Kepner v. Western Fire Ins. Co.

Decision Date27 April 1973
Docket NumberNo. 10884--PR,10884--PR
Citation109 Ariz. 329,509 P.2d 222
PartiesJames H. KEPNER and Shirley Kepner, husband and wife, and Walter James Kepner, a minor, By the Through his next friend James H. Kepner, Appellants, v. The WESTERN FIRE INSURANCE COMPANY, a Kansas corporation, Appellees.
CourtArizona Supreme Court

Jack M. Anderson and John S. Schaper, Phoenix, for appellants.

Renaud, Cook, Miller & Cordova by James M. Videan, Phoenix, for appellees.


This is an appeal by James H. Kepner and Shirley Kepner, his wife, in behalf of Walter James Kepner, their four-year-old son, arising out of litigation to recover damages for an injury suffered by Walter Kepner. In garnishment proceedings, the Superior Court entered judgment in favor of Garnishee-defendant The Western Fire Insurance Company. The Court of Appeals, Division One, reversed, 16 Ariz.App. 549, 494 P.2d 749 (1972). Opinion of the Court of Appeals vacated. Judgment of the Superior Court affirmed.

The facts necessary to resolve this lawsuit establish that Harry and Velma Kepner were the owners of real property at 5733 North 7th Street in Phoenix, Arizona. The property was used as their home and by Harry Kepner as an office for a business known as Harry's Pool Service. A homeowner's policy of insurance was carried with The Western Fire Insurance Company, providing for comprehensive personal liability coverage. In it, Western agreed to pay all sums which the Kepners became legally obligated to pay as damages because of bodily injury or property damage. Western also agreed to 'defend any suit against the insured alleging such bodily injury or property damage and seeking damages Which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent.' The policy did not apply 'to any business pursuits of an insured * * *.' (All emphasis added.)

While a carport at the Kepner residence was being enclosed for use as an office for the pool service, Walter Kepner, grandson of Harry and Velma Kepner, sustained an injury through the use of a power saw being operated by an employee Of Harry Kepner. An action was brought to recover damages for the personal injuries to Walter, but no reference was made in the complaint to the fact that the power saw was being used at the time of the accident in the business activity of Harry's Pool Service. The ground of negligence asserted to be material here, although others were specified in Walter's complaint, is that Harry and Velma Kepner permitted Walter to be in close proximity to a dangerous instrumentality, the power saw.

On these facts, Western denied liability and refused to defend the suit. The Globe Indemnity Company, with whom the Kepners had a business policy, thereafter entered upon the defense of the suit and ultimately settled during the course of the trial for less than the final judgment, taking from the plaintiffs a covenant not to execute.

After judgment, a writ of garnishment was issued and served on Western seeking to satisfy the balance owed on the judgment. On tender of issue, the Superior Court, found: '(T)he accident * * * occurred on the insured premises upon which a business pursuit * * * was being conducted and that the injury occurred in an accident arising out of such business.' Judgment in the garnishment proceeding was entered in favor of Western, and this appeal followed. For the reasons hereinafter set forth, the judgment of the Superior Court is affirmed.

It is a well established principle of law that the parties to an agreement of insurance may contract for any lawful coverage and that an insurance company has the right to limit its liability and to impose conditions and restrictions upon its contractual obligations not inconsistent with public policy. See, e.g., Gottula v. Standard Reliance Ins. Co., 165 Neb. 1, 8--9, 84 N.W.2d 179, 184 (1957).

Western's policy is low premium protection designed to insure a homeowner against the hazards arising out of the operation and maintenance of his home. In this type of policy, certain risks are specifically excluded because they are not embraced within the course of a homeowner's normal activities. Business activities present additional risks over and beyond the ordinary and usual hazards to be found in the operation and maintenance of a home. Callahan v. American Motorists Ins. Co., 56 Misc.2d 734, 289 N.Y.S.2d 1005 (Sup.Ct.1968). They are not within the contemplation of or intended to be within policy coverage. Hence, whether the Kepners were personally negligent in their non-business activities is not a relevant factor in the determination of this case. For, irrespective of their negligence proximately causing the accident, the resulting injuries arose out of carrying on a business pursuit, without which the injuries could not have occurred.

Appellants do not question the language of the policy as excluding business activities from coverage, nor do they question the fact that the power saw was being used in a business activity within the meaning of the policy. Their position is that an insurer may not refuse to defend against a suit which on the facts pleaded in the complaint would be covered by the policy when other facts, which do not appear in the complaint, would exclude coverage.

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...

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