Liberty Bank of Montana v. Travelers Indem. Co. of America

• Citation: 870 F.2d 1504
• Decision Date: 29 March 1989
• Docket Number: No. 87-4240,87-4240
• Parties: LIBERTY BANK OF MONTANA, Plaintiff-Appellant, v. The TRAVELERS INDEMNITY COMPANY OF AMERICA, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1504

870 F.2d 1504

LIBERTY BANK OF MONTANA, Plaintiff-Appellant, v. The TRAVELERS INDEMNITY COMPANY OF AMERICA, Defendant-Appellee.

No. 87-4240.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 7, 1988.

Decided March 29, 1989.

Gary M. Zadick, Ugrin, Alexander, Zadick & Slovak, P.C., Ward E. Taleff, Alexander & Baucus, Great Falls, Mont., for plaintiff-appellant.

Kenneth R. Dyrud, Church, Harris, Johnson & Williams, Great Falls, Mont., for defendant-appellee.

Appeal from the United States District Court for the District of Montana.

Before FLETCHER, BOOCHEVER and TROTT, Circuit Judges.

TROTT, Circuit Judge:

Liberty Bank sued Travelers Indemnity (Travelers) for a declaration that Travelers had a duty to defend Liberty Bank against a counterclaim in its suit against Liberty Manufacturing to foreclose on a security interest. The district court granted Travelers' motion for summary judgment and denied Liberty Bank's motion for partial summary judgment. Liberty Bank appeals this order. We affirm.

I FACTS

As security for a loan, Liberty Manufacturing granted Liberty Bank (Liberty) a security interest in all of its assets, inventory, equipment and accounts receivable. Upon default, Liberty threatened foreclosure unless Liberty Manufacturing brought the loans current. Liberty agreed to defer foreclosure if additional capital was injected into the company. A group of investors, "Private Lenders," were approached to make such investments. Liberty stated that if Private Lenders made the requested investment, the bank would subordinate its security position in the inventory and accounts receivable to the extent that they appreciated in value after September 1, 1981. Based upon this representation, Private Lenders invested in Liberty Manufacturing.

Liberty subsequently repudiated its subordination agreement, foreclosed its security interest, sold the collateral, and applied the proceeds to recover its own investment. During the foreclosure proceedings, Private Lenders brought a counterclaim against Liberty, alleging fraudulent misrepresentation, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing. In this underlying suit, the trial court eventually found in favor of the Private Lenders on the counterclaim.

Pursuant to its belief that the counterclaim in the underlying action triggered the duty to defend provision of their insurance policy, Liberty requested Travelers' assistance. After Travelers refused several tenders of defense, Liberty instituted this action in district court, seeking a declaration regarding the scope of coverage under the insurance policy. Cross-motions for summary judgment were filed. The district court found there was no duty to defend and granted Travelers' summary judgment motion.

II DISCUSSION

We review grants of summary judgment de novo, viewing evidence in the light most favorable to the nonmoving party to determine whether substantive law was correctly applied and whether there was any issue of material fact. Century 21 Real Estate Corp. v. Sandlin, 846 F.2d 1175, 1178 (9th Cir.1988) (citing Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir.1986)).

In this diversity action, Montana law controls the substantive rights and obligations of the parties. St. Paul Fire & Marine Insurance Co. v. Weiner, 606 F.2d 864, 867 (9th Cir.1979). Liberty cites various sections of Appelman, Insurance Law & Practice (1979 ed.), to support its argument that the duty to defend is determined by reference to the pleadings, discovery, and final issues declared ready for trial. While the scope of this rule has not been extensively defined in Montana, we may assume that the Montana Supreme Court, if faced with this issue, would hold that the duty to defend may be triggered by notification to the insured of facts asserted in the pleadings, discovery, or final issues declared ready for trial, giving rise to potential liability under the policy. Another way to state this rule is that the insurer's duty to defend arises when the claim against the insured sets forth facts representing a risk covered by the terms of the policy. Lindsay Drilling & Contracting v. United States Fidelity & Guarantee Co., 208 Mont. 91, 93, 676 P.2d 203, 205 (1984). Under this framework, we must determine whether the district court erred in holding the claims asserted against Liberty did not trigger Travelers' duty to defend.

A. Damage to Reputation

The pertinent portion of the insurance policy which provided protection to Liberty Bank against claims alleging personal injury provides:

II. PERSONAL INJURY AND ADVERTISING INJURY LIABILITY COVERAGE

(A) The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or advertising ... and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury, even if any of the allegations of the suit are groundless, false or fraudulent, ...

The Endorsement further provides:

'Personal Injury' means injury arising out of one or more of the following offenses committed during the policy period:

(1) false arrest, detention, imprisonment or malicious prosecution;

(2) wrongful entry or eviction or other invasion of the right or private occupancy;

(3) a publication or utterance

(a) of a libel or slander or other defamatory or disparaging material, or

(b) in violation of an individual's right of privacy.

Liberty argues the express language of the policy, "the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury," requires Travelers to defend any suit seeking damages on account of personal injury. Liberty contends a claim for damage to reputation was arguably asserted in pretrial discovery ¹ and in the Final Pretrial Order, ² Because Private Lenders were seeking damages for personal injury, Liberty argues the duty to defend, which may be determined from pretrial proceedings, was triggered. Accordingly, we must determine whether the interrogatory response or the Final Pretrial Order contain a claim for personal injury which would trigger Traveler's duty to defend. We consider these in reverse order.

Although the district court recognized the theoretical existence of claims for damage to reputation, the court concluded that the "claim" in this case was merely "consequential" and therefore did not trigger a duty to defend:

"The allegations set forth by the Private Lenders in the underlying action did not include a claim for libel, slander, or defamation. Rather, the Private Lenders merely alleged damaged reputation as an item of consequential damages. In the court's opinion, such a claim for consequential damages was insufficient to trigger a duty to defend on Traveler's part."

Liberty submits this ruling was error for two reasons. First, after recognizing that consequential damages for harmed reputation were alleged, the court failed to consider the broad policy language which imposes a duty upon Travelers to defend all claims seeking damages for the publication or utterance of any defamatory or derogatory material. Second, the court failed to cite any authority for its conclusion that consequential damages are excluded from coverage. Even if Liberty correctly argues the order could have "triggered" a duty to defend, Travelers was never given notice of this order as it was not filed until the day of trial. Accordingly, without deciding whether the request for consequential damages for harm to reputation asserted in the Final Pretrial Order is within the policy's coverage, we find the request for consequential damages did not trigger the duty to defend under the personal injury provision.

We next consider whether a claim for damage to reputation was asserted by virtue of the interrogatory answer. The question we must answer is whether the interrogatory answer could, arguably, be read to state a cause of action--based on Mr. Olson's letter to First United Bank--for "a publication or utterance (a) of a libel or slander or other defamatory or disparaging material...." We find the district court's rejection of "personal injury" coverage is supported by a recent decision of another division of the Montana district court. In Aetna Casualty and Surety Co. v. First Security Bank of Bozeman, 662 F.Supp. 1126 (D.Mont.1987), a discharged bank employee alleged claims for breach of the implied covenant of good faith and fair dealing attendant contracts of employment and for wrongful termination. She sought punitive damages and damages for lost wages, diminished earning capacity, harm to her reputation, and emotional distress. Aetna sought a declaration that the liability policy issued to the bank did not provide coverage for damages sought by the discharged bank employee. ³ On Motion for Reconsideration, the bank argued that under the personal injury endorsement, the liability policy would provide coverage for the claims asserted against it. ⁴

Aetna contended that because there were no allegations of libel, slander, defamation or disparagement in the complaint, there was no coverage under the policy. The bank argued that the employee's allegations that Steven Wheeler told her she was fired could constitute defamatory or disparaging material; therefore, the language of the endorsement was ambiguous. Id. at 1131.

Because Montana courts have not squarely addressed the issue, the district court judge in Aetna, based upon Montana case authority, took an approach he believed the Montana Supreme Court would adopt. Id. at 1131-32. The court held that the "personal injury" endorsement "applied only to claims actually arising out of the enumerated torts." Id. (citing American and Foreign Insurance Co. v. Church Schools, Diocese of Virginia, 645 F.Supp. 628 (E.D.Va.1986)). Additionally, ...