Hoyle v. Utica Mut. Ins. Co.

• Decision Date: 06 June 2002
• Docket Number: No. 27142.,27142.
• Citation: 48 P.3d 1256,137 Idaho 367
• Court: Idaho Supreme Court
• Parties: Richard W. HOYLE, for himself and as an employee for First Security Insurance, Inc., d/b/a Hoyle Insurance, and Hoyle & Associates Insurance, Inc., an Idaho corporation, now known as Winston Incorporated Network, d/b/a Wincorp, Plaintiffs-Appellants, v. UTICA MUTUAL INSURANCE COMPANY, a New York corporation, and Employers Reinsurance Corporation, a Missouri corporation, Defendants-Respondents.

48 P.3d 1256

137 Idaho 367

Richard W. HOYLE, for himself and as an employee for First Security Insurance, Inc., d/b/a Hoyle Insurance, and Hoyle & Associates Insurance, Inc., an Idaho corporation, now known as Winston Incorporated Network, d/b/a Wincorp, Plaintiffs-Appellants, v. UTICA MUTUAL INSURANCE COMPANY, a New York corporation, and Employers Reinsurance Corporation, a Missouri corporation, Defendants-Respondents.

No. 27142.

Supreme Court of Idaho, Boise, February 2002 Term.

June 6, 2002.

Reed & Giesa, P.S., Spokane; Goicoechea Law Offices, Chtd., Boise, for appellants. John P. Giesa argued.

Brassey, Wetherell, Crawford & McCurdy, Boise; Paine, Hamblen, Coffin, Brooke & Miller, Coeur d'Alene; Arnall, Golden & Gregory, LLP, Atlanta, for respondents. Robert T. Wetherell for Utica Mutual Insurance Company and Scott F. Bertschi for Employers Reinsurance Corporation, argued.

TROUT, Chief Justice.

Richard W. Hoyle ("Hoyle") and Hoyle & Associates Insurance, Inc. ("HAII") appeal the district judge's order granting summary judgment in favor of Utica Mutual Insurance Company ("Utica") and Employers Reinsurance Corporation ("ERC").

I. FACTUAL AND PROCEDURAL BACKGROUND

HAII is an insurance agency/brokerage firm formed by Hoyle in 1979. On January 1, 1996, HAII entered into an Asset Purchase Agreement with First Security Insurance, Inc. ("FSI") whereby FSI agreed to acquire substantially all of the assets of HAII. Under the Asset Purchase Agreement, FSI essentially operated the insurance agency previously known as HAII, although HAII remained a separate and distinct corporate entity owned by Hoyle. As a condition precedent to the execution of the Asset Purchase Agreement, FSI executed an Employment Agreement with Hoyle, agreeing to employ Hoyle as an executive management level employee to supervise the sales activities of the Boise, Idaho office. Hoyle remained in that position until his employment was terminated by FSI on June 5, 1997.

On July 1, 1990, HAII purchased an insurance policy from Utica. The Utica policy was in effect from July 1, 1990, through June 30, 1996, and subsequently extended to August 30, 1999. HAII is the named insured under the Utica policy, and pursuant to Section III of the policy, Hoyle was also insured under the policy as the sole shareholder, president and director of HAII. ERC issued an insurance policy to FSI for the period of January 20, 1996, to January 20, 1997. The policy was renewed to cover until January 20, 1999. Hoyle was insured under the policy as an employee of FSI.

In May of 1997, the Idaho Department of Insurance and the Idaho Attorney General's office had served a search warrant on FSI alleging that Hoyle had committed crimes of racketeering, insurance fraud, forgery, criminal solicitation, and misappropriation of premium funds. As a result of the search warrant, the insurance agency was shut down for a period of time as investigators searched and seized files and documents.

On June 13, 1997, Hoyle was criminally indicted by an Ada County grand jury in the District Court of the Fourth Judicial District of the State of Idaho. The indictment alleged Hoyle committed at least 141 criminal acts while serving as an insurance broker for HAII and later for FSI.

On June 16, 1997, FSI filed a civil action in Ada County against Hoyle and HAII seeking damages as a result of Hoyle's alleged fraudulent and criminal conduct. FSI filed an amended complaint against Hoyle and then filed a second amended complaint. In this complaint, FSI sought compensatory damages, indemnification, attorney's fees and costs. The general allegations of this complaint assert that Hoyle and HAII misrepresented and violated the terms of the Asset Purchase Agreement and the Employment Agreement entered between FSI and Hoyle. Nowhere in the complaint does FSI expressly allege negligence.

Shortly after suit was instituted, Hoyle and HAII tendered the defense of both the criminal and FSI civil suit to ERC by letter. On July 31, 1997, ERC denied coverage and denied a duty to defend and indemnify.

On June 8, 1998, Hoyle and HAII tendered defense of the FSI civil suit to Utica. On October 19, 1998, Utica denied coverage and denied a duty to defend and indemnify.

On May 19, 1999, Hoyle and HAII filed this action against Utica and ERC seeking a declaratory judgment that ERC has a duty to defend the criminal suit, and both Utica and ERC have a duty to defend and indemnify the civil suit, as well as asserting claims for breach of contract and breach of the duty of good faith and fair dealing arising out of Utica and ERC's failure to defend these lawsuits.

ERC and Utica filed motions for judgment on the pleadings pursuant to I.R.C.P. 12(c) and Hoyle and HAII filed motions for summary judgment against Utica and ERC. Utica's motion came before the court first, and the district court, utilizing the summary judgment standard, held Utica did not have a duty to defend Hoyle or HAII. ERC's motion then came before the court, and the district court granted ERC's motion with respect to the duty to defend. Later, the district court granted ERC's motion with respect to the duty to indemnify. Hoyle and HAII now appeal those decisions.

II. STANDARD OF REVIEW

With respect to Utica and ERC's motions for judgment on the pleadings, the district judge treated them as motions for summary judgment because matters outside the pleadings were referred to. Idaho Rule of Civil Procedure 12(c), with respect to motions for judgment on the pleadings states:

After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings. If on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.

Because matters outside the pleadings were considered in ruling on Utica and ERC's motions, this Court will review the district judge's decisions under the summary judgment standard.

On appeal from the grant of a motion for summary judgment, this Court employs the same standard as used by the district court originally ruling on the motion. Mutual of Enumclaw Ins. Co. v. Pedersen, 133 Idaho 135, 138, 983 P.2d 208, 211 (1999); McKay v. Owens, 130 Idaho 148, 152, 937 P.2d 1222, 1226 (1997). Summary judgment is proper "if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." I.R.C.P. 56(c). This Court liberally construes all disputed facts in favor of the non-moving party, and draws all reasonable inferences and conclusions supported by the record in favor of the party opposing the motion. Wensman v. Farmers Insur. Co. of Idaho, 134 Idaho 148, 151, 997 P.2d 609, 612 (2000). If reasonable people could reach different conclusions or draw conflicting inferences from the evidence, the motion must be denied. Id. However, if the evidence reveals no disputed issues of material fact, only a question of law remains, and this Court exercises free review. Sun Valley Potatoes, Inc. v. Rosholt, Robertson, & Tucker, Chtd., 133 Idaho 1, 4, 981 P.2d 236, 239 (1999).

III. DISCUSSION

As an initial matter, Hoyle and HAII contend Utica and ERC were required to file a declaratory judgment action if they were not going to defend, citing Kootenai County v. Western Casualty and Surety Co., 113 Idaho 908, 750 P.2d 87 (1988). In Kootenai County, this Court discussed when an insurer must determine its potential for liability and duty to defend:

[I]f the insurer believes that the policy itself provides a basis, i.e., an exclusion for noncoverage, it may seek declaratory relief. However, this does not abrogate the necessity of defending the lawsuit until a determination of noncoverage is made. The insurer should not be allowed to "guess wrong" as to the potential for coverage. "[T]he provision for defense of suits is useless and meaningless unless it is offered when the suit arises." 7 C.J. Appleman, Insurance Law and Practice § 4684 at 83 (Berdal ed.1979).

Kootenai County, 113 Idaho at 910-911, 750 P.2d at 89-90. This language, while admittedly broad, does not require an insurance company to file a declaratory judgment action in every instance, even though it believes there is no potential for coverage, and then tender a defense until the lack of coverage is established. The operative language from Kootenai County is "may" file such an action. However, as Kootenai County emphasizes, the insurance company acts at its own peril if it chooses not to defend a case and it is later determined that the insurance company did, in fact, have such a responsibility.

A. Duty to Defend

This Court has previously articulated the rule regarding an insurer's duty to defend. The duty to defend arises upon the filing of a complaint whose allegations, in whole or in part, read broadly, reveal a potential for liability that would be covered by the insured's policy. Constr. Mgmt. Sys., Inc. v. Assurance Co. of Am., 135 Idaho 680, 682, 23 P.3d 142, 144 (2001); Union Warehouse & Supply Co., Inc. v. Illinois R.B. Jones, Inc., 128 Idaho 660, 667, 917 P.2d 1300, 1307 (1996); Kootenai County v. W. Cas. and Sur. Co., 113 Idaho 908, 910, 750 P.2d 87, 89 (1988) (citing State of Idaho v. Bunker Hill Co., 647 F.Supp. 1064, 1068 (D.Idaho 1986)). How and when an insurer must determine its potential for liability and duty to defend has also been established:

The problem that faces the insurers when a claim is made is determining if there is a potential for liability. However, ... since the advent of notice pleading there will likely be broad ambiguous claims made against the insured making it more

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