Three Sons, Inc. v. Phoenix Ins. Co.

• Decision Date: 13 April 1970
• Citation: 257 N.E.2d 774,357 Mass. 271
• Parties: THREE SONS, INC. v. The PHOENIX INSURANCE COMPANY.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 774

257 N.E.2d 774

357 Mass. 271

THREE SONS, INC. v. The PHOENIX INSURANCE COMPANY.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued Feb. 3, 1970.

Decided April 13, 1970.

Joseph J. Hurley, Boston (Edward J. Murphy, Boston, with him) for defendant.

Edward J. Barshak, Boston, for plaintiff.

Before WILKINS, C.J., and SPALDING, KIRK, SPIEGEL, and REARDON, JJ.

SPAULDING, Justice.

This is a bill for declaratory relief seeking to establish the obligations of The Phoenix Insurance Company (defendant) to defend and pay judgments in pending tort actions. A final decree in favor of the plaintiff was entered from which the defendant appealed. The judge made a report of material facts, and the evidence, all of which is documentary, is reported.

The plaintiff was licensed under G.L. c. 138 as a seller of alcoholic beverages to be drunk on the premises. The defendant insured the plaintiff under a general liability policy, for 'all sums which the insured shall become legally obligated to pay as damages because of bodily injury, * * * including death * * * sustained by any person and caused by accident.' Under the policy the defendant also undertook to 'defend any suit against the insured alleging such injury * * * and seeking damages on account thereof, even if such suit is groundess, false or fraudulent.' The policy contained a clause excluding 'liability imposed upon the insured or any indemnitee, as a person or organization engaged in the business of manufacturing, selling or distributing alcoholic beverages, or as an owner lessor of premises used for such purposes, by reason of any statute or ordinance pertaining to the sale, gift, distribution or use of any alcoholic beverage * * *' (emphasis added).

On August 29, 1966, one Gregory H. Adamian brought an action in tort against the plaintiff. In this action he sought to recover for injuries suffered by him on June 27, 1966, when an automobile in which he was riding collided with an automobile driven by one Coomber. He also sought in this action, as administrator of his wife's estate, to recover for her death and conscious suffering. Adamian's declaration averred that the plaintiff had negligently sold alcoholic beverages to Coomber, a customer in its restaurant, in violation of its duty to the public and G.L. c. 138, § 69. Because of this breach of duty on the part of the plaintiff, it is alleged, Coomber left the plaintiff's premises in an intoxicated state and proceeded to operate a motor vehicle. While so doing and because of his intoxicated condition his car became involved in the collision, causing the injuries and death which are the subject of the Adamian declaration. Adamian's declaration was upheld in Adamian v. Three Sons, Inc., 353 Mass. 498, 233 N.E.2d 18. Domina, a passenger in Coomber's car, brought a similar action against the plaintiff. Both actions are now pending. It was agreed that 'the situation as between plaintiff and Phoenix is in all relevant aspects the same in respect of the Domina action as in the Adamian action.' Both Adamian and Domina agreed to be bound by such decree as might be entered in the present suit.

Upon the commencement of Adamian's action, the plaintiff immediately forwarded the writ to the defendant. The defendant returned the writ, contending that under the exclusion clause the Adamian action was not within the policy. Thereafter, the plaintiff forwarded the declaration to the defendant. The plaintiff took the position that the defendant was obligated to defend the action because any liability of the plaintiff arose, not by reason of statute, but out of common law negligence. Considerable correspondence ensued. The defendant agreed to defend, subject to a reservation of rights concerning its obligation to indemnify the plaintiff under the policy, but insisted on full control of the defence. The defendant's attorney entered an appearance for that purpose. The plaintiff agreed to the defendant's full control of the defence, but not to its reservation or nonwaiver of rights under the policy. Finally on November 29, 1966, the defendant's attorney withdrew because the plaintiff was unwilling to allow the defendant to conduct the defence with full control and still reserve its liability under the policy.

Thereafter the plaintiff brought this bill (1) for declaratory relief to establish the defendant's obligation to defend the plaintiff in the Adamian action and to pay any judgment incurred up to the limits of the policy and (2) for injunctions ordering the defendant to defend the plaintiff, to pay any judgment entered therein, and to pay the plaintiff's legal expenses incurred in the defence of the suits. The court entered a final decree declaring that the plaintiff's insurance covered the facts alleged in the Adamian declaration, that the defendant was obligated to defend the plaintiff in this action without reservation of right so long as it insisted on retaining control of the defence, and that legal expenses totaling $4,350 be paid the plaintiff.

1. The defendant argues that the exclusion clause of the policy renders it inapplicable to the actions pending against the plaintiff. The policy excludes indemnification for 'liability imposed * * * by reason of any statute or ordinance pertaining to * * * any alcoholic beverage.' The defendant does not argue that the potential liability of the plaintiff is imposed by statute. Rather it urges that the scope of the exclusion is not limited to instances of liability directly imposed by statute, but extends to liability in any situation in which a statute pertaining to alcoholic beverages is also violated. In its view the use of the words, 'by reason of,' rather than 'by' indicated the intention of the parties to exclude a broader class of liability. However, this argument cannot be reconciled with the plain meaning of 'by reason of.' The words, 'liability imposed * * * by reason of any statute,' clearly imports a direct causal relation between the fact of liability and the violation of a statute. To qualify for this exclusion, liability must directly result from the violation of a statute, in the sense that the violation, without more, is sufficient to impose liability. Nothing in G.L. c. 138, § 69, imposes civil liability. Indeed, this provision replaced the dramshop statutes, which did directly impose civil liability, when they were repealed by St.1933, Ex.Sess., c. 376, § 2. As we noted in the Adamian case, at p. 499, 233 N.E.2d at p. 19, a violation of c. 138, § 69, may be 'some evidence of the * * * (plaintiff's) negligence as to all consequences the statute was intended to prevent.' It is clear that the basis of Adamian's tort action is grounded in the common law doctrine of negligence and not on the violation of a statute. The judge rightly ruled that the Adamian action was not within the exclusion clause of the policy.

2. The defendant argues that its obligations under the policy were terminated by the plaintiff's breach of its contractual duty to cooperate. The alleged breach consisted of the plaintiff's refusal to permit the defendant to defend the case with full control, under a reservation of rights. The judge found that the plaintiff 'has complied with all policy conditions in respect of notice and co-operation.' The question, therefore, is whether under the insured's duty to cooperate it may refuse to allow the insurer to defend and control a suit under a reservation of rights. The defendant argues that the insured has no such right. We disagree. In Salonen v. Paanenen, 320 Mass. 568, 71 N.E.2d 227 it was held that the defence by the insurer (under a reservation of rights) of an action against an insured will not estop the insurer...