UNITED STATES FID. GUARANTY CO. v. COOK

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Docket Number

No. 33100.

Judges

McGehee, J., delivered the opinion of the court.

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Smart Summary

Factual and Procedural Background

Appellee W.G. Cook sued appellant United States Fidelity Guaranty Company in the chancery court of Scott County seeking reimbursement for attorney's fees and costs incurred in defending a lawsuit filed by Dee McCray. The underlying lawsuit, filed in the circuit court of Lauderdale County, alleged personal injuries sustained by McCray from the operation of a gravel truck covered by the insurance policy. The insurer declined to defend the suit after notification and request. McCray’s declaration alleged he was employed by Cook and others involved in a gravel hauling contract with the State Highway Department, but the record showed Cook was the sole contractor who sublet portions of the work to subcontractors, including Cliff Smith, who employed McCray. The insurance policy covered trucks under a "public liability" policy with specific provisions outlining the insurer's duty to pay damages and defend suits, but excluded liability for bodily injury to employees of the insured.

Legal Issues Presented

Whether the insurer was obligated under the policy to defend the insured in a suit alleging bodily injury to an employee when the policy excluded coverage for bodily injury to employees but included an unconditional duty to defend suits for bodily injury.
Whether the exclusion of liability for bodily injury to employees limits the insurer's duty to defend suits brought by alleged employees.
Whether the insurer's refusal to defend the suit entitled the insured to reimbursement for attorney's fees and costs incurred in defense.

Arguments of the Parties

Appellant's Arguments

The policy in question was an employer's liability policy distinct from a public liability policy, and it only obligated the insurer to defend suits by employees, not suits by members of the general public.
Since Dee McCray alleged he was an employee of Cook, the insurer had no duty to defend because the policy excluded coverage for bodily injury to employees.
The insurer was not obligated to defend suits outside the scope of coverage, even if the allegations proved false.
The contract must be construed as a whole, and the insurer should not be required to defend suits not covered by the policy terms.

Appellee's Arguments

The policy expressly imposed an absolute duty on the insurer to defend any suit against the insured seeking damages for bodily injury, even if groundless, false, or fraudulent.
Exclusion of liability for bodily injury to employees does not limit the insurer’s duty to defend suits brought by alleged employees.
Rules of contract construction require ambiguities to be resolved against the insurer, strict construction of exclusions, and consideration of the parties’ intent and the whole contract.
The insurer should have defended the suit with a reservation of rights rather than refusing outright.
Jury verdicts determine the truth of employee status; until then, the insurer must defend unless it proves the affirmative defense that the injured party was an employee.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Fessenden School, Inc. v. American Mutual Liability Ins. Co., 193 N.E. 558	Insurer's duty to defend suits and contractual interpretation	Referenced by both parties; court noted the duty to defend even groundless suits and the significance of policy language.
United States Fidelity Guaranty Co. v. Yazoo Cooperage Co., 127 So. 579 (Miss. 1930)	Duty of insurer to defend suits by members of the general public	Appellant cited it to argue no duty to defend suits alleging employee claims; court distinguished it but acknowledged its relevance.
New Amsterdam Casualty Co. v. Perryman, 140 So. 342 (Miss. 1932)	Contract construction rules, especially interpreting ambiguous language against insurer	Supported appellee’s position on strict construction of exclusions and interpretation against insurer.
Maryland Casualty Co. v. Beckham, 143 So. 886 (Miss. 1932)	Strict construction of exclusion clauses in insurance policies	Used to reinforce appellee’s argument that exclusions must be narrowly construed.
Locomotive Engineers Ins. Co. v. Meeks, 127 So. 699 (Miss. 1930)	Ordinary meaning of words in contracts	Applied to support appellee’s interpretation of policy language.
University Club v. American Mutual Liability Corp., 189 A. 534	Jury verdict determines truth of employee status for insurer’s defense obligation	Referenced to explain that insurer must defend unless employee status is judicially established.
Fidelity Casualty Co. of N.Y. v. Stewart Dry Goods Co., 271 S.W. 244 (Ky. 1925)	Insurer's duty to defend and burden of proof regarding employee status	Supported appellee’s argument on insurer’s obligation to defend pending proof of employee status.
Ford Hospital v. Fidelity Casualty Co., 183 N.W. 656 (Neb. 1921)	Duty to defend with reservation of rights	Used to argue insurer should have defended suit with reservation rather than refusal.
Tozer v. Ocean Acc. Guarantee Corp., 103 N.W. 509 (Minn. 1905)	Duty to defend under policy provisions	Reinforced appellee’s position on insurer’s obligation to defend suits.
Mann v. Employers Liability Corp., 143 N.W. 794 (Minn. 1914)	Interpretation of insurance defense obligations	Supported appellee’s argument on insurer’s duty to defend.

Court's Reasoning and Analysis

The court analyzed the insurance policy provisions, focusing on the interplay between the insurer's duty to defend any suit seeking damages for bodily injury under section II, article (4)(a), and the exclusion of liability for bodily injury to employees under section IV, subsection (d). The court concluded that the exclusion of liability for employees' bodily injury did not limit or qualify the insurer's absolute duty to defend suits, including those brought by alleged employees. The court reasoned that subsection (d) only excluded the insurer's obligation to pay damages for employee injuries, not the obligation to defend suits alleging such injuries. The court observed that the insurer and insured knew the trucks would be operated by subcontractors and their employees, and the policy was intended to provide broad defense coverage for suits arising from the use of these trucks. The court acknowledged that the allegation of employee status could be false, but that did not relieve the insurer of its duty to defend. It further noted that if the insurer wished to limit its duty to defend, it should have done so explicitly. Since the insurer declined to defend after notice, it was bound to reimburse the insured for attorney's fees and costs incurred in defense.

Holding and Implications

The court affirmed the decree of the chancery court, holding that the insurer was obligated under the policy to defend the insured in the suit brought by Dee McCray and must reimburse the insured for attorney's fees and costs incurred.

The decision directly affects the parties by requiring the insurer to fulfill its defense obligation despite the employee exclusion for damages. The ruling clarifies that exclusions of liability for employees' bodily injury do not negate the insurer’s duty to defend suits brought by alleged employees. No new precedent was established beyond the application of existing contract interpretation principles and insurance law.

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UNITED STATES FIDELITY GUARANTY CO. v. COOK.

Gilbert Cameron, of Meridian, for appellant.

There are two types of policies among others: an employer's liability policy, which carries a different and a higher premium rate and entirely different basis, and a general public liability policy which covers accidents suffered by the general public not in a contractual relationship to the owner of the instrumentality. There is a vast difference between these two policies.

If an employer's liability policy is in question and the question arose where a member of the general public sued the owner of an automobile, who was not an employee of the owner or assured, and this same provision in this policy was there invoked, that the insurance company would defend any suit whether groundless or not, and the insurance company defended on the ground that the policy issued was only an employer's liability policy, would the court be justified in ignoring the provision of the policy that it should only cover and protect employers against suits by their employees and hold that it was the duty of the insurer to defend the law suit whether its assured was an employer or not?

One is the counterpart of the other and a contract can not be taken apart and divorced from the subject matter with which the contracting parties are dealing.

In this particular case Dee McCray filed suit against Mr. Cook and alleged that he was an employee of Mr. Cook, and it is our contention the policy sued upon did not obligate appellant to defend that law suit for the reason that the policy did not cover employees of Mr. Cook and the fact that it turned out that Dee McCray's allegation that he was an employee was false and untrue did not obligate the company to defend a law suit that was not within the purview of its policy.

Policies of insurance are to be construed as any other contracts except that such policies are to be construed liberally in favor of the insured and strictly as to the insurer, this being upon the theory that the insurer draws the contract and sells it to the insured.

Miss. Digest, Insurance, Sec. 146 (1-2-3).

The cardinal rule in construing contracts must be that all the provisions must be given effect if possible to do so.

Surely it cannot be held that it was the duty of the company, under its policy, to appear and defend suits not covered by the terms of its policy.

Fessenden School, Inc. v. American Mutual Liability Ins. Co., 193 N.E. 558. O.B. Triplett, Jr., of Forest, for appellee.

The express language of the policy imposed upon appellant an absolute duty to defend.

Fessenden School v. American Mutual Liability Ins. Co., 193 N.E. 558; U.S.F. G. Co. v. Yazoo Cooperage Co., 157 Miss. 27, 127 So. 579.

In giving meaning to the contractual provisions, the following rules of construction are applicable and relevant: (1) Where words or other manifestations of intention bear more than one reasonable meaning, an interpretation is preferred which operates more strongly against the party from whom they proceed.

Restatement "Contracts", sec. 236; New Amsterdam Casualty Co. v. Perryman, 140 So. 342, 162 Miss. 864.

(2) Exclusion clauses in insurance policies are to be most strictly construed.

Maryland Casualty Co. v. Beckham, 143 So. 886, 163 Miss. 836.

(3) The court should ascertain the intention of the parties to a contract in the light of their situation when making it, looking also to the subject matter thereof.

Restatement "Contracts," sec. 235, Miss. Annot. Clause (d).

(4) If the conduct of the parties subsequent to a manifestation of intention indicates that all the parties placed a particular interpretation upon it, that meaning is adopted if a reasonable person could attach it to the manifestation.

Restatement "Contracts," sec. 235 (e).

(5) The whole of a written instrument must be looked to in construing it.

Restatement "Contracts," sec. 235, Miss. Annot. Clause (c).

(6) The words used in a contract must be taken according to their ordinary meaning.

Restatement "Contracts," Miss. Annot. Clause (a); Locomotive Engineers, etc., Ins. Co. v. Meeks, 127 So. 699, 157 Miss. 97.

The appellant should have defended with reservation of rights.

Ford Hospital v. Fidelity Casualty Co., 106 Neb. 311, 183 N.W. 656; Tozer v. Ocean Acc. Guarantee Corp., 94 Minn. 478, 103 N.W. 509, 99 Minn. 290, 109 N.W. 410; Mann v. Employers Liability Corp., 123 Minn. 305, 143 N.W. 794.

Even in cases where the policy provisions have only required the insurer to defend a "claim covered by the policy," the authorities hold that:

(a) The verdict of the jury is determinative of the falsity or truth of the charge.

University Club v. American Mutual Liab. Corp., 189 A. 534; Sargent Mfg. Co. v. Travelers Ins. Co., 165 Mich. 87, 34 L.R.A. (N.S.) 491, 130 N.W. 211.

(b) Unless the jury in the personal injury action determined the fact by its verdict, the insurer was liable for defense costs and expenses unless it proved its affirmative defense, which in this case is that Dee McCray was Cook's employee.

University Club v. American Mut. Liab. Co., 189 A. 534; Fidelity Casualty Co. of N.Y. v. Stewart Dry Goods Co., 208 Ky. 429, 271 S.W. 244, 43 A.L.R. 326.

Argued orally by V.W. Gilbert, for appellant, and by O.B. Triplett, Jr., for appellee.

INSURANCE.

Where insurer agreed by "Agreement A" of section one of public liability policy to pay damages arising out of bodily injury accidentally sustained, and by section 2 to defend any suit against insured seeking damages for bodily injury, but by section 4 insurer stipulated that it should not be liable for damage under "Agreement A" for bodily injury to employee of insured, section 4 did not limit section 2, and insurer was bound to reimburse insured for attorney's fees and costs expended in defending an alleged employee's suit for personal injuries.

McGehee, J., delivered the opinion of the court.

Appellee, W.G. Cook, sued the appellant, United States Fidelity Guaranty Company, in the chancery court of Scott county, upon a liability insurance policy, seeking reimbursement for attorney's fees and costs incurred by him in defending a lawsuit filed in the circuit court of Lauderdale county by one Dee McCray for the recovery of damages on account of personal injuries sustained by the operation of one of the gravel trucks covered by the policy; and which suit the appellant had declined to defend after being duly notified and requested so to do.

The declaration filed by Dee McCray alleged that he was employed by the appellee at the time of his injury, and also by Cliff Smith and others, all of whom he alleged were partners in the work of hauling gravel and material furnished by the State Highway Department to points designated by the department under a contract with the State Highway Commission; whereas the record in the case at bar discloses that, as a matter of fact, said contract was awarded to the appellee, W.G. Cook, as an individual, and that he thereupon executed his bond for the performance of such contract, with the appellant as surety thereon; that thereafter appellee sublet a part of the work to Cliff Smith, by whom Dee McCray was employed, and sublet the remainder to other subcontractors; and that an independent contractor's agreement was duly entered into in writing by the appellee with each subcontractor, respectively, at the time of the subletting of the work, as prepared and furnished by the appellant, prior to the issuance of the policy of insurance herein sued on.

The policy in question covers fifteen trucks of the one and a half ton type, and is denominated by the appellant as a public liability policy, in that the same contains the obligation designated as "Agreement A" to pay on behalf of the assured all sums which the assured shall become obligated to pay as damages by reason of liability imposed upon him by law for damages arising out of bodily injury accidentally sustained by any person or persons if caused by the ownership, maintenance, or use of the trucks covered by the terms of the policy.

It does not appear just how it was contemplated that the assured could become obligated to pay damages by reason of an obligation imposed upon him by law to the general public for bodily injury to any person caused by the ownership, maintenance, or use of the trucks covered by the policy, since it was known by both the insurer and the assured at the time of the issuance of the policy that the trucks in question were to be furnished by the subcontractors who were to maintain, operate, and have control of them through their own agents and employees in carrying on the work under the express terms of the independent contractor's agreement executed at the instance of the insurer.

There is also a like obligation contained in the policy, designated as "Agreement `B'," to pay the damages caused to the property of others by the ownership, maintenance, or use of such trucks, where liability may be imposed by law upon the assured therefor. These provisions, together with "Agreement `G'," relating to damage to the trucks themselves by collision, and "Agreement `D'," relating to glass damage thereto, are grouped under section I of the policy. Under section II, it is provided that "This policy shall also include the following provisions as respects Agreements `A' and `B',"; and under article (4) it is stipulated that "The Company further agrees, (a) to defend in his name and behalf any suit against the assured seeking damages on account of such bodily injury or property damage, even if such suit is groundless, false or fraudulent. . . ." Then, under section IV, it is further stipulated that "The Company shall not be liable under this policy for any accident, loss, or damage: . . . (d)," which reads, "under Agreement A for bodily injury to any employee of the assured sustained during the course of his employment. . . ."

It is contended by the appellant that, since the declaration filed by Dee McCray in the circuit court case alleged that he was an employee of appellee, the assured, there was no obligation on the part of appellant, the insurer, to defend the McCray suit; that the allegations of the declaration in that behalf control in determining the question of liability to defend, and in support of that contention cites the following cases: United States Fidelity Guaranty Co. v. Yazoo Cooperage Co., 157 Miss. 27, 127 So. 579; Fessenden School, Inc., v. American Mutual Liability Insurance Co., 289 Mass. 124, 193 N.E. 558, and the numerous authorities therein cited.

However, it is unnecessary to consider the rule announced in those cases in deciding the question here involved, for the reason that, in our opinion, subsection (d) of section IV of the policy, above quoted, does not undertake to limit or in anywise qualify subsection (a) under article (4) of section II, which obligates the insurer to defend any suit against the assured, etc., but specifically refers to and singles out "Agreement `A'" under section I of the policy, and excludes only the obligation to pay damages for bodily injury in so far as the employee is concerned, and does not exclude the obligation to defend any suit whether by an employee or other person. In other words, it clearly and expressly mentions agreement capital "A," which appears only in section I, and makes no reference to the obligation to defend any suit as contained in subsection little "(a)" of article (4) of section II of the policy. The obligation "to defend in his name and behalf any suit against the assured seeking damages on account of such bodily injury or property damage, even if such suit is groundless, false, or fraudulent," is left unqualified by any other provision of the policy, and constitutes an absolute obligation to defend any and all suits against the assured seeking damages on account of bodily injury sustained by reason of the ownership, maintenance, or use of the trucks covered by the policy, whether by an employee or not.

Unless the policy obligates the insurer in this case to defend all suits against the assured, there is but little risk, if any, assumed, since there could be no liability to pay damages for bodily injury or property damage caused by trucks neither owned by the assured nor operated by his servants or employees; nor would the defense of any suit be required to proceed very far in the absence of an allegation of the relationship of master and servant between the assured and the person injured, or an ability to show such relationship between the assured and the person operating the truck where the suit is filed by a member of the general public. We think that it was contemplated that the assured should receive a more substantial consideration for the premiums paid than would flow to him if the policy should be construed not to apply to all suits filed against him by reason of the ownership, maintenance or use of the trucks covered therein.

Dee McCray was injured by the use of one of such trucks, and was a member of the general public so far as the assured was concerned, even though he alleged that he was an employee. The appellant concedes that, if Dee McCray had alleged in his suit against the appellee that he had been run over and injured by one of these trucks, and had sued appellee as one of the general public that, then, under the case of United States Fidelity Guaranty Co. v. Yazoo Cooperage Co., supra, it would have been the duty of the company under its policy to defend the lawsuit even though it should be developed on the trial that he was actually an employee of the appellee. As to this we express no opinion, since that would involve the question as to whether any exception contained in such policies of insurance in favor of an employee refers to real employees, and not merely to one who alleges himself to be an employee, and further involves the application of the rule announced in the authorities hereinbefore mentioned. It is sufficient to say that his suit could be groundless, and come within the class which the assured obligated itself to defend, on account of the nonexistence of the alleged relation of master and servant, as well as for any other cause. If the exception of liability for bodily injury to any employee of the assured had also excluded the liability to defend any suit brought by such an employee, a different question would be presented for decision under the authorities relied upon by appellant. But we express no opinion on this point, since we have reached the conclusion that the policy obligated the appellant in either event to defend the suit; and, having failed to do so after due notice, it is bound to reimburse the appellee for the attorney's fees and costs expended in that behalf.

The decree of the court below is therefore affirmed.

Affirmed.