Betts Patterson Mines

Montana Insurers Beware: Deny the Duty to Defend at Your Own Risk if You Previously Acknowledged Such a Duty

This edition of the Insurance Commando Blog analyzes Tidyman’s Management Services, Inc. v. Davis, 376 Mont. 80, 330 P.3d 1139 (2014), a recent Montana decision finding a Montana insurer liable for a $29,000,000 stipulated judgment.

The dispute arose out of the decision of the board of directors of Tidyman’s Management Service Inc. (“TMSI”) to merge with SuperValu, to form a new company, Tidyman’s, LLC (“Tidyman’s”). Following that decision, certain employee shareholders of TMSI filed a lawsuit in federal court alleging that the board of directors had breached their duties under ERISA and breached their corporate fiduciary duties in failing to heed advice from a financial expert about the merger. The board tendered the defense and indemnity of the lawsuit to their insurer, National Union Fire Insurance Company of Pittsburgh, Pa. (“NUFI”), who accepted the tender under a reservation of rights. The plaintiffs eventually settled with all but two of the directors. Following the settlement, the federal court dismissed the action declining to assert supplemental jurisdiction. The plaintiffs then filed an action in Montana state court asserting the same claims against the two non-settling board members, Michael Davis and John Maxwell, in their capacity as directors of the insured. In that action, however, the plaintiffs also named TMSI as a party plaintiff. TMSI was an insured under the policy as the predecessor to Tidyman’s.

The NUFI policy at issue was issued to Tidyman’s for the liability of its officers and directors. During the federal action, NUFI had defended Mr. Davis and Mr. Maxwell under a reservation of rights. After the filing of the state court action, NUFI’s third party claim administrator advised Mr. Davis and Mr. Maxwell that NUFI would no longer pay for their defense based on the policy’s “insured vs. insured” exclusion, because an insured, TMSI, was a party plaintiff against the two board members, who were also insureds. After this notification, the board members asserted claims against NUFI for breaching its duty to defend them in the state court action. Subsequently, NUFI confirmed its denial in paying for the board members’ defense in two additional letters. NUFI brought a motion to dismiss the claims against it based on the exclusion.

Following this, Mr. Davis stipulated to a judgment totaling $29,000,000 against him in exchange for the plaintiffs agreeing not to execute it against him. Mr. Davis also assigned any claims he had against NUFI to the plaintiffs. The parties then filed a motion to approve the stipulation for entry of judgment. Shortly thereafter, NUFI changed its position, advising that it would advance defense costs to the remaining board members, subject to a full reservation of rights. Mr. Maxwell then entered into the same stipulation as Mr. Davis. That same day, the plaintiffs filed a motion for summary judgment against NUFI alleging that it wrongfully denied the duty to defend. Subsequently, NUFI filed a request for an evidentiary hearing and jury demand on the motions to approve the stipulated judgments and a motion for summary judgment on its duty to defend. The court subsequently granted the plaintiffs’ motion for summary judgment while denying NUFI’s, resulting in the entry of the $29,000,000 stipulated judgment against NUFI. NUFI appealed.

On appeal, NUFI argued that the trial court had erred by not analyzing coverage under the policy and that the state court action implicated the insured v. insured exclusion because it was undisputed that (1) the plaintiffs included directors of the insured,(2) Mr. Davis and Mr. Maxwell were directors of the insured, (3) the complaint alleged that the directors were insureds under the policy, and (4) TMSI was 60% owner of the insured. Notwithstanding this seemingly reasonable argument, the Montana Supreme Court affirmed the trial court’s grant of summary judgment on NUFI’s breach of the duty to defend.[1] In upholding the granting of summary judgment on the duty to defend, the majority decision rejected this argument holding that the duty to defend is triggered whenever the facts in a complaint potentially implicate coverage.

So how was coverage potentially implicated in this instance given the seemingly obvious applicability of the insured v. insured exclusion? According to the majority, the fact that NUFI had defended Mr. Davis and Mr. Maxwell under a reservation of rights in the federal action was sufficient to establish a potential of coverage in the state action, despite the addition of TMSI as a party plaintiff, a fact that seemingly implicated the insured v. insured exclusion. It also did not matter that the state and federal actions were distinct from one another because, according to the majority, “all that matters is whether [NUFI] was on notice that the Policy was potentially implicated.” It is very concerning that the Court did not compare the allegations of the state action complaint to the policy exclusions as is typical in duty to defend cases. Rather it merely took notice of the fact that NUFI had (1) defended the board members in the federal court action, (2) withdrew its coverage in the state court action – which the Court determined meant there had previously been coverage, and (3) subsequently withdrew the coverage denial and agreed to defend the board members under a reservation of rights. In the Court’s words: “where the insurer itself recognized the complaint potentially implicated the Policy and required it to provide a defense, we can see no need for further analysis to conclude that the duty to defend was invoked.”

What does this mean? From our perspective, it means that insurers in Montana need to consider more than just the alleged facts and the insurance policy and if there are any facts in the claim file or facts concerning a related action that indicate the insurer potentially should defend, it should defend under a reservation of rights and file a declaratory judgment on its duties. As explained by the Court:

If we were to hold the District Court in error for failing to analyze coverage, as the Dissent urges, we would be providing insurers with an avenue to circumvent the clear requirement imposed by our precedent that where the insurer believes a policy exclusion applies, it should defend under a reservation of rights and seek a determination of coverage through a declaratory judgment action. Where an insurer believes a policy exclusion precludes coverage, our case law is clear as to the prudent process to follow. NUFI, instead, took its chances by refusing to defend Davis and Maxwell in the state action. NUFI cannot avoid liability for the stipulated settlement agreement by attempting to convince this Court it was necessary to analyze coverage under the Policy before determining it had breached the duty to defend—when, as we have explained many times before, the proper process to seek such analysis is through a declaratory judgment action. Many of the arguments NUFI and the Dissent urge we address call for analysis that would have been proper had NUFI adhered to the correct process and filed a declaratory judgment action to discern coverage—but they are not proper at this stage of the proceedings.[[2]]

Given this holding, it behooves insurers in Montana to defend under a reservation of rights and file a declaratory judgment action – even where an exclusion appears to bar all potential of coverage. If this is not done, an insurer may likely lose the ability to rely on its coverage defenses and its policy limits.

            [1] We note that the court did remand the case back to the trial court on the issue of the reasonableness of the amount of the judgment. The court did not find that a reasonableness hearing was mandatory – just that there was an issue of fact in this instance regarding whether the judgment was reasonable.

            [2] 376 Mont. at 96.

Jeff Tindal