Hartford Ins. v. Merchants & Farmers Bank

Citation928 So.2d 1006
Decision Date02 September 2005
Docket Number1031883.
CourtSupreme Court of Alabama

Micheal S. Jackson of Beers, Anderson, Jackson, Patty & Van Heest, P.C., Montgomery, for appellant.

Wilbor J. Hust, Jr., and James K. Lambert of Zeanah, Hust, Summerford & Williamson, Tuscaloosa, for appellee.


This action arises out of a dispute between Hartford Casualty Insurance Company ("Hartford") and its insured, Merchants & Farmers Bank ("Merchants"). Merchants filed an action against Hartford seeking a judgment declaring that Hartford was obligated to defend and indemnify Merchants in an action between Merchants and one of its customers, Bridges Warehouse Furniture, Inc. ("Bridges"), a retail seller of furniture. The trial court determined that Hartford was obligated to defend and to indemnify Merchants in that underlying action. Hartford appealed. We reverse and remand.


As a result of a series of financial transactions between Merchants and Bridges beginning in May 2001 evidenced by a loan agreement, Bridges became indebted to Merchants, and Merchants, in exchange, obtained a perfected security interest in Bridges's inventory and equipment, and in all proceeds derived from the sales of its inventory. In September 2002 Bridges defaulted on its debt to Merchants. Shortly after the default, Merchants learned that Bridges had entered into an agreement with a third party, Barnett & Brown, Inc. ("Barnett"), another furniture retailer, pursuant to which Barnett had placed its inventory in Bridges's store as part of a liquidation sale. Merchants also learned that Barnett was in the process of removing all of its inventory from Bridges's store.

Merchants undertook to ascertain the nature and extent of the relationship between Bridges and Barnett and discovered that Barnett had not filed a financing statement relating to the inventory it had placed in Bridges's store, as required by the Uniform Commercial Code, and therefore had not secured its interest in the inventory. Counsel for Merchants concluded that any furniture belonging to Barnett and placed in Bridges's store for sale was under consignment. This conclusion led Merchants' attorney to instruct Merchants that Merchants had a security interest superior to Barnett's in merchandise placed in Bridges's store by Barnett and in any proceeds from the sale of that merchandise. Acting on this advice, Merchants notified Barnett of its position by letter. Before Merchants had an opportunity to act, Barnett sued Merchants and Bridges.

Barnett's complaint asserted three causes of action: (1) conversion; (2) detinue; and (3) negligence, willfulness, and wantonness. In substance, Barnett alleged that Merchants had improperly seized inventory and money belonging to Barnett and that in so doing Merchants had breached a duty it owed Barnett.

Merchants turned to Hartford to provide a defense to Barnett's action and for indemnification if required. Hartford concluded that the allegations of the complaint did not meet the policy definition of an "occurrence," "property damage," or "bodily injury," and it declined to provide a defense or to agree to indemnify Merchants. Merchants then filed this declaratory-judgment action against Hartford and also named Barnett as a defendant.1

In the policy Hartford issued to Merchants, Hartford agreed to

"pay those sums that the insured [Merchants] becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies. We will have the right and duty to defend the insured against any `suit' seeking those damages. However, we will have no duty to defend the insured against any `suit' seeking damages for `bodily injury' or `property damage' to which this insurance does not apply."

The policy included the following definitions:

"`Bodily Injury' means bodily injury, sickness or disease sustained by a person, including mental anguish or death resulting from any of these at any time.

". . . .

"`Occurrence' means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

". . . .

"`Property damage' means:

"a. Physical injury to tangible property, including all resulting loss of use of that 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."

(Hartford's brief, Appendix, Tab 1; emphasis added.)

The exclusions page of the policy includes the following language:

"2. Exclusions

"This insurance does not apply to:

"a. Expected or Intended Injury

"`Bodily injury' or `property damage' expected or intended from the standpoint of the insured...."

(Hartford's brief, Appendix, Tab 1.)

The trial court held a hearing at which evidence was presented ore tenus. After the hearing, the court issued a judgment, in which it concluded that the actions of Merchants complained of by Barnett constituted an "occurrence" within the meaning of the policy. The trial court found no specific intent on the part of Merchants to cause damage to Barnett and no high degree of certainty on the part of Merchants that its actions would cause damage to Barnett. Thus, the trial court found that none of the exclusions in the policy applied and that to deny coverage to Merchants would deny the reasonable expectations of the parties. It declared that Hartford was obligated to defend Merchants against the allegations of Barnett's complaint and that Hartford was obligated to "provide liability insurance coverage to the bank for the claims of Barnett."

Hartford argues on appeal that there are no factual allegations in the complaint or facts presented by Merchants that may be proved by admissible evidence that demonstrate an "occurrence" within the meaning of the policy, so as to establish a duty on Hartford's part to defend or to indemnify Merchants in the action brought by Barnett against Merchants.

Standard of Review

When a trial court interprets an insurance policy as a matter of law, that interpretation is subject to a de novo review. Upton v. Mississippi Valley Title Ins. Co., 469 So.2d 548, 555 (Ala.1985); Aetna Life Ins. Co. v. Hare, 47 Ala.App. 478, 256 So.2d 904, 911 (1972). However, when evidence is presented ore tenus in a nonjury case, a judgment based on that ore tenus evidence will be presumed correct and will not be disturbed on appeal unless it is plainly and palpably wrong or against the great weight of the evidence. Eagerton v. Second Econ. Dev. Coop. Dist. of Lowndes County, 909 So.2d 783, 788 (Ala.2004). Nevertheless, this rule is not applicable where the evidence is undisputed or where the material facts are established by undisputed evidence. Salter v. Hamiter, 887 So.2d 230, 233-34 (Ala.2004). Additionally, when the trial court "improperly applies the law to the facts, the presumption of correctness otherwise applicable to the trial court's judgment has no effect." Ex parte Bd. of Zoning Adjustment of Mobile, 636 So.2d 415, 418 (Ala. 1994).


We first examine whether Hartford has a duty to defend. Our cases have held that the duty to defend is "more extensive" than the duty to indemnify. This Court has stated:

"It is well settled `that [an] insurer's duty to defend is more extensive than its duty to [indemnify].' United States Fid. & Guar. Co. v. Armstrong, 479 So.2d 1164, 1168 (Ala.1985) (citations omitted). Whether an insurance company owes its insured a duty to provide a defense in proceedings instituted against the insured is determined primarily by the allegations contained in the complaint. Id. at 1168. If the allegations of the injured party's complaint show an accident or an occurrence within the coverage of the policy, then the insurer is obligated to defend, regardless of the ultimate liability of the insured. Ladner & Co. v. Southern Guar. Ins. Co., 347 So.2d 100, 102 (Ala.1977)(citing Goldberg v. Lumber Mut. Cas. Ins. Co., 297 N.Y. 148, 77 N.E.2d 131 (1948)). However, `[t]his Court . . . has rejected the argument that the insurer's obligation to defend must be determined solely from the facts alleged in the complaint in the action against the insured.' Ladner, 347 So.2d at 103. In Pacific Indemnity Co. v. Run-A-Ford Co., 276 Ala. 311, 161 So.2d 789 (1964), this Court explained:

"`We are of [the] opinion that in deciding whether a complaint alleges such injury, the court is not limited to the bare allegations of the complaint in the action against [the] insured but may look to facts which may be proved by admissible evidence. . . .'

"276 Ala. at 318, 161 So.2d at 795; see Ladner, 347 So.2d at 103 (quoting this language). `[I]f there is any uncertainty as to whether the complaint alleges facts that would invoke the duty to defend, the insurer must investigate the facts surrounding the incident that gave rise to the complaint in order to determine whether it has a duty to defend the insured.' Blackburn v. Fidelity & Deposit Co. of Maryland, 667 So.2d 661, 668 (Ala.1995)(citing United States Fid. & Guar. Co. v. Armstrong, 479 So.2d 1164 (Ala.1985)) (other citations omitted). When a complaint alleges both acts covered under the policy and acts not covered, the insurer is under a duty to at least defend the allegations covered by the policy. Blackburn, 667 So.2d at 670 (citing Tapscott v. Allstate Ins. Co., 526 So.2d 570, 574 (Ala.1988))."

Acceptance Insurance Co. v. Brown, 832 So.2d 1, 14 (Ala.2001). In Tanner v. State Farm Fire & Casualty Co., 874 So.2d 1058, 1064-65 (Ala.2003), this Court stated:

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