Ottumwa Housing Authority v. State Farm Fire and Cas. Co.

Decision Date17 February 1993
Docket NumberNo. 91-1955,91-1955
PartiesOTTUMWA HOUSING AUTHORITY, Appellant, v. STATE FARM FIRE AND CASUALTY COMPANY, Appellee.
CourtIowa Supreme Court

F. Richard Lyford of Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, for appellant.

John B. Grier of Cartwright, Druker & Ryden, Marshalltown, for appellee.

Considered by LARSON, P.J., and CARTER, LAVORATO, NEUMAN, and ANDREASEN, JJ.

LAVORATO, Justice.

This breach of contract action essentially involves an insurance coverage question. The district court sustained the insurer's motion for summary judgment, concluding that there was no coverage and no corresponding duty to defend. Given these conclusions, the district court determined that the insured's bad faith claim against the insurer was moot. The insured appealed. After considering the contentions and arguments of the parties on these issues, we affirm.

I. Background Facts and Proceedings.

Joyce Kay Streeby and Lisa White Evans were employed by the Ottumwa Housing Authority. The executive director of OHA at that time was Ted Simpson.

OHA was insured by State Farm Fire and Casualty Company. State Farm had issued to OHA two liability policies: (1) a general liability policy, and (2) a workers compensation and employers liability policy.

In September and October 1987, Streeby and Evans advised OHA that they were asserting claims against it based on Simpson's alleged sexual harassment. OHA passed this information on to State Farm which investigated the claims.

On October 15, 1987, Streeby and Evans filed complaints regarding Simpson's conduct with the Iowa Civil Rights Commission. OHA forwarded copies of these complaints to State Farm.

After receiving advice from its lawyers, State Farm denied coverage under the general liability policy for the civil rights sexual harassment claims. A short time later, State Farm likewise denied coverage under the workers compensation part of the second liability policy.

Several months later Streeby filed for workers compensation. State Farm retained as its defense lawyers the same firm that had advised it to deny coverage under the general liability policy.

While Streeby's workers compensation claim was pending, Streeby and Evans filed a state court petition and a federal court complaint against OHA, Simpson, and the city of Ottumwa. The petition and complaint alleged identical claims of sexual harassment based on Simpson's alleged conduct. OHA forwarded the petition and complaint to State Farm. State Farm again sought advice about coverage concerning the two civil suits from the same firm that was representing it in the workers compensation proceedings.

Meanwhile Streeby dismissed her workers compensation proceeding. One day later State Farm's lawyers advised it that neither the general liability policy nor the workers compensation policy afforded coverage for the sexual harassment claims asserted in the state and federal lawsuits. Shortly thereafter, State Farm denied coverage and refused to defend OHA and Simpson in the state and federal lawsuits.

OHA then hired separate counsel for itself and Simpson to represent them in the state and federal cases. While these cases were pending, OHA filed this suit seeking a declaratory judgment that the policies afforded coverage and imposed a duty on State Farm to defend.

Eventually OHA, Simpson, and the city of Ottumwa reached a settlement with Streeby and Evans in the state and federal lawsuits. Following this settlement, OHA amended its pleadings in the declaratory judgment action. The amendment alleged a breach of contract, seeking damages for State Farm's (1) denial of coverage for sexual harassment claims in the two civil suits, (2) failure to defend those suits and (3) bad faith. The amendment sought judgment against State Farm for all amounts that OHA paid in settlement and defense of the state and federal lawsuits. The district court sustained State Farm's motion for summary judgment on these issues, and this appeal followed.

II. Standard of Review.

Summary judgment is appropriate under Iowa Rule of Civil Procedure 237 only when the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Colton v. Branstad, 372 N.W.2d 184, 187 (Iowa 1985). No fact question exists if the only dispute concerns the legal consequences flowing from undisputed facts. Brown v. Monticello State Bank, 360 N.W.2d 81, 84 (Iowa 1984). In such circumstances, summary judgment is proper. Jacobs v. Stover, 243 N.W.2d 642, 643 (Iowa 1976). On appeal of a summary judgment ruling, then, we must decide (1) whether a genuine issue of material fact exists, and (2) if the law was correctly applied. Hernandez v. Farmers Ins. Co., 460 N.W.2d 842, 843 (Iowa 1990).

III. Duty to Defend.

In the general liability policy, State Farm agrees to "defend any claim or suit against the insured seeking damages payable under this policy, even though the allegations of the suit may be groundless, false, or fraudulent."

In the workers compensation part of the workers compensation and employers liability policy, State Farm agrees to "defend ... any claim, proceeding or suit against [the employer-insured] for benefits payable by this insurance." This provision goes on to say that State Farm has "no duty to defend a claim, proceeding or suit that is not covered by this insurance." In the employers liability part of this policy, State Farm agrees to "defend ... any claim, proceeding or suit against [the employer-insured] for damages payable by this insurance." This provision goes on to say that State Farm has "no duty to defend a claim, proceeding or suit that is not covered by this insurance."

Under these duty to defend provisions, our task is to compare the pleadings in the state and federal suits with the policies to determine whether an issue of potential or possible liability is generated under the terms of the policies. First Newton Nat'l Bank v. General Casualty Co., 426 N.W.2d 618, 623 (Iowa 1988). This determination is a law question for us to decide. For that reason, we are not bound by the district court's conclusions.

IV. The Coverage Issues Under the General Liability Policy.

The district court determined from the pleadings in the state and federal lawsuits that the damages alleged did not fall within the policy definitions of bodily injury and personal injury under the general liability policy. The court also determined that as to bodily injury there was no occurrence as defined in the policy. For these reasons, the court ruled there was no coverage under the policy.

A. Bodily injury and occurrence. The policy language relevant to our analysis of the bodily injury and occurrence issues is this:

Coverage L--Business Liability

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury ... caused by an occurrence to which this insurance applies.

....

Section II-Definitions

....

2. [B]odily injury means bodily injury, sickness or disease sustained by any person which occurs during the policy period....

....

12. [O]ccurrence means an accident, including continuous or repeated exposure to conditions, which results in bodily injury ... neither expected nor intended from the standpoint of the insured....

(Emphasis added.)

OHA believes that the allegations of "physical illness" in the state and federal pleadings are sufficient to trigger coverage under the policy's bodily injury definition. OHA also believes the allegations as to how those damages came about fall within the meaning of the policy's definition of occurrence. Even were we to assume OHA is correct, State Farm would be under no duty to indemnify it. This is because of the following exclusion under the policy, which State Farm relied on in the district court and relies on here:

Business Liability Exclusions

Under Coverage L [Business Liability], this policy does not apply:

....

9. to bodily injury to any employee of the insured arising out of and in the course of their employment by the insured....

This employee exclusion clause applies regardless of whether the employer has any liability under the workers compensation law to the employee for the bodily injury. All that is required is that the bodily injury arise out of and in the course of employment. Other courts interpreting an exclusion identical or similar in language to this one have reached the same conclusion. See Cowen v. Mercury Fin. Co., 607 So.2d 1067, 1068-69 (La.App.1992); National Ben Franklin Ins. Co. v. Harris, 161 Mich.App. 86, 87-91, 409 N.W.2d 733, 735-36 (1987); Milbank Mut. Ins. Co. v. Biss, 281 Minn. 260, 263-66, 161 N.W.2d 622, 624-25 (1968); Truck Ins. Exch., Inc. v. Vassholz, 839 S.W.2d 22, 23-24 (Mo.App.1992); Progressive Casualty Ins. Co. v. Marca, 100 Or.App. 726, 729-31, 788 P.2d 490, 491-92 (1990).

Under our workers compensation law, "[t]o be compensable an employee's injury must occur 'in the course of employment' and also 'arise out of it.' " McClure v. Union Counties, 188 N.W.2d 283, 287 (Iowa 1971); Iowa Code § 85.3(1) (1989). The language "arising out of and in the course of employment" has established meaning under our workers compensation law:

"Arising out of" relates to the cause and origin of the injury. An injury occurs in the course of employment when it is within the period of employment at a place where the employee reasonably may be performing his duties, and while he is fulfilling those duties or engaged in doing something incidental thereto.

McClure, 188 N.W.2d at 287 (citations omitted). We think this same meaning was intended to apply to the language "arising out of and in the course of employment" in the employee exclusion clause. We say this because the exclusion pertains to work related injuries.

The...

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