U.S. Fire Ins. Co. v. Schnabel
| Decision Date | 18 December 1972 |
| Docket Number | No. 1570,1570 |
| Citation | 504 P.2d 847 |
| Parties | UNITED STATES FIRE INSURANCE COMPANY, Appellant, v. John J. SCHNABEL and Schnabel Lumber Company, Appellees. |
| Court | Alaska Supreme Court |
Robert J. Annis, Juneau, for appellant.
Michael M. Holmes, Faulkner, Banfield, Boochever & Doogan, Juneau, for appellees.
Before RABINOWITZ, C. J., and CONNOR and ERWIN, JJ.
John Schnabel and the Schnabel Lumber Company were insured under a general liability policy issued by the United States Fire Insurance Company. Under the terms of the policy, United States Fire agreed to
pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . property damage to which this insurance applies, caused by an occurrence and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent . . ..
During the effective period of the policy, Schnabel was engaged in the relocation of a road near Haines, Alaska. In the course of the road construction, Schnabel entered upon the lands of Albert and William Schafer, prepared a roadbed across their property, and in the process cut and removed timber and extracted gravel and blue clay from the Schafers' property. The Schafers brought suit against Schnabel and the Schnabel Lumber Company for trespass upon their property and for conversion of raw materials. 1 Schnabel tendered defense of this suit to United States Fire Insurance Company, but the company refused to defend. Schnabel thereafter retained his own counsel to defend the suit.
The Schafers ultimately were awarded damages in the amount of $8,350. 2 The trial court in that case found that the Schafers had failed to prove that Schnabel had acted in bad faith, and that the Schafers were entitled to damages for innocent removal of the raw materials rather than the higher measure of damages for bad faith removal. 3
Following entry of judgment in the Schafer litigation Schnabel brought suit against United States Fire alleging that the company had breached its duty to defend and seeking damages for the total amount of the Schafers' judgment, 4 plus the expenses Schnabel had incurred in defending the suit. United States Fire, by way of affirmative defense, denied that it had a duty to defend because the damages Schnabel became obligated to pay the Schafers were excluded from coverage under the policy.
Schnabel moved for summary judgment. During the hearing on that motion, counsel for United States Fire orally moved the court for leave to amend its answer to include a set-off or counterclaim against Schnabel on the theory that Schnabel had received a benefit of $8,350, the value of the raw materials he removed. United States Fire contended that Schnabel would be unjustly enriched by that amount if a judgment against the company included the $8,350.
The superior court granted Schnabel's motion for summary judgment, but made no mention in its memorandum decision of United States Fire's motion for leave to amend. Within 10 days after the entry of judgment, United States Fire moved the court for post-judgment relief, seeking a reduction in the judgment of $8,350. The superior court denied the motion. United States Fire has appealed from the summary judgment and from the superior court's denial of its motion for post-judgment relief.
In National Indemnity Company v. Flesher, 469 P.2d 360, 366, 367 (Alaska 1970), we effectively held that an insurer has a duty to defend when the suit alleges facts within an exception to the policy but the true facts are within, or potentially within, the policy coverage and are known or reasonably ascertainable to the insurer. The first question before us, then, is whether the Schafers' suit against Schnabel involved facts that were within, or potentially within, the policy's coverage.
The Schafers' complaint alleged that Schnabel
with full knowledge of the rights of (the Schafers) to the property in question and with willful and utter disregard of those rights . . . started and almost completed a road across (the Schafers') property . . . removed standing timber . . . and removed . . . fill material . . .. 5
In his answer, Schnabel did not deny that he had done the acts alleged, but defended on the ground that he had received the Schafers' permission to build the road across their property. 6
United States Fire argues that it had no duty to defend, primarily because there was no coverage or potential coverage under the policy in question, since the damage to Schafers' property fell within one of the policy's stated exclusions. The portion of the policy upon which United States Fire relies provides:
This insurance does not apply:
(1) to property damage to
(1) property owned or occupied by or rented to the insured, or
(2) property used by the insured, or
(3) property in the care, custody or control of the insured as to which the insured is for any purpose exercising physical control . . ..
United States Fire reasons that these exclusions control for Schnabel must have had physical control or use of the Schafers' property in order to have entered upon it and converted the raw materials. In this regard, United States Fire points to the fact that since Schnabel admitted in his answer to the Schafers' complaint that he had entered upon the Schafers' property, and thus even under Schnabel's version of the facts the above-quoted exclusion precludes coverage, consequently it had no duty to defend.
We do not agree that this exclusion applies in consideration of the circumstances surrounding the trespass as set forth by Schnabel in his answer to the Schafers' complaint. 7 This care, custody and control exclusion is a standard one in liability policies and has been the subject of a good deal of litigation. 8 Many courts have found that care, custody and control exclusions are ambiguous and must be construed against the insurance company. 9 In deciding whether the exclusion applies to particular facts, some courts have focused on the language of the exclusion. 10 Others have looked to the apparent reasons why insurance companies adopted this particular exclusionary language in their liability policies to determine whether, in light of those reasons, the policy was intended to exclude coverage in the circumstances of the particular case. 11
Where real property is involved, the care, custody and control exclusion is particularly ambiguous because it does not make clear whether the word 'property' refers only to the portion of the property damaged or to the property as a whole. 12 While Schnabel may have had control over or used the portion of the Schafers' property that he actually entered upon, he did not use or exercise control over all of the Schafers' real property. Thus, if we construe 'property' in favor of the insured, 13 we should construe the term to mean the entire tract that Schafers owned. Under this construction, the exclusion does not apply because Schnabel did not use or exercise care, custody or control over the 'property' damaged. 14
Nor do we believe the reasons advanced for the care, custody and control exclusion have any application to the facts of the case at bar. One commentator has suggested that the exclusion has been placed in liability policies
to avoid what is called in the insurance business 'adverse selection of risks'. Keeping in mind that the standard policies are printed to apply very generally to all activities of our civilized life, one person buys insurance having in mind the possibility of certain losses common to his business or other activities; another insured has in mind entirely different hazards against which he is certain that he needs the coverage. Since insurance premiums are based on the 'experience' for each coverage, it is not reasonable that policyholder A should have to pay a rate based on the exposures more common to policyholder B and vice versa. Most of the property damage exclusions can be eliminated by an endorsement forming a part of the policy for which an additional premium is charged; in this way the losses are distributed among those who incur them.
. . . Another reason for the exclusion is concerned with the 'moral hazard': when the insured takes charge of a piece of property or an article having any value which belongs to the claimant, he feels morally responsible for any damage caused by him and is more interested in seeing that the owner is generously compensated by his company. In many of the cases a 'bailment for hire' is involved and the insured is absolutely liable for all practical purposes for any damage and if negligence must be established, he is ready for the evidence necessary. 15
The damage to the Schafers' property cannot be characterized as arising out of a risk common to Schnabel's business or other activities. Schnabel was not constructing the road for a third party for a contract price; nor was road construction apparently a common activity for him. Nor do we believe the 'moral hazard' rationale is present in this case. For, while Schnabel claims he believed he entered the Schafers' lands with their permission, the Shafers claimed he had no permission and filed suit for trespass. Schnabel might have felt a moral responsibility to see the Schafers generously compensated for damage to their property had the Schafers actually given him permission to enter upon their lands. Under the circumstances of the case at bar, we cannot find any factual basis for holding the moral hazard rationale of the care, custody and control exclusion applicable. 16 We therefore hold that the superior court was correct in determining that United States Fire had a duty to defend Schnabel in the Schafers' litigation and that the company breached that duty. 17 However, we believe the superior court erred in refusing to allow...
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