National Indem. Co. v. Flesher v. Sterneman

• Decision Date: 22 May 1970
• Docket Number: No. 1065,1065
• Citation: 469 P.2d 360
• Parties: NATIONAL INDEMNITY COMPANY, Appellant, v. George B. FLESHER and Estelle Flesher, Appellees, v. Ronald W. STERNEMAN, Intervenor-Appellee.
• Court: Alaska Supreme Court

Page 360

469 P.2d 360

NATIONAL INDEMNITY COMPANY, Appellant, v. George B. FLESHER and Estelle Flesher, Appellees, v. Ronald W. STERNEMAN, Intervenor-Appellee.

No. 1065.

Supreme Court of Alaska.

May 22, 1970.

John M. Conway and Jesse Bell, Anchorage, for appellant.

John M. Savage, of Savage, Erwin, Curran & Johnson, Anchorage, for appellee & & Johnson, Anchorage, for appellee & intervenor-appellee.

Jesse Bell and John M. Conway, Atkinson, Wade, Conway & Young, Anchorage, for appellant.

John M. Savage, Savage, Erwin, Curran & Johnson, Anchorage, for appellees and intervenor-appellee.

Before BONEY, C. J., DIMOND, RABINOWITZ and CONNOR, JJ., and FITZGERALD, Superior Court Judge.

RABINOWITZ, Justice.

This declaratory judgment action initiated by appellee George Flesher raises questions concerning the insurer, National's, duty to defend. The trial court held that National had a duty to defend Flesher, that National breached its duty to defend, and awarded damages against National. This appeal followed.

Insurer National issued to insured George Flesher an automobile liability insurance policy. This policy included a $10,000 limit on liability per person and standard covenant to defend and drive-other-cars provisions. Under the policy, the insurer agreed to pay 'all sums which the insured shall become legally obligated to pay as damages because of bodily injury * * * sustained by any person.' The policy required the insurer to 'defend any suit against the insured alleging such injury * * * and seeking damages on account thereof, even if such suit is groundless false or fraudulent; but the company may make such investigation, negotiation and settlement of any claim as it deems expedient.' Specifically excluded from policy coverage was the use of 'any automobile * * * in a business or occupation' of the insured. ¹

In June of 1962, intervenor Sterneman disabled a Broadway Cab Company taxicab near Soldtna. Appellee George Flesher, a Broadway Cab stockholder and employee, had Al's East Fifth Service, Inc. send a wrecker truck and driver, one Phillip Van Buren, from Anchorage to tow the cab back. Flesher, rather than Van Buren, was driving the wrecker, with the cab in tow, when he ran it off the highway, injuring intervenor Sterneman.

Sterneman subequently brought a personal injury action against appellee Flesher, Al's East Fifth Service, Inc., Broadway Cab Company, and Van Buren. In his first amended complaint, Sterneman alleged that appellee Flesher was Al's 'borrowed servant or employee' and also an 'agent' of Broadway Cab 'in the course and scope of his employment' with Broadway Cab when he negligently drove Al's wrecking truck off the road. ² Flesher denied these allegations admitting only that Sterneman was injured in an accident in Al's truck at a time when it was occupied by Sterneman, Flesher, and Van Buren. Sterneman's second amended complaint alleged in part that Flesher drove Al's wrecking truck as Al's 'borrowed servant and employee,' and also as 'agent and employee' of Broadway Cab 'in the course and scope of his employment.' ³ In his answer, appellee Flesher 'specifically' denied that he was the 'agent' of Broadway Cab and denied that he was the borrowed servant and employee of Al's.

After the inception of this litigation, Flesher's attorney wrote several letters to appellant National Indemnity requesting them to defend Flesher. National repeatedly refused these tenders of defense on the ground that its policy did not cover the accident.

Flesher then instituted a declaratory judgment action against National Indemnity, his automobile liability insurance carrier, because of its failure to defend him against the then pending personal injury action which had been commenced by Sterneman against Flesher, Al's East Fifth Service, Inc., Broadway Cab Company, and Van Buren. ⁴ National admitted it had refused to assume the defense of Flesher contending that it was not required to under its policy. More specifically, in an affirmative defense National asserted that its contract of insurance did 'not apply to the facts alleged and thus far established' in the Sterneman personal injury action.

While the declaratory judgment action was still pending, Sterneman and Flesher settled the negligence action. Flesher stipulated to the entry of judgment for $23,575, plus attorney's fees. Sterneman also covenanted not to execute against Flesher, and Flesher assigned to Sterneman his rights against National Indemnity. Then, Sterneman intervened in Flesher's declaratory judgment action against National. ⁵ Flesher and Sterneman subsequently moved for partial summary judgment that the policy covered the accident, and National moved for a partial summary judgment that it did not. Both motions were denied on the ground that there was a genuine issue of material fact. ⁶

Later Flesher and Sterneman moved for summary judgment asserting that the damages flowing from National's breach of its duty to defend Flesher in the negligence suit were fixed. The trial court granted partial summary judgment in favor of Flesher and Sterneman reserving for hearing the question of whether the stipulated $23,575 judgment was reasonable, and whether a settlement offer had been made to National prior to Flesher and Sterneman's stipulated judgment in the negligence action. After hearing, the court found the Flesher-Sterneman settlement reasonable, and took under advisement the question of whether National's liability should be for the $10,000 policy limit or the full amount of the settlement, ultimately deciding that National was responsible in full.

In this appeal, National argues that its duty to defend could arise only if Sterneman's complaint had alleged a cause of action within the scope of the policy. Appellees argue that National had a duty of 'reasonable investigation' to determine whether an action might terminate in liability within the scope of the policy, and that National should have known from all the pleadings that the action would so terminate. National counters that even under appellees' 'reasonable investigation' rule there remained a question of fact precluding summary judgment as to whether a reasonable investigation on National's part would have disclosed a claim within the scope of its policy.

The drive-other-cars clause extended the coverage afforded by National's policy to 'any other automobile,' with several exceptions, such as 'any accident arising out of the operation of an automobile * * * repair shop, service station' and 'and automobile while used in a business or occupation' of Flesher except a 'private passenger automobile.' National's policy defined 'private passenger automobile as any automobile the purposes of use of which are stated in the declaration as 'pleasure and business. " The only automobile, the purpose of which were stated in the declarations of the policy, was Flesher's Mercedes. ⁷ As previously noted, the duty-to-defend clause required National to defend any suit against Flesher 'alleging' injury for which the policy afforded insurance 'even if such suit is groundless, false or fraudulent.'

In granting appellee Flesher and intervenor Sternman's motion for summary judgment, the trial court held that there was at least a 'colorable claim coming within the terms of the policy' obligating National to defend, miniminally at least, to the point establishing whether or not there was coverage. ⁸ In reaching these conclusions, the trial court relied upon our decision in Theodore v. Zurich General Accident and Liability Insurance Company. ⁹ There, as in the case at bar, Zurich had promised to defend its insured against any suit 'alleging' bodily injury or death even if such suit was 'groundless, false, or fraudulent.' In holduing Zurich had a duty to defend, we said:

This language means that the obligation to defend exists when the injured party asserts a claim which, as a claim, is for a loss covered by the policy. It is the allegation made in the complaint that controls. If it comprehends an injury that may be within the policy, then the promise to defend includes it. The promise is not contingent upon the allegations being true. It may not be. But the burden of establishing this-in showing that the suit is 'groundless'-is one which Zurich agreed to assume. ¹⁰

Theodore is factually and theoretically distinguishable from the case at bar. In Theodore, the complaint alleged facts bringing the claim within policy coverage. In the instance case, National argues that Sterneman's complaint alleged a claim outside the scope of the policy. National emphasizes the point that Sterneman alleged Flesher drove a 'wrecking truck' while in the 'course and scope of his employment.' From this National concludes it had no duty to defend because the allegations in the first and second amended complainsts, which asserted that Flesher was driving as an employee of Broadway Cab, clearly take the accident out of the drive-other-cars coverage. ¹¹ Flesher and intervenor Sterneman attempt no refutation of this line of argument, but say that Sterneman's third amended complaint in the negligence action eliminated all allegations that Flesher was acting in the course and scope of his employment for Broadway Cab, thus bringing the claim within policy coverage. ¹² This third amended complaint was not made part of the record on appeal. If the third amended complaint is applicable, then the drive-other-cars coverage in the National policy would apply.

Appellees' reliance on the third amended complaint is misplaced since our research has disclosed that this pleading was not filed in the negligence action until after Sterneman and Flesher had stipulated to the entry of judgment, Sterneman had covenanted not to execute, and Flesher had assigned his rights against National. In such circumstances, the third amended complaint is not relevant to resolution of the question of whether National had a duty to defend Flesher in the...