Incredibly the Supreme Court of Montana has two decisions on this year’s annual Top 10 Coverage Cases list – that’s one more than the entire state has traffic lights. [Seriously, for a small population state, its Supreme Court issues a lot of really interesting opinions.]

The Supreme Court of Montana’s decision in J&C Moodie Properties v. V. involves an issue that I have never seen litigated, yet has the potential to arise with frequency – especially since it would come up in the context of the continuous trigger. As we all know, the continuous trigger has graduated from its roots in asbestos and environmental property damage – where it still lives large -- to arguments that it applies to construction defect coverage and lots of other scenarios where efforts are made to find coverage, increase the availability of coverage or share coverage.

At issue in J&C Moodie -- can an insurer admit that it had a duty to defend, but, despite not defending, not have breached the duty to defend because its insured was defended by another insurer? The insurer lost. However, the court also was clear that that need not always be the outcome. That there are two sides to the issue adds to J&C Moodie’s significance as guidance for other courts addressing this scenario down the road.

J&C Moodie Properties involves coverage for construction defects. Claims were brought against Haynie Construction for defective construction of a building, for Moodie, for a farm equipment dealership. During the course of its work Hayne was insured by both Farm Bureau and Scottsdale. Farm Bureau undertook Haynie’s defense under a reservation of rights. Scottsdale disclaimed a defense – asserting that an exclusion precluded coverage for operations prior to the inception of the policy.

Haynie and Moodie reached a settlement and filed it with the trial court that recited: “(1) Moodie’s claims against Haynie; (2) Moodie’s expert witnessess’s opinion that the project was negligently constructed and that Moodie suffered $5,650,000 in damages; (3) Scottsdale’s refusal to provide a defense or coverage; (4) Haynie’s resulting substantial risk, including financial insolvency; (5) the settlement reached between Moodie and Haynie for $5,650,000; (6) Moodie’s agreement to file a covenant not to execute on such judgment; and (7) Haynie’s agreement to assign all its rights and interest in the Scottsdale policy to Moodie. Kyle Haynie attested that, as a result of Scottsdale’s refusal to provide a defense, he had ‘settled with Moodie to eliminate the severe risks to me and my business.’”

Moodie filed an action against Scottsdale seeking a declaratory judgment that Scottsdale had breached its duty to defend, that the judgment was reasonable and negotiated in good faith and Scottsdale was liable for the stipulated judgment. The trial court ruled in favor of Moodie on all issues, including that Scottsdale had a duty to defend.

Scottsdale appealed everything to the Montana Supreme Court – except the decision that it had a duty to defend. Instead, Scottsdale’s argument was that “it did not breach the duty because, at all times during the litigation, Haynie was fully defended by counsel provided by Farm Bureau.”

The Montana Supreme Court held that Scottsdale breached the duty to defend. However, the court was clear that, under some situations, the fact that one insurer is defending can preclude another insurer’s breach.

The Montana Supreme Court described Scottsdale’s handling of the claim as follows: “After receiving notice of the claim, Scottsdale spoke with Kyle Haynie on March 21, 2013, learning that Farm Bureau had assigned a claim number to the matter and filed an Answer on behalf of Haynie, and again on March 25, 2013, when it learned that the construction contract had been signed before the inception of its policy period and that Farm Bureau was undertaking defense of Haynie. Doing nothing more, on May 20, 2013, Scottsdale denied coverage pursuant to the ‘Designated Operations Exclusion’ of its policy, and did nothing further until it was named as a defendant in this action following entry of the stipulated judgment.”

Scottsdale pointed to decisions from the Montana high court that it asserted support its position. However, the court didn’t break a sweat to distinguish them. In particular, the court distinguished Scottsdale’s handling of the claim from that of State Farm in State Farm v. Schwan (Mont. 2013): “State Farm Fire engaged in discussions with the insured’s co-insurer, confirmed the co-insurer did not need assistance and was defending the insureds on all claims, committed to assuming the defense if the co-insurer discontinued its defense, participated in settlement discussions, and kept the insured advised of its actions. State Farm Fire also filed a declaratory action to determine coverage and hired coverage counsel for the insureds, even though not required to do so under the policy. We reasoned that the insureds had not been ‘left unprotected or . . . prejudiced’ by State Farm Fire’s actions and the duty to defend had not been breached.”

The Supreme Court of Montana was unambiguous in how it viewed Scottsdale’s “roll the dice” handling of the claim: “[C]ontrary to what we have ‘repeatedly admonished insurers (citation omitted) Scottsdale did not seek a declaratory ruling to confirm its internal coverage determination. A declaratory action could have been brought early in the litigation—either upon tendering a defense to Haynie upon reservation of rights, or while letting Farm Bureau take the lead in defending Haynie—to resolve the coverage issue and confirm whether Scottsdale had a duty to defend. Failing that, Scottsdale provided no other assistance whatsoever to its insured related to the defense. As the District Court found, ‘Scottsdale can point to no evidence of actions it took to assist or participate in its insured’s defense.’ Unlike the insurers in Schwan and Westchester [Surplus Lines v. Keller Transportation (Mont. 2016)], Scottsdale made no effort to contact the co-insurer to further understand the claims, offered no coordination, and provided no other defense support pending a ruling that would affirmatively confirm whether coverage existed under the policy. It simply made the unilateral decision that it was done.”