Granite State Ins. Corp. v. Mountain States Tel. & Tel. Co.

Decision Date25 October 1977
Docket NumberCA-CIV,No. 1,1
Citation573 P.2d 506,117 Ariz. 432
PartiesGRANITE STATE INSURANCE CORPORATION, a corporation, Appellant, v. The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado Corporation, Appellee. 3129.
CourtArizona Court of Appeals

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, P. C., by James H. O'Connor, Henry L. Timmerman, Phoenix, for appellant.

Fennemore, Craig, von Ammon & Udall, P. C., by Philip E. von Ammon, Toni S. McClory, Phoenix, for appellee.



This is an appeal from an order of the Superior Court granting a motion for summary judgment in favor of appellee, The Mountain States Telephone and Telegraph Company (Mountain Bell), and against appellant Granite State Insurance Corporation (Granite State).

The matters in connection with this appeal arise from a declaratory judgment action brought by Mountain Bell against Granite State to interpret the terms of an insurance policy. The complaint alleges a breach by Granite State of its contractual obligation to defend by wrongfully refusing to undertake the defense of Mountain Bell to an action brought against it by Margaret Andreason an employee of Arizona Building Maintenance Corporation to collect damages for injuries she allegedly suffered when she fell over a protruding pipe on Mountain Bell's parking lot while performing custodial duties at Mountain Bell's building. Mountain Bell's action alleged Andreason's employer was an independent contractor designated by Mountain Bell to perform maintenance and custodial services at Mountain Bell's building and that the accident is covered under the terms of a policy with Granite State. It also alleges that Granite State's refusal to defend the damage action has caused it to incur attorney's fees in connection with the damage action for which they seek payment.

The first question raised which we shall consider is whether there is a genuine issue of material fact which precludes the issuance of summary judgment as a matter of law. Such a judgment should not be granted if upon examination of the record it is determined that there is a disputed fact which, if true, could affect the final judgment. Colby v. Bank of Douglas, 91 Ariz. 85, 370 P.2d 56 (1962); 16 A.R.S., Rules of Civil Procedure, Rule 56. In this connection the record must be viewed in the light most favorable to the party opposing the motion for summary judgment and summary judgment should not be granted where there is the slightest doubt as to the facts. Lujan v. MacMurtrie, 94 Ariz. 273, 383 P.2d 187 (1963); Lawless v. Ennis, 3 Ariz.App. 451, 415 P.2d 465 (1966); Tiffany Inc. v. W.M.K. Transit Mix, Inc., 16 Ariz.App. 415, 493 P.2d 1220 (1972).

Both parties agree that the record is devoid of any evidence as to what Andreason was doing, if anything, with reference to her work at the time she fell over the protruding pipe in the parking area. In view of the posture of this case, and the manner in which the issues were raised, particularly with reference to the exclusion provisions of the policy, which will be hereinafter discussed, we cannot say as a matter of law that it clearly appears that there are no genuine material triable issues of fact present. Not knowing anything of what the fact situation really is, we can assume that there could arise a conflict in the evidence as to certain facts, the determination of which could have a lot to do with respect to the legal effect of Andreason's actions in reference to the terms of the policy. We believe in such a situation the granting of summary judgment at this stage would result in depriving the parties of a full hearing on the issue involving exclusion provisions and we therefore reverse on this point.

Because of their importance in the event of trial, we next consider the merits of certain legal issues raised upon the facts of record over which there is no dispute.

On the question of the insurer's duty to defend, it is conceded that appellee had timely notified appellant of Andreason's claim against appellee and that appellant's refusal to defend the law suit has forced appellee to retain attorneys and incur certain legal expenses in connection therewith. The policy terms are clear that the insurance company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages for bodily injury to which the policy applies. The policy also provides that the company shall have the right and duty to defend any suit against the insured, even if any of the obligations of the suit are groundless, false or fraudulent. We believe that the questions raised on this issue are answered by our Supreme Court in Kepner v. Western Fire Insurance Co.,109 Ariz. 329, 509 P.2d 222 (1973). To begin, an insurer's duty to defend a policyholder is not absolute and will depend upon the actual facts rather than upon the allegations of the complaint filed by a third party against the policyholder.

In Kepner, which involved a homeowner's policy but which reasoning is applicable to the facts of this case, our Supreme Court on this point said:

"The decisions concerning when it is the duty of an insurer to defend have been collated in an extensive annotation in 50 A.L.R.2d 458 (1956), 'Allegations in third person's action against insured as determining liability insurer's duty to defend.' Concededly, the determination of whether to defend is frequently a difficult decision for the insurer, but as a generality it may be said, as the annotator states:

'If the complaint in the action brought against the insured upon its face alleges facts which come within the coverage of the liability policy, the insurer is obligated to assume the defense of the action, but if the alleged facts fail to bring the case within the policy coverage, the insurer is free of such obligation.' 50 A.L.R.2d at 464 (footnotes omitted).

The Arizona cases support the foregoing general statement. See, Cagle v. Home Ins. Co., 14 Ariz.App. 360, 483 P.2d 592 (1971); Tucson Public School Dist. No. One v. Home Insurance Co., 9 Ariz.App. 233, 451 P.2d 46 (1969); Lawrence v. Burke, 6 Ariz.App. 228, 431 P.2d 302 (1967); Paulin v. Fireman's Fund Ins. Co., 1 Ariz.App. 408, 403 P.2d 555 (1965).

Many distinctions have been drawn, some dependent upon the language of the various policies' provisions and some upon the facts of the particular case. The distinction here is that the alleged facts ostensibly bring the case within the policy coverage but other facts which are not reflected in the complaint plainly take the case outside the policy coverage. We hold that in this situation there is no absolute duty to defend for these reasons:

First, under modern practices, such as the Federal Rules of Civil Procedure, followed in Arizona, the complaint serves a notice function and is framed before discovery proceedings crystalize the facts of the case. The trial focuses on the facts as they exist rather than on facts which might exist under the theory of recovery in the complaint. Accordingly, the duty to defend should focus upon the facts rather than upon the allegations of the complaint which may or may not control the ultimate determination of liability. See, e. g., United States Fidelity & Guar. Co. v. Baugh, 146 Ind.App. 583, 257 N.E.2d 699 (1970).

Second, there are many cases, such as here, where the allegation of facts in the complaint, even if proved, will not be decisive as to the obligation of the insurer to pay the resulting judgment. The proof of negligence proximately causing Walter Kepner's injuries justifies a judgment favorable to him, but the fact that the insureds' policy excludes coverage is irrelevant and could not be shown at the trial. As the Supreme Court of Iowa said in the recent case of New Hampshire Ins. Co. v. Christy, Iowa, 200 N.W.2d 834, 838 (1972):

'The allegations in a pleading are not, in all circumstances and situations, the decisive factor in determining whether there exists a duty on the part of the insurance company to defend. This is especially true when the duty to defend depends upon a factual issue which will not be resolved by the trial of the third party's suit against the insured, the duty to defend may depend upon the actual facts and not upon the allegations in the pleading.'

In the instant case, the trial of the negligence action did not resolve the factual issue of whether the accident fell within the exclusionary clause of the policy; further litigation was required to fix the responsibility for payment of the judgment and would have been required even if the insurer had undertaken the defense.

Third, it is to be recognized there are cases where, if on the facts the insurer has reason to believe the policy does not cover the insured, the interests of the insured and insurer may diverge. Several recent cases recognize that the insurer should not then control the defense. Glens Falls Ins. Co. v. American Oil Co., 254 Md. 120, 254 A.2d 658 (1969); Burd v. Sussex Mutual Ins. Co., 56 N.J. 383, 267 A.2d 7 (1970). " 109 Ariz. at 331-332, 509 P.2d at 224.

Particularly apropos to our issue is the following language in Kepner :

"Where there are facts which might exclude coverage, the insurer cannot always defend with complete fidelity. There must be a proceeding at which the insurer and the insured are each represented by counsel of their own choice to fight out their differences. Such a testing of the insurer's liability may take the form of a declaratory judgment brought in advance of the third party's action or proceedings on garnishment following the trial of the third party's action as in the instant case. Burd v. Sussex Mutual Ins. Co., supra. And see, Comment, 'The Insurer's Duty to Defend under a Liability Insurance Policy,' 114 U.Pa.L.Rev. 734 (1966). If the insurer refuses to defend and awaits the determination of its obligation in...

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