Revelation Industries, Inc. v. St. Paul Fire & Marine Ins. Co.

• Decision Date: 10 April 2009
• Docket Number: No. DA 07-0752.,DA 07-0752.
• Citation: 206 P.3d 919,2009 MT 123,350 Mont. 184
• Parties: REVELATION INDUSTRIES, INC., formerly known as Revelation Engineering, Inc., Plaintiff and Appellant, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Defendant and Appellee.
• Court: Montana Supreme Court

206 P.3d 919

2009 MT 123

350 Mont. 184

REVELATION INDUSTRIES, INC., formerly known as Revelation Engineering, Inc., Plaintiff and Appellant, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Defendant and Appellee.

No. DA 07-0752.

Supreme Court of Montana.

Argued and Submitted January 14, 2009.

Decided April 10, 2009.

For Appellant: Robert L. Sterup (argued), Holland & Hart, LLP, Billings, Montana.

For Appellee: Guy W. Rogers (argued), Jon A. Wilson, Brown Law Firm, P.C., Billings, Montana.

Justice PATRICIA O. COTTER delivered the Opinion of the Court.

¶ 1 Revelation Industries (Revelation) sued its insurer, St. Paul Fire & Marine Insurance Company (St. Paul), for refusing to defend and indemnify Revelation in a lawsuit with Phillips Environmental Products, Inc. (Phillips). The Eighteenth Judicial District Court ruled that St. Paul had no duty to defend Revelation. Revelation appeals. We reverse and remand.

ISSUES

¶ 2 A restatement of the issues on appeal is:

¶ 3 Did the District Court err when it determined that St. Paul had no duty to defend Revelation based on the contents of Phillips' complaint?

¶ 4 Did the policy requirement of an "event" excuse coverage in this case?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 5 In 1999, Revelation and Phillips entered into an oral arrangement under which Revelation would design and develop for Phillips a specific product known as a WAG Bag. This bag was a disposable sanitary bag to be used with Phillips' portable environmental toilets. Revelation, in turn, subcontracted with Manchester Packaging Corporation (Manchester) to produce these bags in accordance with Phillips' specifications. Notwithstanding Manchester's written affirmation that the produced bags met Phillips' specifications, the bags Manchester shipped to Revelation did not contain cornstarch as required by Phillips. Revelation, without knowledge of the bags' nonconformity, provided them to Phillips. Phillips promptly claimed the bags did not meet its requirements and in March 2000 terminated its relationship with Revelation.

¶ 6 Over the next several months, Revelation made numerous futile attempts to meet with Phillips in an effort to resolve Phillips' concerns and salvage the parties' arrangement. Finally, at a meeting of the parties on October 4, 2000, Phillips claimed to have suffered significant damages for which it held Revelation responsible. Because St. Paul was its insurer under a Commercial General Liability (CGL) policy, the following day, Revelation contacted St. Paul by telephone, informed the insurer of the potential claim, and requested coverage. St. Paul responded by memorializing the conversation in a letter to Revelation. In this letter, St. Paul reiterated the following facts:

As I understand this matter, Revelation Engineering entered into a verbal joint venture with Phillips Enviro to produce a field toilet. Your responsibility was to design a biodegradable bag system for the human waste. Your [sic] were to be paid a royalty by Phillips for your design. You contracted the manufacture of the bag system to Manchester Packaging Corp. Apparently, Manchester left out cornstarch as a component of the polymer bag system. The omission was discovered by Phillips, and they have indicated a claim against you.... You have requested a written statement of claim from Phillips, which you have yet [sic] received.

¶ 7 On October 20, 2000, Phillips demanded from Revelation compensation for damages it claimed to have suffered as a result of Revelation's failure to provide it with a conforming product. This demand letter made no mention of Manchester's production of the nonconforming bags, despite Phillips' knowledge that Revelation engaged Manchester as its subcontractor to develop and manufacture these bags. On October 26, Revelation's attorney forwarded Phillips' letter to St. Paul and again requested defense and indemnity under the CGL policy Revelation held through St. Paul. Notably, in November 2000, a St. Paul interoffice memorandum obtained in discovery referenced Manchester's manufacture of the defective bags, but nonetheless concluded that the damages were not the result of an "event" and that several policy exclusions applied. On December 11, 2000, St. Paul notified Revelation in writing that various policy exclusions applied; therefore, it would not defend and indemnify Revelation against Phillips' claim.

¶ 8 In February 2001, Phillips filed a complaint against Revelation in the same district court as that in which the present action was filed, seeking damages stemming from the nonconforming production. Notably, the complaint did not reference Manchester's role in producing the WAG bags. Revelation forwarded the complaint to St. Paul. St. Paul reviewed the complaint and again declined coverage. Revelation subsequently funded its own defense against Phillips' claim and, in May 2001, filed a third-party complaint against Manchester.

¶ 9 In December 2001, Revelation sued St. Paul claiming that St. Paul had breached the policy contract. The Complaint sought defense costs and indemnity. However, a summons was not served on this Complaint until December 2002. St. Paul did not answer the Complaint and no other filings occurred in this case until November 2004 when Revelation filed its First Amended Complaint. St. Paul subsequently filed a timely answer in which it counterclaimed for a declaratory ruling that it was not obligated to defend Revelation on the grounds that the CGL policy contained numerous applicable exclusions to coverage.

¶ 10 During this time, Revelation continued to defend itself against Phillips' action and pursue its third-party action against Manchester. In September 2006, the District Court ruled against Phillips and in favor of Revelation, and awarded Revelation approximately $431,000 in damages.

¶ 11 In May 2007, in the present case, both St. Paul and Revelation moved for summary judgment. In its motion, Revelation argued that the exclusions cited by St. Paul were inapplicable and that the subcontractor provision of the insurance policy rendered coverage for the claim. St. Paul, in its reply to Revelation's motion, restated its "exclusions" arguments but also argued that the facts alleged in Phillips' complaint — specifically the absence of mention of Manchester — justified its denial of a defense and indemnity. The District Court held a hearing on the motions in September 2007. In December 2007, the District Court granted St. Paul's motion, ruling that while the insurance policy provided "coverage for a defective product manufactured by a subcontractor such as Manchester," because Phillips' complaint did not include actual reference to Manchester's role, it did not allege facts that would give rise to insurance coverage under Revelation's policy with St. Paul. Consequently, it concluded that St. Paul was not obligated to defend or indemnify Revelation for Phillips' claims.

¶ 12 Revelation filed a timely appeal.

STANDARD OF REVIEW

¶ 13 Our standard of review in appeals from summary judgment rulings is de novo. We review a district court's conclusions of law to determine whether they are correct and its findings of fact to determine whether they are clearly erroneous. Tractor & Equipment Co. v. Zerbe Bros., 2008 MT 449, ¶ 12, 348 Mont. 30, 199 P.3d 222 (citations omitted).

DISCUSSION

¶ 14 Did the District Court err when it determined that St. Paul had no duty to defend Revelation based on the contents of Phillips' complaint?

¶ 15 St. Paul and Revelation disputed the interpretation and application of several provisions contained in Revelation's CGL policy. The disputed provisions relevant to this appeal are whether this claim constituted an "event," and whether this claim is excluded under the "completed work" exclusion or covered under the "subcontractor exception" to that exclusion.

¶ 16 The St. Paul policy provides coverage for Revelation against bodily injury and property damage liability that is caused by an "event." "Event" is defined as an "accident." "Accident" is not defined in the policy. In addition to requiring that an "event" occur before coverage is accepted, the policy contains several exclusions to coverage. The relevant exclusion in this case is the "completed work" exclusion.

¶ 17 The "completed work" exclusion states:

We won't cover property damage to any of your products that's caused by the product itself or by any of its parts.

. . .

Nor will we cover property damage to your completed work that's caused by the work itself or by any of its parts. But we won't apply this exclusion part if ... the damaged completed work, or the completed work that causes the property damage, was done for you by others.

This last clause is the "subcontractor exception" to the "completed work" exclusion, the application of which is disputed in this case.

¶ 18 As the facts above indicate, St. Paul clearly knew that Revelation's subcontractor, Manchester, manufactured the defective bags that gave rise to Phillips' claim against Revelation. Nonetheless, St. Paul denied coverage on several grounds including that the subcontractor provision was inapplicable because Phillips' complaint did not reference, allege or suggest subcontractor involvement. The District Court determined that the dispositive question was whether St. Paul, when evaluating its obligation to defend Revelation was entitled to look exclusively to the allegations of Phillips' complaint, or whether its was obligated to incorporate into its coverage evaluation its undisputed knowledge that Revelation had hired a subcontractor and the subcontractor's work had caused Phillips' damage.

¶ 19 Despite concluding that the CGL policy would cover Revelation for damages caused by a subcontractor, the District Court held that "only the facts alleged in the Complaint against the insured trigger the duty to defend, not any facts alleged in the Third-Party Complaint against a third-party who is not insured under...