or deny an award of prejudgment interest to determine if the District Court's interpretation of the law is correct. Ramsey v. Yellowstone Neurosurgical Assocs., 2005 MT 317, ¶ 18, 329 Mont. 489, ¶ 18, 125 P.3d 1091, ¶ 18 (citations omitted).

DISCUSSION

¶15 I. Did the District Court err in concluding that the 1997 policy was the applicable policy?

¶16 The 1997 policy, by its terms, only applies to "property damage" that occurred during the policy period. The 1997 policy defines "property damage" as:

a. Physical injury to tangible property, including all resulting loss of use of the property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

All parties agree that the "loss of use" of the treatment plant occurred after the 1997 policy expired. The question, then, is whether the selection and application of paint to the pipes and tanks by All Purpose, which did occur during the 1997 policy period, constituted "physical injury to tangible property." We conclude that the application of improper paint did cause "physical injury" to the pipes and tanks. The 1997 policy thus applies to all damage suffered by the City of Libby because the resulting loss of use is "deemed to occur at the time of the physical injury that caused it."

¶17 Continental, citing to Endo Laboratories, Inc. v. Hartford Ins. Group, 747 F.2d 1264, 1268 (9th Cir.1984), argues "that the time of the occurrence of an accident within the meaning of an indemnity policy is not the time the wrongful act was committed, but the time when the complaining party was actually damaged." While Continental agrees that the paint was applied during the 1997 policy period, it categorizes the application of the improper paint as the "injury-producing act, not the injury itself." The City of Libby was therefore not "actually damaged," according to Continental, until the plant was shutdown for repainting, after the 1997 policy period.

¶18 Although our case law is sparse on the subject of what, exactly, constitutes "physical injury" in the context of a commercial general liability insurance contract, we did consider the issue in Lindsay Drilling & Contracting v. U.S. Fidelity & Guaranty Co., 208 Mont. 91, 676 P.2d 203 (1984). There we considered, among other issues, whether "salting" of core samples with gold constituted "physical injury" under a definition of "property damage" that read: "physical injury to or destruction of tangible property . . . ." Lindsay Drilling, 208 Mont. at 95, 676 P.2d at 205. We concluded that the core samples had been "physically injured" because "[t]hey were physically and materially altered when they were salted with gold. That alteration resulted in a detriment . . . ." Lindsay Drilling, 208 Mont. at 96, 676 P.2d at 206. Applying this rationale, we now hold that the term "physical injury" refers to a physical and material alteration resulting in a detriment.

¶19 Here, the application of improper paint during the 1997 policy period caused "physical injury" because it physically and materially altered the treatment center's tanks and pipes, resulting in a detriment to the City of Libby. The detriment in fact was that the pipes and tanks had to be stripped and repainted. However, even if the City of Libby had taken no action (that is, even if the treatment plant had not been shut down and repainted), the City still would have been damaged because the paint would not have sufficiently protected the pipes and tanks. As with the "salted" core samples in Lindsay Drilling, the application of improper paint reduced the value of the pipes and tanks to the City of Libby.

¶20 Additionally, the fact that the discovery or diagnosis...