Safeco Ins. Co. v. Ellinghouse

• Decision Date: 17 September 1986
• Docket Number: No. 85-257,85-257
• Citation: 43 St.Rep. 1689,725 P.2d 217,223 Mont. 239
• Parties: SAFECO INSURANCE COMPANY, Plaintiff and Appellant, v. George ELLINGHOUSE, Defendant and Respondent.
• Court: Montana Supreme Court

Page 217

725 P.2d 217

223 Mont. 239

SAFECO INSURANCE COMPANY, Plaintiff and Appellant, v. George ELLINGHOUSE, Defendant and Respondent.

No. 85-257.

Supreme Court of Montana.

Submitted May 13, 1986.

Decided Sept. 17, 1986.

Williams Law Firm, Richard Ranney, argued, Missoula, Landoe, Brown, Planalp & Kommers, Gene I. Brown, argued, Bozeman, for plaintiff and appellant.

Anderson, Edwards & Molloy, Richard W. Anderson, argued, Billings, for defendant and respondent.

HARRISON, Justice.

This cause of action arose in the District Court of the Thirteenth Judicial District of the State of Montana in and for the County of Yellowstone. The cause began as a declaratory judgment action September 20, 1982. Plaintiff, Safeco Insurance Company, filed suit against defendant, George Ellinghouse, to determine whether Ellinghouse had liability coverage under his Safeco policy in a suit then pending against him and others for the June, 1977, death of Raymond A. Taylor in Glendive, Montana. Ellinghouse answered alleging coverage and counterclaimed against Safeco for actual and punitive damages for bad faith, fraud, misrepresentation, and breach of the insurance contract. We reverse, unless remittitur is accepted as provided.

The coverage question and the counterclaim were tried to a jury. After hearing all the evidence the District Court ruled there was coverage as a matter of law and so instructed the jury. Thus, only the bad faith counterclaim was presented to the jury, which found for Ellinghouse and awarded him $25,000 plus accrued interest in economic damages, $200,000 for emotional damages, and $5,000,000 punitive damages. Judgment was entered and Ellinghouse's claim for attorney's fees was reserved for later hearing. The District Court denied Safeco's motion for a new trial and judgment notwithstanding the verdict.

George Ellinghouse was self-employed under the name Turf-Aid Distributing Company in 1973. The business involved the sale of industrial equipment to golf courses, parks and cemeteries for the maintenance of large turf areas. Early in 1974 Ellinghouse provided consultation services for the installation of a sprinkler system at a golf course in Glendive, Montana. The system was fully installed and Ellinghouse completed all his operations for the project by mid-1974.

In June, 1977, Raymond Taylor died while working on this golf course, allegedly by electrocution while digging up a leak in the underground sprinkler system near certain underground electrical lines. At the time of the accident, Ellinghouse carried a Safeco insurance policy insuring his business premises for property damages, and affording him $100,000 in liability coverage. It is undisputed this policy was in full force and effect at the time of Taylor's death. The policy, however, contained an exclusion for "completed operations" coverage. In April, 1980, Taylor's widow filed suit in Dawson County, Montana, for Raymond Taylor's death, naming six defendants, including Ellinghouse.

Ellinghouse's insurance agent in Billings, Montana, forwarded notice of the claim and the legal papers served on Ellinghouse to Safeco's office. Safeco initially accepted coverage of the claim without question, and retained attorney Lon Holden of Great Falls, Montana, to defend Ellinghouse. All parties involved at that time assumed Ellinghouse had coverage under the Safeco policy and acted accordingly. Holden had $100,000 in liability coverage with which to negotiate.

In August, 1981, Charles Hodge of Safeco's home office in Seattle, reviewed the Ellinghouse file and discovered the case involved a business operation which had been completed three years before Taylor died. Hodge issued a memo to other Safeco officials noting Ellinghouse's policy contained a "completed operations" exclusion and thus, in his opinion, there was no coverage under the policy. Ellinghouse was not informed of that discovery until he received a coverage denial letter in November.

In October, 1981, a Safeco adjuster presented a "non-waiver" agreement to Ellinghouse which he signed, despite the fact Lon Holden, the attorney retained by Safeco to defend him, was not consulted about the non-waiver document. The adjuster testified that he explained to Ellinghouse at this time there were coverage problems and that the non-waiver agreement would preserve both Ellinghouse's and Safeco's rights under the policy. Ellinghouse denied the adjuster had explained anything about coverage problems at this meeting.

In November, 1981, eighteen months after Safeco had accepted the Taylor claim without reservation, and two months before the original trial date of January, 1982, Safeco formally denied coverage by letter to Ellinghouse. This letter quoted in full two exclusions in the policy upon which Safeco relied for denial of coverage. The first exclusion was the "completed operations" exclusion originally discovered by Hodge at Safeco's home office. The second exclusion was the "away from the designated premises" exclusion and, unlike the "completed operations" exclusion, was not part of the original policy. Safeco later admitted at trial it was wrong in relying on the "away from the designated premises" exclusion, because this exclusion did not have the proper endorsement of Ellinghouse to be effective. The denial letter stated that Safeco would continue to provide legal defense for Ellinghouse, but would not be responsible for any subsequent judgment entered against him, or any settled negotiations. None of the other defendants' counsel were notified of this denial of coverage until February, 1982.

At this point Ellinghouse retained personal counsel. The trial date originally set for January, 1982, was vacated, and the trial re-set for May, 1982. It was vacated again and never re-set. In April, Taylor's attorney offered to settle the entire lawsuit for $165,000, including $50,000 for the claim against Ellinghouse. Ellinghouse forwarded the $50,000 offer to Safeco and demanded that it reinstate his policy and pay the offer. Safeco refused. When Safeco filed its declaratory judgment action in September, all the defendants in the Taylor case except Ellinghouse had reached a settlement.

In March, 1983, Ellinghouse asked Safeco's attorney, Holden, to withdraw from the case and requested his file. Shortly thereafter, Ellinghouse and Taylor reached a $25,000 cash settlement and agreed Taylor was to receive the first $45,000 of any net proceeds recovered by Ellinghouse from Safeco. Ellinghouse borrowed $25,000 from a bank and executed a trust indenture on his home. A few days later, Safeco re-entered the picture and offered $50,000 to Ellinghouse to fund settlement of the Taylor claim, believing the original settlement offer to be open. Safeco was informed Ellinghouse had settled the claim himself.

In making its $50,000 offer to Ellinghouse, Safeco suggested that if Safeco lost the declaratory action, it would pay all of Ellinghouse's defense costs, but if Safeco won, Ellinghouse would owe it $50,000. This offer was not contingent on a dismissal or compromise of Ellinghouse's counterclaim. Safeco was informed the offer was too late, due to the settlement made by Ellinghouse.

The three major issues presented to this Court are whether the District Court erred in directing a verdict on the issue of coverage; whether certain prejudicial instructional and evidentiary errors prevented Safeco from receiving a fair trial; and whether the punitive award was excessive or unconstitutional, and the emotional distress award improper or excessive.

Safeco's position is there was no coverage under the terms of the policy itself. The only two grounds on which it could be held to have any duty to extend liability coverage to Ellinghouse are the ambiguity of the policy terms or estoppel to deny coverage. Waiver and estoppel were the bases for the District Court's ruling there was coverage as a matter of law.

Safeco argues the District Court erred in its ruling that Safeco was estopped to deny coverage to Ellinghouse as a matter of law. We affirm the District Court's action. Safeco's position is Ellinghouse failed to prove each essential element of the affirmative defense of estoppel, especially the last element: "the party must in fact have acted upon it [conduct of the other party] to his detriment." Matter of Shaw (1980), 189 Mont. 310, 615 P.2d 910, 914. Safeco argues Ellinghouse did not prove by clear and convincing evidence he was worse off because Safeco denied him coverage in November, 1981, than he would have been had it denied coverage immediately. Alternatively, if there were some evidence by which a jury might have concluded Ellinghouse was prejudiced, that evidence should have been presented to a jury for its determination. We find no merit in this argument.

We adopt the general rule in an insurance estoppel case as set forth in 14 Couch, Insurance 2d, Sec. 51.85 (2d ed. 1982), as follows Where an insurer, without reservation and with actual or presumed knowledge, assumes the exclusive control of the defense of claims against the insured, it cannot thereafter withdraw and deny liability under the policy on the ground of noncoverage, prejudice to the insured by virtue of the insurer's assumption of the defense being, in this situation, conclusively presumed ... the loss of the right of the insured to control and manage the case is itself prejudicial.

This rule was deliberately ignored by Safeco's home office.

Further, the Montana Unfair Trade Practices Act requires that the insurer " ... promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim ..." Section 33-18-201(14), MCA. See also, 38 A.L.R.2d 1148.

Finally, the Washington case of Transamerica Ins. Group v. Chubb and Son, Inc. (1976), 16 Wash.App. 247, 554 P.2d 1080, is particularly important to the question of estoppel. In Chubb the insureds were defended...