Equine Assisted Growth & Learning Ass'n v. Carolina Cas. Ins. Co.

Decision Date19 August 2011
Docket NumberNo. 20090676.,20090676.
PartiesEQUINE ASSISTED GROWTH AND LEARNING ASSOCIATION, Plaintiff and Appellee, v. CAROLINA CASUALTY INSURANCE COMPANY, Defendant and Appellant.
CourtUtah Supreme Court

OPINION TEXT STARTS HERE

James L. Harris, Salt Lake City, for plaintiff.

Gregory J. Sanders, Patrick C. Burt, Salt Lake City, for defendant.

On Certiorari to the Utah Court of Appeals

Justice NEHRING, opinion of the Court:

INTRODUCTION

¶ 1 In this petition, we must decide whether the court of appeals correctly concluded that the district court erred when it refused to consider extrinsic evidence to determine that an insurer did not have a duty to defend an insured under the terms of an insurance policy. We affirm the court of appeals' decision and hold that the district court erred when it refused to consider extrinsic evidence as required by the terms of the insurance policy.

BACKGROUND

¶ 2 In March 2005, Greg Kersten resigned as the chief executive officer and trustee of Equine Assisted Growth and Learning Association (EAGALA). He remained a paid employee of EAGALA until his employment was terminated on November 16, 2005. The day after his termination, Mr. Kersten sued EAGALA's board of trustees seeking monetary damages and injunctive relief. Mr. Kersten captioned the complaint so it appeared that EAGALA was the plaintiff, and Mr. Kersten signed the complaint as “President and CEO” of EAGALA. Although Mr. Kersten had no authority to sue on EAGALA's behalf, he nevertheless obtained a temporary restraining order giving him control of EAGALA. The EAGALA board members were forced to demonstrate that Mr. Kersten was no longer affiliated with EAGALA and that he had no standing to sue in its name. The district court eventually dissolved the temporary restraining order, and Mr. Kersten voluntarily dismissed the case. EAGALA incurred substantial costs defending itself and its board members against Mr. Kersten's miscaptioned suit.

¶ 3 EAGALA notified its insurance carrier, Carolina Casualty, of Mr. Kersten's complaint and requested coverage for the costs of its defense. Carolina Casualty had issued EAGALA a nonprofit organization liability insurance policy. The policy covered the “Costs of Defense,” defined as the “costs and expenses ... resulting solely from the investigation, defense and appeal of any Claim against the Insureds.” It defines a “Claim” as “a written demand for monetary or non-monetary relief including ... a civil, criminal, administrative or arbitration proceeding.” However, the policy excluded from coverage “any Claim made against an Insured ... by, on behalf of, or in the right of the Insured Entity.”

¶ 4 Carolina Casualty denied coverage, contending that the complaint was brought “by, on behalf of, or in the right of [EAGALA].” Even after EAGALA explained that Mr. Kersten had no authority to file the complaint, Carolina Casualty argued that it was still an excluded claim because the complaint was captioned in EAGALA's name.

¶ 5 EAGALA sued Carolina Casualty to establish coverage for the costs of defending Mr. Kersten's unsuccessful suit. Carolina Casualty sought judgment on the pleadings on the basis that any claim in the complaint was one “by, on behalf of, or in the right of [EAGALA] because it was captioned as such. In response, EAGALA proffered extrinsic evidence that Mr. Kersten had no authority to sue in EAGALA's name and, therefore, the “insured versus insured” exclusion to coverage did not apply. But the district court refused to consider any extrinsic evidence. Instead, it compared the complaint with the policy and held that, on its face, Mr. Kersten's complaint fell within the “insured versus insured” exclusion to coverage. The district court reasoned that “the general rule is that in order to discern whether a duty to defend exists ... a court [must] examine the allegations in the underlying [c]omplaint in light of the relevant policy language.” The district court held that in making this determination, [e]xtrinsic evidence is ... unnecessary and, in fact, ... improper for the [c]ourt to consider....” Based on this reasoning, the district court granted Carolina Casualty's motion for judgment on the pleadings and dismissed EAGALA's complaint.

¶ 6 EAGALA appealed, and the court of appeals reversed.1 Relying on Fire Insurance Exchange v. Estate of Therkelsen,2 the court of appeals explained that whether extrinsic evidence is admissible in the duty-to-defend analysis turns on the parties' contractual terms.3 The court of appeals concluded that under the language of the insurance policy, extrinsic evidence was admissible to determine whether the complaint was “actually” filed “by, on behalf of, or in the right of [EAGALA].” 4 Carolina Casualty filed a petition for writ of certiorari, which we granted. We have authority to hear and decide this petition under Utah Code section 78A–3–102(3)(a).

STANDARD OF REVIEW

¶ 7 “On certiorari, we review the court of appeals' decision for correctness.” 5

ANALYSIS

¶ 8 The court of appeals concluded that the insurance policy Carolina Casualty issued to EAGALA conditioned the duty to defend upon information not contained in the complaint, and therefore, the district court should have examined extrinsic evidence in its analysis of the duty to defend outlined in the policy. ‘An insurance policy is merely a contract between the insured and the insurer.’ 6 An insurer's ‘duty to defend arises solely under [the terms of the] contract.’ 7 This duty is broader than the duty to indemnify.

1. Equine Assisted Growth & Learning Ass'n v. Carolina Cas. Ins. Co., 2009 UT App 200, ¶¶ 7–8, 216 P.3d 971.

8 It is triggered whenever “the insurer ascertains facts giving rise to potential liability under the insurance policy.” 9 “Where factual questions render coverage uncertain ... the insurer must defend until those uncertainties can be resolved against coverage.” 10

¶ 9 We examined the scope of the duty to defend in Fire Insurance Exchange v. Estate of Therkelsen.11 There we noted that an insurance contract may base the duty to defend on the face of the complaint and its allegations, or on the facts and circumstances underlying the complaint. 12 Whether a court may consider extrinsic evidence depends on how the duty is described in the contract.13

¶ 10 On one hand, when the terms of an insurance contract condition the duty to defend upon allegations contained on the face of the complaint, “extrinsic evidence is irrelevant to ... determin[e] ... whether a duty to defend exists.” 14 For example, an insurer would have no duty to defend an insured based on a complaint sounding solely in battery when the policy excludes intentional torts from coverage. Under these circumstances, the “duty-to-defend analysis ... focus[es] on two documents: the insurance policy and the complaint. ‘An insurer's duty to defend is determined by comparing the language of the insurance policy with the allegations of the complaint,’ 15 and extrinsic evidence plays no part in the analysis.

¶ 11 On the other hand, when policy terms define the scope of the duty to defend in reference to something other than the allegations in the complaint, a court may look beyond the text of the complaint to determine whether the duty has been triggered.16 In that situation, an inquiry limited to the face of the policy and the complaint leaves unanswered the question of whether the insurer has a duty to defend. Thus, while the analysis always begins with an examination of the policy language and the complaint, it ends there only if the policy terms when compared with the allegations definitively indicate that there is or is not a duty to defend. Otherwise, the duty-to-defend inquiry requires information that must be presented in the form of extrinsic evidence.

¶ 12 Applying this framework, we begin our analysis by examining the language of the contract. We then compare the relevant policy provisions with the complaint to determine whether the contract conditions the duty to defend solely in reference to the complaint. Finding that this comparison neither eliminates nor establishes a duty to defend, we conclude that the relevant contractual provision ties the duty to defend to facts not contained in the complaint. As a result, we hold that extrinsic evidence is necessary to determine whether Carolina Casualty had a duty to defend EAGALA.

I. THE POLICY, WHEN COMPARED TO THE COMPLAINT, DOES NOT INDICATE WHETHER THE DUTY TO DEFEND HAS BEEN TRIGGERED

¶ 13 The primary purpose of contract interpretation is to “ascertain the intentions of the parties at the time of contracting.17 To discover these intentions, we first examine the plain language of the contract.18 Additionally, we “consider each contract provision ... in relation to all of the others, with a view toward giving effect to all and ignoring none.” 19

¶ 14 The insurance agreement between Carolina Casualty and EAGALA states in relevant part that the “Policy shall pay on behalf of the Insureds all Loss ... arising from any Claim made against the Insureds during the Policy Period.” The policy defines “Loss” as “Damages and Costs of Defense.” It further defines “Costs of Defense” as “reasonable and necessary fees, costs, and expenses ... resulting solely from the investigation, adjustment, defense and appeal of any Claim against the Insureds.”

¶ 15 While the insurance agreement provides a broad duty to defend any claim brought against EAGALA and its agents, it narrows that duty with a list of coverage exclusions. Among these exclusions is an “insured versus insured” clause that excludes from coverage claims brought by EAGALA against itself or its agents. Specifically, the policy states that [t]he insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured ... by, on behalf of, or in the right of [EAGALA].”

¶ 16 Having identified the relevant contractual provisions, we turn to the face of the...

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