Westchester Surplus Lines Ins. Co. v. Keller Transp., Inc.

• Decision Date: 12 January 2016
• Docket Number: No. DA 14–0278.,DA 14–0278.
• Citation: Westchester Surplus Lines Ins. Co. v. Keller Transp., Inc., 382 Mont. 72, 365 P.3d 465 (Mont. 2016)
• Parties: WESTCHESTER SURPLUS LINES INSURANCE COMPANY, Plaintiff and Appellant, v. KELLER TRANSPORT, INC.; Wagner Enterprises, LLC; Thomas F. Jones and Rita A. Jones, husband and wife; Debra L. Sykes; Ronald L. Kohler and Barbara J. Kohler, husband and wife; and Dennis A. Arnold and Geraldine N. Arnold, husband and wife, Defendants and Appellees.
• Court: Montana Supreme Court

382 Mont. 72

365 P.3d 465

WESTCHESTER SURPLUS LINES INSURANCE COMPANY, Plaintiff and Appellant,

v.KELLER TRANSPORT, INC.; Wagner Enterprises, LLC; Thomas F. Jones and Rita A. Jones, husband and wife; Debra L. Sykes; Ronald L. Kohler and Barbara J. Kohler, husband and wife; and Dennis A. Arnold and Geraldine N. Arnold, husband and wife, Defendants and Appellees.

No. DA 14–0278.

Supreme Court of Montana.

Argued Sept. 11, 2015.

Submitted Sept. 16, 2015.

Decided Jan. 12, 2016.

For Appellant: Jonathan D. Hacker (argued), O'Melveny & Myers LLP; Washington, District of Columbia, Allan H. Baris, Moore, O'Connell & Refling, P.C.; Bozeman, Montana, Robert J. Slavik, Cozen O'Connor; Seattle, Washington.

For Appellee Debra L. Sykes: Trent N. Baker, Datsopoulos, MacDonald & Lind, PC; Missoula, Montana.

For Appellees Tom and Rita Jones, Ronald and Barbara Kohler, and Dennis and Geraldine Arnold: Roger M. Sullivan (argued), McGarvey, Heberling, Sullivan & Lacey, PC; Kalispell, Montana. Timothy M. Bechtold, Bechtold Law Firm, PLLC; Missoula, Montana, Alan J. Lerner, Lerner Law Firm; Kalispell, Montana.

For Amici Montana Trial Lawyers Association: John L. Amsden, Justin P. Staples, Beck & Amsden, PLLC; Bozeman, Montana.

Justice JIM RICE delivered the Opinion of the Court.

¶ 1 Westchester Surplus Lines Insurance Company (Westchester) appeals from orders entered by the Fourth Judicial District Court, Missoula County, in this declaratory action that granted summary judgment against Westchester and in favor of its insureds, Keller Transport, Inc. (Keller), and Wagner Enterprises, LLC (Wagner). We affirm in part and reverse in part. We address the following issues on appeal:

1. Did the District Court err by determining that Westchester's policy was ambiguous and that it provided an additional $4 million in coverage under the "general aggregate" limit?

2. Did the District Court err by holding that Westchester breached its duty to defend the insureds under its policy?

PROCEDURAL AND FACTUAL BACKGROUND

¶ 2 In April 2008, Keller leased a tanker truck from Wagner to transport gasoline to Kalispell, Montana. On Highway 35, adjacent to Flathead Lake, the truck's trailer traveled off the road, overturned, and spilled 6,380 gallons of gasoline. The gasoline flowed underneath the highway and beneath several homeowners' (Homeowners) properties.

¶ 3 Keller and Wagner were both insured under a Commercial Transportation Policy issued by Carolina Casualty Insurance Company (CCIC), which provided two distinct coverages: commercial automobile (Auto), and commercial general liability (CGL). The stated limit for the Auto coverage was $1 million per accident, while the stated limit for the CGL coverage was $1 million for each occurrence, as well as a $2 million "General Aggregate." The CGL provisions stated that its "General Aggregate" limit was the most that would be paid under the CGL coverage regardless of the number of insureds or persons making claims. CCIC's policy stated that CCIC had the duty to defend its insureds against any lawsuit that might implicate the policy, but that such duty terminated when the coverage limits had "been exhausted by payment of judgments or settlements."

¶ 4 Westchester insured both Keller and Wagner under an excess liability policy, which covered those losses exceeding the coverage limits of CCIC's policy. Stated limits of the Westchester excess policy were $4 million for each "occurrence" as well as a $4 million "General Aggregate." The term "General Aggregate" was not defined. The Westchester policy incorporated the CCIC policy, stating, "[e]xcept as otherwise stated herein, and except with respect to (1) any obligation to investigate or defend any claim or suit, or (2) any obligation to renew, the insurance afforded by this policy shall apply in like manner as the underlying insurance described in the Declarations." The Declarations in turn referenced the coverages of the CCIC policy. Regarding the duty to defend, the Westchester policy stated that Westchester "shall not be called upon to assume charge of the settlement or defense of any claim made or proceeding instituted against the insured; but the company shall have the right and opportunity to associate with the insured in the defense and control of any claim or proceeding reasonably likely to involve the company."

¶ 5 The Westchester policy contained a federally-mandated endorsement, known as the "MCS–90," as a protection for third parties injured in motor carrier vehicle accidents. The MCS–90 endorsement was created by the Motor Carrier Act of 1980 as a means to guarantee recovery for injured third parties when insurance coverage was lacking. The MCS–90 required Westchester to pay up to the prescribed limit for each motor carrier vehicle accident regardless of whether covered by the policy. The insured motor carrier may be required to reimburse the insurer for any payout the insurer would not otherwise have been obligated to make. The MCS–90 attached to Westchester's policy stated "[t]his insurance is excess and the company shall not be liable for amounts in excess of $4,000,000 for each accident in excess of the underlying limits of $1,000,000 for each accident."

¶ 6 Following the accident, CCIC initiated payments for related clean-up expenses and litigation costs. Late in 2008, CCIC exhausted the $1,000,000 Auto coverage limit of its policy. Shortly before reaching the limit, CCIC notified Keller and Wagner that its duty to defend would end once the Auto coverage had been exhausted, citing the duty to defend provision of its policy. In January 2009, the Homeowners initiated suit against Keller and Wagner in the Twentieth Judicial District Court, Lake County, alleging negligence for causing the accident and in the manner that clean-up efforts had been implemented, which Homeowners asserted had caused further damage (hereinafter "the tort action."). Because the limits of its Auto coverage had been exhausted, CCIC referred the matter to Westchester. Westchester undertook defense of the suit on behalf of Kohler and Wagner pursuant to a reservation of rights, noting the provision of its policy that disavowed a duty to defend and, like CCIC, Westchester stated it would continue defending only until "the applicable Westchester Policy Limit has been exhausted." Westchester did not seek to withdraw from the defense pursuant to the reservation of rights, and continued defending Keller and Wagner until December 2009, by which time it had paid $4 million in clean-up expenses and litigation costs. On the ground that the limit of its excess coverage for Auto liability had been exhausted, Westchester referred the defense back to CCIC in early 2010. Keller and Wagner did not challenge Westchester's assessment that the limits of its policy had been reached.

¶ 7 In response to Westchester's referral, CCIC made assurances to Keller and Wagner in February 2010 that it would continue to provide a defense despite having previously exhausted the limits of its policy's Auto coverage. CCIC's payments for defense costs resumed in May 2010. Despite the delay in re-initiation of payments, Keller and Wagner remained represented by counsel at all times.

¶ 8 In August 2010, CCIC initiated this action (hereinafter "the declaratory action") in the Fourth Judicial District Court, Missoula County, seeking a declaration of CCIC's and Westchester's responsibilities for Keller's and Wagner's defense and costs, naming Westchester, Keller and Wagner. Thereafter, Homeowners made a claim that the CCIC policy provided an additional $1 million pursuant to the CGL coverage, and that the Westchester policy likewise provided an additional $4 million in excess limits under the CGL coverage. On the premise that the post-rollover negligent conduct of Keller and Wagner constituted a separate occurrence under the CGL coverage, Homeowners demanded an additional $5 million to settle their claims. In response to these claims, CCIC amended its complaint in this declaratory action, seeking a ruling on whether separate CGL coverage was implicated by the Homeowners' claims in the underlying litigation, in addition to the Auto coverage. Westchester likewise sought a declaration that the limit under its excess policy was $4 million in total, regardless of the coverages that applied, and that the limit had already been exhausted. CCIC and Westchester thus opposed Homeowners' contention that the policies provided an additional $5 million in coverage.

¶ 9 Keller and Wagner, on the premise they had been prejudiced by the delay in the re-initiation of defense payments by CCIC earlier in the year, entered settlement negotiations with Homeowners, excluding CCIC and Westchester. In January 2011, eight months after their defense payments had resumed, Keller and Wagner filed confessions of judgment in the tort action in favor of Homeowners that stipulated Homeowners had suffered $13,066,474 in damages. This amount was to be offset by $3 million that Homeowners had received from a settlement with another defendant. Keller and Wagner assigned their rights under the policies to Homeowners, who agreed to collect the remainder of the judgments "by any legal means only upon and against" CCIC and Westchester. Between them, CCIC and Westchester fully paid Keller's and Wagner's defense costs from the commencement of the underlying tort action through the entry of their confessions of judgment.

¶ 10 Shortly before the confessions of judgment were filed in the tort action, CCIC and Westchester moved to intervene in that case. CCIC and Westchester asserted a right to a determination establishing the reasonableness of any damages judgment, and the right to participate in that determination. The Lake County District Court issued an order stating it would not rule on CCIC's and Westchester's motion to intervene until the coverage issue had been determined in the Missoula County declaratory action.

¶ 11 All parties moved for partial summary judgment on two...