Hart Const. Co. v. American Family Mut. Ins. Co.

• Decision Date: 30 March 1994
• Docket Number: No. 930054,930054
• Citation: 514 N.W.2d 384
• Parties: HART CONSTRUCTION COMPANY, successor in Interest to Hart, Inc.; and Michael E. Hart, Jr., Plaintiffs and Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 384

514 N.W.2d 384

HART CONSTRUCTION COMPANY, successor in Interest to Hart Inc.; and Michael E. Hart, Jr., Plaintiffs and Appellants, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant and Appellee.

Civ. No. 930054.

Supreme Court of North Dakota.

March 30, 1994.

Ronald F. Fischer, Pearson, Christensen, Larivee and Fischer, Grand Forks, for plaintiffs and appellants.

Jay H. Fiedler, Letnes, Marshall, Fiedler & Clapp, Grand Forks, for defendant and appellee.

SANDSTROM, Justice.

In this case we address the issue of an insurance company's duty to represent its insured in a lawsuit.

A 1982 winter storm blew down a pole barn being built on the Ballantyne Brothers farm. Claiming its subcontractor was negligent, the seller/contractor, Menard, Inc., refused to pay the subcontractor, Hart Construction Company, for the additional cost of rebuilding the pole barn. Hart sued Menard and the Ballantynes. Menard and the Ballantynes answered, raising the affirmative defense of negligence. Menard cross-claimed against the Ballantynes for failure to maintain insurance required by their agreement. Ballantynes counterclaimed against Hart for indemnity from Menard's cross-claim. Hart amended his complaint adding his insurer, American Family Mutual Insurance Company, as a defendant, claiming American Family had a duty to defend and indemnify him from the affirmative defenses of, and counterclaim for, negligence. American Family denied liability, claiming it had no obligation to assist in Hart's suit. Hart's claim against American Family was severed from the rest of Hart's claims. The district court granted American Family's motions for summary judgment concluding American Family had no duty to defend or indemnify Hart under the insurance policy. Hart appeals.

We reverse and remand, holding: (1) the Ballantynes' counterclaim for negligence was a "suit for damages" under the insuring clause of Hart's American Family policy; (2) Hart's policy, as amended, provided coverage for Hart's negligence; and therefore, (3) American Family was under a duty to defend Hart from the Ballantynes' counterclaim.

I

Michael E. Hart, Jr., owns an incorporated construction business, Hart Construction Company. In September 1981, Hart agreed with Menard, Inc., to serve as a subcontractor to build Menard farm buildings. Under the agreement, Hart was required to purchase and maintain insurance protecting against claims arising out of Menard contracts performed by Hart as subcontractor. ¹ Hart took the Menard/Hart agreement to James Donahue, his American Family insurance agent, and requested an update in his comprehensive general liability insurance (CGL) policy. Hart's original CGL policy, effective May 22, 1981, provided $300,000 bodily injury liability coverage, and $100,000 property liability coverage. The policy also contained a "CL-425" endorsement, modifying the policy's exclusions section.

Donahue forwarded the necessary paperwork and a copy of the Menard/Hart agreement to American Family. American Family issued a change endorsement amending Hart's policy. Under the amended policy, American Family agreed to insure Hart for $1,000,000 bodily injury and property damage liability coverage, effective November 21, 1981. The change endorsement did not include, or refer to, the CL-425 endorsement.

In October 1981, Menard sold a pole barn to the Ballantyne Brothers, a farming operation at Westhope, North Dakota, and assigned Hart to perform the work on the contract. In February 1982, a winter storm with high winds blew down the partially completed pole barn. Under the contract with Menard, the Ballantynes were required to carry builder's risk insurance. The Ballantynes had not purchased builder's risk insurance. The Ballantynes claimed the pole barn collapsed because of Hart's negligent construction. Hart filed a claim with American Family. American Family concluded Hart's amended policy did not provide coverage for negligence. American Family did not notify Hart of its conclusion. Instead, American Family sent a letter to the Ballantynes denying the claim, explaining an investigation found no negligence on Hart's part.

Hart repaired the damage and finished construction on the pole barn. Based on its contention that Hart's negligence was responsible for the collapse, Menard refused to pay Hart for the extra material and labor costs of rebuilding the pole barn. Claiming authority under the Menard/Hart agreement, Menard also withheld payments for other jobs Hart had completed. Hart sought indemnity from American Family. American Family refused coverage.

In 1986, Hart Construction Company and Michael E. Hart, Jr., (collectively Hart) sued Menard, Inc., and Russell and Orlyn Ballantyne, doing business as Ballantyne Brothers (Ballantynes), claiming breach of contract and fraud and deceit. The suit sought damages for labor costs, material costs, lost profits, and loss of business. Menard answered, claiming because Hart was negligent in constructing the pole barn, all sums due under the Menard/Hart agreement were satisfied by payment. Menard filed a cross-claim against the Ballantynes, claiming the Ballantynes were under a contractual duty to carry builder's risk insurance, and therefore, the Ballantynes were liable to Menard for any sums due under Hart's complaint. The Ballantynes defended by claiming Hart was negligent in constructing the pole barn. The Ballantynes counterclaimed against Hart seeking indemnity in the event Menard recovered judgment against them for damages resulting from the collapsed barn.

In response to Menard's defense and the Ballantynes' counterclaim, Hart amended his complaint and added American Family as a defendant. Hart claimed American Family should defend and indemnify him from Menard's affirmative defense of, and the Ballantynes' counterclaim for, negligence. Hart's claim against American Family was severed from the claims against Menard and the Ballantynes. A jury returned a verdict in Hart's favor on his claim against Menard and the Ballantynes. The jury found the collapse of the pole barn was not caused by Hart's negligence.

Following the jury verdict, Hart renewed his claims against American Family, arguing (1) American Family was under an obligation to defend and indemnify him against Menard's and the Ballantynes' charges of negligence; (2) American Family acted in bad faith when it refused to defend and indemnify him; and (3) he is entitled to damages.

In its motions for summary judgment and dismissal, American Family argued: (1) under the CGL policy, American Family was not obligated to indemnify Hart against Menard's actions of self-help; (2) under the CGL policy, American Family was not obligated to provide legal support in Hart's plaintiff suit against Menard and the Ballantynes because: (a) there was no suit for damages against Hart, and (b) the CGL policy excluded coverage for damages caused by Hart's negligence; and, (3) American Family acted in good faith and provided the insurance coverage Hart requested.

In a March 9, 1990, memorandum decision, the district court granted American Family partial summary judgment, concluding American Family was not liable to Hart under the CGL policy:

"Despite Plaintiff's argument that it makes no difference whether Mr. Hart commences an action or is being sued as a defendant, it appears the basis for the liability insurance coverage under Coverage B, property damage liability, is clearly applicable only when insured 'shall become legally obligated to pay as damages'.... Where the plaintiff, as an insured, commences a lawsuit to collect monies legally owed him, and the affirmative defense of negligence is alleged by the defendants, this court concludes as a matter of law that no obligation exists upon the insurer under the general contracting language of this policy."

The district court also concluded the doctrine of reasonable expectations of the insured did not apply in this case. The court however allowed Hart to amend his complaint:

"The only matter unresolved is whether the Plaintiff has any claim for relief remaining or available as a result of the evidence now before the Court. While this Court hesitates to develop any theories or claim for relief in a case, Plaintiff has raised throughout the case, the issue of whether the insurance coverage was less than what Plaintiff requested and discussed with his agent, Mr. Donahue.... Stated differently, the issue of whether the insurer through their agent failed or omitted to initially procure the proper insurance for Mr. Hart."

In response to the March 9, 1990, memorandum decision, Hart moved to amend the complaint and for reconsideration of the issue of coverage under the policy. Hart argued American Family was under a duty to defend him against Menard's and the Ballantynes' claims of negligence. The district court, in a May 3, 1990, memorandum decision, granted Hart's motion to amend the complaint, but denied Hart's motion for reconsideration. The court explained:

"A review of [duty to defend cases] confirms that in each case the insured had been sued by a third party. This factor is a fundamental difference in Plaintiff's case. A review of North Dakota caselaw, neighboring jurisdictions, and the treatises have not turned up any caselaw to support the Plaintiff's position of a duty to defend when the insured commences the action. Very clearly, the duty to defend is triggered by two factors. First, the insured is sued by a third party. Second, the language in the Complaint of the third party. Plaintiff's assertion to extend the duty to defend to an action commenced by the insured against third parties who raise an affirmative defense of negligence is without authority, and is not a natural extension of this liability policy."

In Hart's amended complaint, he added his agent, James Donahue, as a defendant. The amended complaint included claims against American Family and Donahue for a breach of...