Klamath Pacific Corp. v. Reliance Ins. Co.

• Jurisdiction: Oregon
• Parties: KLAMATH PACIFIC CORPORATION, an Oregon corporation, and Robert Stewart, Respondents, v. RELIANCE INSURANCE COMPANY, Appellant, and Insurance Company of the State of Pennsylvania, a Pennsylvania corporation, Defendant. 9302944CV; CA A91172. Court of Appeals of Oregon, In Banc
• Citation: 950 P.2d 909,151 Or.App. 405
• Court: Oregon Court of Appeals
• Decision Date: 26 November 1997

Page 909

950 P.2d 909

151 Or.App. 405

KLAMATH PACIFIC CORPORATION, an Oregon corporation, and Robert Stewart, Respondents, v. RELIANCE INSURANCE COMPANY, Appellant and Insurance Company of the State of Pennsylvania, a Pennsylvania corporation, Defendant.

9302944CV; CA A91172.

Court of Appeals of Oregon,

In Banc.

Argued and Submitted March 17, 1997.

Taken In Banc Sept. 4, 1997.

Decided Nov. 26, 1997.

William G. Earle, Portland, argued the cause for appellant. On the briefs were William L. Hallmark and Hallmark, Keating & Abbott, P.C.

Gregory B. Snook, Portland, argued the cause for respondents. With him on the brief was Kilmer, Voorhees & Laurick, P.C.

LANDAU, Judge.

At issue in this case is whether defendant Reliance Insurance Company (Reliance) had a duty to defend plaintiffs Robert Stewart and Klamath Pacific Corporation (Klamath Pacific) in lawsuits brought by former employees of Klamath Pacific. The trial court held that Reliance did owe plaintiffs such a duty to defend in the underlying actions. Reliance appeals.

In February 1990, two former employees of Klamath Pacific, Ballinger and Sutfin, filed actions in federal district court against Klamath Pacific, against Stewart, as principal shareholder and president of Klamath Pacific, and against two supervisors employed by Klamath Pacific, Pearce and Mahoney. Although Ballinger and Sutfin alleged various federal claims in those actions, the claims now at issue are their pendent state claims of intentional infliction of emotional distress. Those claims (presented the same in both Ballinger's and Sutfin's pleadings), included the following allegations:

"2.

"At all relevant times hereto, Defendant Klamath Pacific Corporation ('Klamath Pacific') was an Oregon Corporation doing business in the state of Oregon.

" * * * * *

"4.

"On or about August 1988, Plaintiff was hired by Klamath Pacific as a traffic control person. Defendant Kevin Mahoney ('Mahoney') and Defendant Michael Pearce ('Pearce') were employees of Klamath Pacific and were Plaintiff's supervisors.

"5.

"Beginning from the time of Plaintiff's initial employment with Klamath Pacific, and continuing throughout her employment, Plaintiff was subjected to unwelcome sexual harassment by Mahoney, Pearce and Klamath Pacific. The sexual harassment was undesirable and offensive to Plaintiff and was based upon Plaintiff's sex. Such harassment affected the term, condition or privilege of Plaintiff's employment, and created a hostile and abusive working environment.

"6.

"Defendant Robert Stewart ('Stewart'), principal shareholder and President of Klamath Pacific knew or should have known of the harassment, and failed to take prompt remedial action.

" * * * * *

"15.

"While employed at Klamath Pacific, Plaintiff was subjected to conduct intending to inflect [sic] severe mental or emotional distress. The intentional conduct included in part, but is not limited to, the following:

"a. Pearce and Mahoney intentionally grabbed or rubbed Plaintiff's breasts and buttocks.

"b. Mahoney grabbed his crotch and made gestures to Plaintiff to indicate the size of his penis.

"c. Mahoney gestured to Plaintiff with his hand on his throat and then spit, simulating masturbation and ejaculation.

"d. Pearce and Mahoney made sexually explicit comments and gestures to and about Plaintiff.

"16.

"The acts of Defendants caused Plaintiff severe mental or emotional distress including shame, humiliation, embarrassment and severe emotional distress, as well as physical illness.

"17.

"The comments and conduct of the Defendants amounted to an extraordinary transgression of the bounds of socially tolerable conduct.

"18.

"As a result of the above conduct by Defendants, Plaintiff is entitled to general damages, compensatory damages and punitive damages."

Ballinger's and Sutfin's claims for intentional infliction of emotional distress eventually were dismissed by the federal district court, and both filed similar claims in state court, making the following allegations "1.

"At all relevant times hereto, Defendant Klamath Pacific Corporation ('Klamath Pacific') was an Oregon Corporation doing business in the state of Oregon.

"2.

"In August 1988, Plaintiff was hired by Klamath Pacific as a traffic control person.

"* * * * *.

"19.

"At all relevant times hereto, Klamath Pacific was Plaintiff's employer, Pearce was Plaintiff's acting supervisor, and Mahoney acted as Plaintiff's supervisor in the absence of Pearce. While on the job at Klamath Pacific, Pearce and Mahoney abused their positions as supervisors over Plaintiff in one or more of the following instances of their intentional conduct (conduct is not limited to these specific acts):

"(a) On at least one occasion, Pearce and Mahoney intentionally rubbed their arms against Plaintiff's breasts.

"(b) Mahoney grabbed his crotch and made gestures to Plaintiff to indicate the size of his penis.

"(c) Mahoney gestured to Plaintiff with his hand on his throat and then spit, simulating masturbation and ejaculation.

"(d) On numerous occasions, Pearce and Mahoney grabbed, or attempted to grab, Plaintiff's breasts and buttocks.

"(e) On numerous occasions, Pearce and Mahoney made sexually explicit comments and gestures to and about Plaintiff.

"20.

"Defendants knew that the above acts would cause Plaintiff severe mental or emotional distress, and Defendants Pearce and Mahoney committed the above acts with the intent to cause Plaintiff severe mental or emotional distress.

"21.

"The comments and conduct by Defendants were outrageous in the extreme and were an extraordinary transgression of the bounds of socially tolerable conduct, and caused Plaintiff shame, humiliation, embarrassment and severe physical and emotional distress.

"22.

"As a result of the above acts and conduct by Defendants Pearce and Mahoney, Plaintiff is entitled to general damages, compensatory damages [and] punitive damages against Pearce and Mahoney directly, and against Stewart and Klamath Pacific vicariously under the doctrine of Respondeat Superior."

In their state court actions, Ballinger and Sutfin also added a new state law claim for battery. The state claims again alleged that Klamath Pacific was an Oregon Corporation and that Ballinger and Sutfin were hired as traffic controllers in August 1988. Those claims further alleged:

"28.

"During Plaintiff's period of employment with Klamath Pacific from August 1988 through August 1989, Defendants Pearce and Mahoney voluntarily and intentionally committed the following (not exclusive list) acts:

"(a) On at least one occasion, both Pearce and Mahoney intentionally rubbed their arms against Plaintiff's breasts.

"(b) On several occasions, both Pearce and Mahoney grabbed and pinched Plaintiff's breasts and buttocks.

"(c) On at least one occasion, Mahoney grabbed Plaintiff and pulled her up against him.

"29.

"Such contact with Plaintiff was offensive, unpermitted, and insulting to Plaintiff, causing her embarrassment, shame, and emotional harm.

"30.

"As a result of Defendants Pearce and Mahoney's acts and omissions as alleged above, Plaintiff is entitled to recover damages for lost wages, general damages, compensatory damages, and punitive damages against Pearce and Mahoney directly, and against Stewart and Klamath Pacific vicariously under the doctrine of Respondeat Superior."

At all relevant times, Klamath Pacific and Stewart were covered by a general liability insurance policy issued by Reliance. The policy contained the following exclusions:

"Insurance under Coverage A. Bodily Injury and Property Damage Liability does not apply to:

"a. Intentional acts:

"bodily injury or property damage expected or intended from the standpoint of the insured. This exclusion does not apply to bodily injury resulting from the use of reasonable force to protect persons or property.

" * * * * *

"e. Employers liability:

"(1) bodily injury to an employee of the insured arising out of and in the course of employment by the insured[.]"

(Boldface in original.) The policy defines "bodily injury" as "bodily injury, sickness or disease sustained by a person, including care, loss of services or death resulting from any of these at any time." The policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Emphasis omitted.)

Klamath Pacific and Stewart tendered the defense of Ballinger's and Sutfin's actions against them to Reliance. Reliance refused to defend Klamath Pacific and Stewart in these actions. ¹ Reliance asserted that the claims did not contain allegations of "bodily injury" covered by their policy or that coverage was excluded either under the "intentional acts" exclusion or under the employers liability exclusion contained in the policy. Klamath Pacific and Stewart hired counsel to represent them in the actions by Ballinger and Sutfin.

Klamath Pacific and Stewart also instituted this action for declaratory judgment against Reliance, claiming that Reliance had a duty to defend Stewart in the underlying federal suits and to defend both Klamath Pacific and Stewart in the underlying state suits and seeking reimbursement for the costs of defending the Ballinger and Sutfin claims. The parties stipulated to the relevant facts, as set forth above, and filed cross-motions for summary judgment. The trial court concluded that Reliance had a duty to defend the underlying claims. By stipulation of the parties, the determination of damages was referred to a referee and awarded. The trial court entered judgment in favor of Klamath Pacific and Stewart, affirming the findings of the referee and awarded plaintiff's prejudgment interest, as well. Reliance appeals that judgment.

The issues on appeal are whether Reliance had a duty to defend Stewart and Klamath Pacific in the state court actions, whether Reliance had a duty to defend Stewart in the federal actions and, if so, whether that duty...