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Fire Insurance Exchange v. Oltmanns

Supreme Court of Utah

February 28, 2018

Fire Insurance Exchange, Appellee,
Robert Allen Oltmanns, Appellant.

         On Certiorari to the Utah Court of Appeals

         Second District, Farmington The Honorable Glen R. Dawson No. 090700825

          Stewart B. Harman, Joel D. Taylor, Salt Lake City, for appellee

          Donald L. Dalton, Salt Lake City, for appellant

          Justice Himonas authored the opinion of the Court, in which Chief Justice Durrant, Associate Chief Justice Lee, and Justice Pearce joined.

          Justice Durham filed an opinion concurring in part and concurring in the result.

          Due to her retirement, Justice Durham did not participate in the Petition for Rehearing. Justice Petersen became a member of the Court on November 17, 2017, and, accordingly, participated in the Petition for Rehearing

          AMENDED OPINION [*]

          Himonas, Justice


         ¶1 Robert Oltmanns was named as a defendant in a personal injury case. He filed a claim with his insurer, Fire Insurance Exchange, who questioned whether the claim was covered under the policy. Rather than deny the claim outright, Fire Insurance brought a declaratory judgment action to determine whether the claim was covered under Mr. Oltmanns's policy. The court of appeals ultimately held that it was covered, and Mr. Oltmanns filed a counterclaim seeking attorney fees for the declaratory judgment action, arguing that it was brought in bad faith. The question presented for this court is whether the court of appeals erred in concluding that Fire Insurance's denial of Mr. Oltmanns's insurance claim was "fairly debatable, " thus negating Mr. Oltmanns demand for attorney fees and expenses for the coverage dispute and appeal. We affirm the court of appeals' decision to uphold the summary judgment of the district court.


         ¶2 In 2006, Mr. Oltmanns was piloting a Honda F-12 AquaTrax personal watercraft that was towing Mr. Oltmanns's brother-in-law, Brady Blackner. Mr. Blackner sustained injuries, and filed a lawsuit against Mr. Oltmanns. Mr. Oltmanns tendered the defense to Fire Insurance Exchange under his homeowner's insurance policy. The insurance policy contains the following provision under Section II -Liability, Coverage E - Personal Liability:

We pay those damages which an insured becomes legally obligated to pay because of bodily injury, property damage or personal injury resulting from an occurrence to which this coverage applies. . . . At our expense and with attorneys of our choice, we will defend an insured against any covered claim or suit. We are not obligated to pay defense costs, including attorneys' fees of any claim or suit where you select an attorney not chosen by us because there is a dispute between you and us over coverage. We may investigate and settle any claim or suit that we consider proper. Our obligation to defend any claim or suit ends once we have paid our limit of liability.

         In the same liability section of the insurance contract, in a subsection titled "Additional Coverages, " Fire Insurance agrees to pay "[i]n addition to the limits of liability . . . all costs we incur in the settlement of a claim or defense of a suit with attorneys of our choice."

         ¶3 Fire Insurance conducted an in-house review of Mr. Oltmanns's claim and then submitted his claim to outside counsel for a coverage opinion. Whether the accident was deemed covered was uncertain because of the following exclusion in its liability coverage:

         We do not cover bodily injury [that] . . . .

7. results from the ownership, maintenance, use, loading or unloading of:
a. aircraft
b. motor vehicles
c. jet skis and jet sleds or
d. any other watercraft owned or rented to an insured and which:
(1) has more than 50 horsepower inboard or inboard-outdrive motor power; or
(2) is powered by one or more outboard motors with more than 25 total horsepower; or
(3) is a sailing vessel 26 feet or more in length. Exclusions 7c and d do not apply while jet skis, jet sleds or watercraft are stored.

         ¶4 Fire Insurance also asked Mr. Oltmanns's attorney to continue to represent him, indicating that Fire Insurance might reimburse him for his fees and expenses should the accident be deemed a covered occurrence. Fire Insurance's outside counsel advised Fire Insurance that he believed there was a high probability that the incident would not be covered, but that Fire Insurance should authorize him to file a declaratory judgment action seeking a determination of its responsibility to Mr. Oltmanns under the policy. He advised this course of action because "[u]nder Utah law, a liability insurance carrier's duty to defend is broader than its duty to indemnify, " and "[i]t would be dangerous to simply deny coverage because Mr. Blackner and Mr. Oltmanns may enter into an agreement to stipulate to a large judgment and Mr. Oltmanns could then assign his claims against Fire Insurance Exchange to Mr. Blackner."

         ¶5 Fire Insurance filed the action and then moved for summary judgment. The district court ruled in favor of Fire Insurance, finding that the exclusion precluded coverage. Mr. Oltmanns appealed and the court of appeals reversed, holding that the term "jet ski" as used in the exclusion was ambiguous and construed the contract against the insurer in favor of the insured. Fire Ins. Exch. v. Oltmanns, 2016 UT App 54, ¶ 5, 370 P.3d 566. Fire Insurance then settled with Mr. Blackner for the policy limit of $300, 000 and paid Mr. Oltmanns's attorney fees and expenses for his defense of that claim.

         ¶6 Fire Insurance did not pay for Mr. Oltmanns's costs of defending the declaratory judgment action. Mr. Oltmanns then filed a counterclaim against Fire Insurance in the still open declaratory judgment action seeking "damages for breach of the implied covenant [of good faith and fair dealing], which include his attorney fees for prosecuting this coverage action and the successful appeal" as well as "damages for the severe emotional distress that was caused by the coverage denial and his self-defense of a significant personal injury claim." Fire Insurance once again moved for summary judgment and for a motion to dismiss. The district court granted summary judgment finding that Fire Insurance's actions were reasonable because the coverage issue was "fairly debatable." Fire Insurance then withdrew its motion to dismiss. Mr. Oltmanns appealed and the court of appeals affirmed the district court, holding that "when an insurance company proceeds in a reasonable way to resolve a difficult coverage question, its eventual loss at the appellate level does not foreclose a determination that an issue of interpretation was fairly debatable, as was the case here." Id. ¶ 15.


         ¶7 This case comes before us on certiorari review from the court of appeals decision. "[W]e review the court of appeals' decision for correctness. The review focuses on whether the court of appeals correctly reviewed the trial court's decision [to grant summary judgment to Fire Insurance] under the appropriate standard of review." Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600 (citation omitted). "We review the district court's grant of summary judgment for correctness." Torian v. Craig, 2012 UT 63, ¶ 13, 289 P.3d 479 (citation omitted). Under Utah Rule of Civil Procedure 56, we view any facts and any reasonable inferences "in the light most favorable to the party opposing summary judgment." Farmers Ins. Exch. v. Call, 712 P.2d 231, 237 (Utah 1985) (citation omitted).


         ¶8 In both his trial- and appellate-level briefing, Mr. Oltmanns advanced the same basic argument: because it wasn't "fairly debatable" whether the term "jet ski" encompassed a Honda F-12 Aquatrax (in Mr. Oltmanns view, it obviously did not), Fire Insurance breached its duty to Mr. Oltmanns by seeking a declaratory judgment that the "jet ski" exclusion in Mr. Oltmanns's insurance policy encompassed bodily injuries resulting from the use of that jet-ski-like watercraft. As Mr. Oltmanns has put it:

[Fire Insurance] relied on the advice of counsel [that an Aquatrax would be encompassed by the "jet ski" policy exclusion] in refusing the tender of defense. However, the advice was patently flawed. Therefore, the claim was not "fairly debatable, " and [Fire Insurance] breached the insurance contract and the implied duty of good faith [and] fair dealing.

          ¶9 On Mr. Oltmanns's account of the governing law, then, whether Fire Insurance breached its duties to Mr. Oltmanns turned entirely on whether the "jet ski" exclusion's applicability to an Aquatrax was fairly debatable: If it was fair for Fire Insurance to argue that the "jet ski" exclusion encompassed an Aquatrax then there was no breach; otherwise, according to Mr. Oltmanns, there was.

         ¶10 Mr. Oltmanns's argument fails on its own terms. It was more than fair for Fire Insurance to argue that its policy's "jet ski" exclusion applied to bodily injuries resulting from the use of an Aquatrax. In litigating whether the "jet ski" exclusion encompassed Aquatrax accidents, Fire Insurance put forward substantial usage evidence suggesting that the term "jet ski" is, in Fire Insurance's words, a "genericized term for any type of personal watercraft." Fire Insurance's argument is bolstered by the fact that "jet ski" is frequently treated as a generic term in cases, ordinances, and dictionaries. [1] The cited dictionaries, ordinances, and cases show that the public uses the trademarked term "jet ski" generically, at least on occasion. That suggests that the scope of the term may be fairly debatable.

         ¶11 That conclusion is also confirmed by the context of the "jet ski" exclusion in the insurance policy. The governing language excludes injury resulting from "the ownership, maintenance, use, loading or unloading of aircraft, motor vehicles, jet skis and jet sleds, or any other watercraft owned or rented to an insured." (numbering omitted). With the exception of jet ski, each of the excluded terms unambiguously refers to the generic name for a category of items. None refers to a specific brand. This supports a generic reading of "jet ski" under the noscitur a sociis canon of construction. See Third Nat'l Bank in Nashville v. Impac Ltd., Inc., 432 U.S. 312, 322 (1977) ("[W]ords grouped in a list should be given related meaning." (footnote omitted)). And that further indicates that the scope of "jet ski" is at least fairly debatable.

         ¶12 True, in a decision from an earlier phase of this case-a decision not currently before us-the court of appeals concluded that the "jet ski" exclusion did not apply to injuries resulting from the use of an Aquatrax, apparently declaring the term "jet ski" irredeemably obscure. See Fire Ins. Exch. v. Oltmanns, 2012 UT App 230, ¶¶ 9-10, 285 P.3d 802 ("Even discounting the bizarre possibility that [Fire Insurance] meant to refer only to one Kawasaki watercraft model, it still cannot be definitively said what the insurer intended . . . ."). But, candidly, the correctness of the court of appeals' decision is as open to debate as the issue it resolved.

         ¶13 The concurrence, however, doesn't affirm the court of appeals on the basis that Mr. Oltmanns's argument fails on its own terms. Instead, the concurrence concludes that Mr. Oltmanns waived his argument that he was entitled to attorney fees because Fire Insurance breached its duties when it sought a declaratory judgment that it did not have to defend Mr. Oltmanns in connection with the Aquatrax accident. It then devotes many pages of dicta to its view that Mr. Oltmanns's "fair debatability" argument analyzed the problem the wrong way. According to the concurrence, Mr. Oltmanns should have characterized his claims against Fire Insurance as "third-party claims." Infra ¶¶ 26-27. Under this characterization of Mr. Oltmanns's lawsuit, the concurrence tells us that "fair debatability" is irrelevant. Instead, because it arose in the third-party context, the appropriateness of Fire Insurance's decision to file a declaratory judgment action turned not on whether the "jet ski" coverage question was fairly debatable, but on whether Fire Insurance's position was "reasonable under the circumstances." Infra ¶ 28.

         ¶14 The concurrence then proceeds to outline the entire syndrome of duties and obligations that an insurer owes an insured in the third-party context. Because Fire Insurance's declaratory judgment action arose in the third-party context, the concurrence says that Fire Insurance was operating under a "heightened duty" to act as an agent or fiduciary for Mr. Oltmanns. Infra ¶¶ 41-42. It therefore owed Mr. Oltmanns four duties:

(1) [T]he duty to defend an action brought against [Mr. Oltmanns] that could conceivably fall within the scope of the policy coverage (as defined by the insurance contract), (2) the duty to be fair and reasonable in diligently investigating the validity of claims, (3) the duty to indemnify [Mr. Oltmanns] for valid claims, and (4) the duty to settle claims within the policy limits where possible.

Infra ¶ 48.

         ¶15 And, despite concluding that Mr. Oltmanns failed to preserve his argument that Fire Insurance breached its duty to defend him in the underlying lawsuit arising from the Aquatrax accident, the concurrence also details the scope and nature of the duty an insurer owes an insured to defend against a third-party lawsuit. Infra ¶¶ 49-50.

         ¶16 We have two problems with the concurrence's analysis. First, we don't agree that Mr. Oltmanns "waived his argument that Fire Insurance breached the implied covenant of good faith by bringing the declaratory judgment action" because he somehow "conceded that [Fire Insurance's decision to file that action] was merited in his brief to the court of appeals and his brief to this court." Infra ¶ 24. The court of appeals certainly didn't see it this way. It understood Mr. Oltmanns to have argued that Fire Insurance breached its fiduciary duties in seeking declaratory judgment because the coverage question-whether an Aquatrax was covered by the term "jet ski"-was not "fairly debatable."

         ¶17 We see this same argument in Mr. Oltmanns's brief to this court. It's true that there are stray comments in Mr. Oltmanns's supreme court briefing to the effect that Fire Insurance "had the right to seek declaratory relief." But the obvious thrust of Mr. Oltmanns's argument is that he is entitled to attorney fees in connection with the declaratory judgment action because "[t]here was no good basis for [Fire Insurance's decision to] fil[e] the declaratory judgment action"- and this because whether the term "jet ski" encompassed an Aquatrax was not a "'fairly debatable' coverage question." We therefore consider this argument on its own terms. And we conclude that, even accepting Mr. Oltmanns's premises-i.e., even accepting that Mr. Oltmanns would be entitled to attorney fees if the coverage question was not fairly debatable-Mr. Oltmanns loses.

         ¶18 We are also concerned by the concurrence's decision to explain, in detail, the differences between first-party and third-party insurance claims. On its own terms, the concurrence's opinion is good stuff. It's, as Judge Chamberlain Haller might put it, "lucid, intelligent, [and] well thought-out."[2] And it may very well be entirely correct. But this isn't the case for it. Mr. Oltmanns framed his claim as a first-party claim: Fire Insurance is liable because it could not fairly argue-it wasn't "fairly debatable"-that an Aquatrax was a "jet ski." Fire Insurance then responded to this argument on those same terms. As a consequence, nobody-not the parties, not the insurance industry, not the plaintiffs' bar-is fairly on notice that this is the case in which we intend to announce that an insurer's decision to seek a declaratory judgment in connection with a third-party lawsuit must be analyzed under third-party insurance law. Nor, needless to say, has anybody been put on notice that we're prepared to announce an ...

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