Loftin v. United States Fire Insurance , 106 Ga. App. 287 ( 1962 )

Hall, Judge.

Whether or not the plaintiff’s petition presented an issue as to the defendant insurance company’s obligation, under its insurance contract, to defend the claim and suits brought against the plaintiff is the only question before us. The contract provision in question is the following: “With respect to such insurance as is afforded by this policy for bodily injury liability and for property damage liability, the company shall (a) defend any suit against the insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent, but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.” Similar or identical provisions are contained in most liability insurance policies. 7A Appleman, Insurance Law & Practice, 428, § 4682; 50 ALR2d 458, 461, 463.

In the usual case the facts alleged in the complaint brought against the insured and the trae facts relating to coverage or non-coverage will be the same, so that there will be no dispute Whether the insured’s liability is covered by the policy and whether the insurer has a duty to defend. Dispute has often arisen, however, when a complaint against the insured shows false facts within the coverage of the policy, but the true facts, of which the insurer has knowledge from information furnished by the insured or from its own investigation, are not within coverage. The insurer must defend these suits for the reason that it has expressly obligated itself to do so by the insurance contract containing the common provision that the insurer will defend even groundless, false or fraudulent suits. McGettrick v. Fidelity &c. Co. of N. Y., 264 F2d 883, 886 (2d Cir. 1959); Bloom-Rosenblum-Kline Co. v. Union Indem. Co., 121 Ohio St. 220 (167 NE 884, 886); London Guarantee &c. Co. v. Shafer, 35 FSupp. 647, 649; Summer & Co. v. Phoenix Indem. Co., 32 NYS2d 2 (177 Misc. 887), affirmed 38 NYS2d 800 (265 App. Div. 911), appeal denied 41 NYS2d 180; Grand Union Stores v. General Accident Fire &c. Corp., 295 NYS 654, 657 (163 Misc. 451), affirmed 298 NYS 187, 251; 7A Appleman, Op. cit. 448, § 4684.

Webster’s New International Dictionary defines “groundless” as “without ground or foundation, wanting cause or reason for support.” The groundless suit which the insurer undertakes to defend is a suit containing unsupportable allegations which on their face show coverage by the policy of the liability asserted against the insured for “damages because of bodily injury, sickness or disease, including death at any time resulting therefrom, sustained by any person,” or “because of injury or destruction of property, including the loss of use thereof, caused by accident and arising out of the ownership, maintenance and use of the automobile.” Whether or not the insured could be liable to the injured claim'ant under the true facts is not determinative of the groundlessness of the suit. For example, a suit is brought alleging injury and damage arising out of the use of the insured automobile. In truth the automobile involved was another automobile owned by the insured and not covered by the policy. This is a groundless suit because the allegations show coverage, even though the insured may, or may not, be personally liable under the trae facts. Another example: The injured plaintiff alleges that the insured automobile was being driven by the wife of the insured, thus showing that the insured’s liability is covered by the policy. In truth the automobile was being driven by an employee in the insured’s business, under which facts the insured’s liability is excluded. This is a groundless suit in contemplation of the insurance contract. “But a distinction must be drawn between groundless suits and actions which, even if successful would not be within the policy coverage.” 7A Apple-man, Op. cit. 448, '§ 4684. A claim based on true facts not within coverage is not groundless within the meaning of the policy, but simply one for which liability insurance is not afforded and which the insurer did not undertake to defend (though the insured may be liable.)

Much rarer than actions involving “groundless” suits are the cases in which the insured seeks recovery for the expenses of defending a suit on the ground that the known or ascertainable facts giving rise to a claim were covered by the policy, but the complaint against the insured alleged untrue facts showing non-coverage. In this class of cases, when the insurance contract contains a provision like the one now in issue, the insurer must defend for the reasons hereinafter stated.

As to the defense of a suit alleging untrue facts showing non-coverage, when the known or ascertainable facts are within coverage, the contract is ambiguous as to the rights and duties between the insured and the insurer. In such a case, “the rights of the parties must be determined by fairly construing the insurance contract in such a way as to carry out its intended purpose.” McGettrick v. Fidelity &c. Co. of N. Y., 264 F2d 883, 886, supra. The dubiousness of asserting the non-ambiguity of the contract provision in issue is well illustrated by the lack of agreement among the decisions throughout the country on this problem. 7A Appleman, Op. cit. 442-443, § 4683; 29A Am. Jur. 567, § 1454; 50 ALR2d 458, 497. Fairly construing the provision in question in light of the objects of the policy, We do not believe that the intent of the parties was to allow the insurer to ignore the true facts and to place the burden on the insured to enter into the defense of the suit to prove coverage already known to the insurer.

Liability insurance policies are usually prepared, as was the one in the present case, on a form contract which describes several coverages, each designated by a letter and descriptive words and each limited by a stated maximum amount of liability. Each individual policy is issued on the printed form for the coverages for which a premium is written in. Thus an individual policy will effect one or more coverages to the insured. The language “With respect to such insurance as is afforded by this policy for bodily injury liability and for property damage liability, the company shall (a) defend any suit against the insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, . . .” is a part of the form of contract upon which the coverages to the individual insured are to be filled in. It must be considered in this light to mean, “If this policy is issued for, or affords insurance for, bodily injury liability or property damage liability, the company shall defend any suit alleging such injury, etc.” Furthermore, an interpretation of the words, “such insurance as is afforded by this policy” to mean other than “insurance afforded according to the true facts” would be unreasonable.

We must assume that the insurer’s undertaking to defend was intended to afford benefits to the insured. The undertaking to defend suits alleging facts within coverage, even though groundless, will benefit the insured only if he is sued for a sum in excess of the policy limits. Without such an express undertaking the insurer will defend suits, groundless or not, up to the limits of the policy to protect itself from an excessive or default judgment against the insured, which it would be liable to pay. But when untrue facts are alleged in the complaint showing an exclusion from coverage, the insurer need not defend in its own interest, as it would not be liable for a judgment based upon these untrue facts. Hence its undertaking to defend will be of definite benefit to the insured sued by such a complaint when the true facts are within coverage. We may reasonably presume that the undertaking to defend “with respect to the insurance afforded by this policy” was intended to give the insured this benefit—to defend suits when the policy affords insurance according to the true facts.

If the insurer intended otherwise, it could have made its intent clear and unmistakable by undertaking to defend “unless the complaint alleges facts which show the claim to be excluded from coverage,” or by using other unambiguous language, for example: “The company shall defend claims and suits, groundless or otherwise, for which it may become liable only when the allegations thereof show injury covered by the policy and do not show the claim to be excluded by the policy.”

The rule of thumb that has been enunciated in cases where the complaint against the insured alleges untrue facts showing the insured’s liability or coverage by the policy—that the insurer’s obligation to defend is to be determined by the allegations of the complaint (See 50 ALR2d 458, 463)—upholds the insurer’s explicit undertaking to defend groundless, false or fraudulent suits. McGettrick v. Fidelity &c. Co. of N. Y., 264 F2d 883, 885, supra. The true rule is that the duty to defend is determined by the contract; and since the contract obligates the insurer to defend claims asserting liability under the policy; even if groundless, the allegations of the complaint are looked to to determine whether a liability covered by.the policy is asserted. Therefore, to speak of the allegations of the complaint as the standard determining the duty to defend is confusing. In any event, that so-called “rule” has no proper application when the incident causing injury is covered by the policy, but the complaint against the insured falsely. shows non-coverage. The rights of the parties in this situation must be found in the undertaking, “With respect to such insurance as is afforded by this policy for bodily injury liability and for property damage liability, the company shall (a) defend any suit against the insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, . . .”

We cannot accept the contention that the allegations of the complaint alone determine the duty to defend in this class of cases.

The burden is on the insurer to show that a loss or claim comes within an exception to coverage. Pilgrim Health &c. Ins. Co. v. Gormley, 40 Ga. App. 30, 37 (148 SE 666); Johnson v. Southern Life Ins. Co., 95 Ga. App. 625 (98 SE2d 382); Union Central Life Ins. Co. v. Cofer, 103 Ga. App. 355, 361 (119 SE2d 281). With respect to an exception to the duty to defend, this burden is not carried merely by proving that the allegations of the complaint allege facts excluding the claim from the policy. University Club v. American Mut. Liab. Ins. Co. of Boston, 124 Pa. Super. 480 (189 A 534, 536).

An insurance policy is a “contract of adhesion,” prepared by legal draftsmen to be accepted by daymen. Patterson, The Delivery of a Life Insurance Policy, 33 Harv. L. Rev. 198, 222 (1919); See Schultz, The Special Nature of the Insurance Contract, 15 Law & Contemporary Prob. 376 (1950). Such a contract should be construed as reasonably understood by the insured. Royal Indem. Co. v. McClatchey, 101 Ga. App. 507, 510 (114 SE2d 394); Fokes v. Interstate Life &c. Ins. Co., 59 Ga. App. 680 (2 SE2d 170); American Cas. Co. v. Callaway, 75 Ga. App. 799, 802 (44 SE2d 400); Life Ins. Co. of Va. v. Williams, 48 Ga. App. 10, 13 (172 SE 101); Atlas Assur. Co. v. Lies, 70 Ga. App. 162, 165 (27 SE2d 791); Penn Mutual Life Ins. Co. v. Childs, 65 Ga. App. 468, 475 (16 SE2d 103); Johnson v. Mutual Life Ins. Co., 154 Ga. 653 (115 SE 14). See 13 Appleman, Op. cit. 199, § 7481, 202, § 7482; 3 Corbin, Contracts, 592, § 599 (1951); 1954 Wis. L. Rev. 335. In considering the policy as a whole, laymen might well conclude that the company would defend any suit arising from an accidental injury in truth covered by the policy despite the manner in which the injured party presented his claim, as well as a suit falsely showing coverage.

The Pennsylvania court in Wilson v. Maryland Cas. Co., 377 Pa. 588 (105 A2d 304), cited in the dissenting opinion, infra, feared that a standard embracing the actual facts would force the company to defend on the word of the insured. The insurer, however, is in a position to decide whether or not to defend after a preliminary investigation of the facts, since it would not be liable for breach of the defense clause unless the insured could prove in a subsequent suit against it that the injured party had an enforceable claim within the policy and that the insurer knew or could have ascertained this. See 7A Appleman, Op. cit. 496, § 4690. Of course, if the insurer assumes the defense at the urging of the insured, and the plaintiff obtains a judgment on a theory not covered by the policy, the insurer should not be estopped to deny liability. To protect its rights fully, an insurer should obtain a non-waiver of rights agreement before undertaking a defense, or seek a declaratory judgment to determine its rights. See 7A Appleman, Op. cit. 515, §§ 4692-93; 29A Am. Jur. 564, § 1451; Note, 2 Stan. L. Rev. 383 (1950).

The defendant contends in effect that its obligation must depend uniformly on either the true facts or the allegations of the complaint, and that because the insurer is bound to defend a suit falsely alleging a claim covered by the policy, therefore it is excused from defending a suit alleging facts not covered, whether false or not. “The conclusion ... is a non sequitur.” McGettrick v. Fidelity &c. Co. of N. Y., 264 F2d 883, 886, supra. The duty 'to defend in the former instance is established by the undertaking to defend suits “even if groundless, false, or fraudulent.” McGettrick, supra; Bloom-Rosenblum-Kline Co. v. Union Indem. Co., 121 Ohio St. 220, supra; London Guarantee &c. Co. v. Shafer, 35 FSupp. 647, supra; Summer & Co. v. Phoenix Indem. Co., 32 NYS2d 2, supra. The duty to defend in the latter instance arises from the undertaking “with respect to such insurance as is afforded by this policy” to defend any suit alleging personal injury, etc. This undertaking says nothing about the rights and duties of the parties in the event there is a variation between the allegations of the complaint showing an exception to coverage and the true facts. “It would seem, therefore, that it must have reference to objective facts.” McGettrick v. Fidelity &c. Co. of N. Y., 264 F2d 883, 885, supra. This policy cannot be construed to have intended other than that, when the insured in good faith complies with the terms of the policy requiring him to give notice to the insurer of claims and suits, the insurer undertakes to ascertain the true facts, with respect to an alleged exclusion from coverage and its duty to defend rests thereon. It would not be reasonable to say that it was the intention of the contracting parties, when the insured has given all notice and information required of him, that the assertions of a third party, a stranger to the contract, rather than the true facts, be allowed to determine the rights between the contracting parties, unless such an intention is clearly manifested by the terms of the contract, as in the undertaking to defend groundless suits.

We recognize that some courts in other jurisdictions have taken the opposite view (Wilson v. Maryland Cas. Co., 377 Pa. 588, supra; Thomas v. American Universal Ins. Co., (1952) 80 R.I. 129, 93 A2d 309; Lawrence v. Northwest Cas. Co., 50 Wash. 2d 282, 311 P2d 670, 50 ALR2d 458, 497, et seq.), but we hold that when the complaint against the insured alleges untrue facts placing the claim within an exception in the policy, but the true facts, known or ascertainable to insurer, are within coverage, the insurer is obligated to defend the suit. McGettrick v. Fidelity &c. Co. of N. Y., 264 F2d 883, supra; American Motorists Ins. Co. v. Southwestern Greyhound Lines, 283 F2d 648, 649; Hardware Mutual Cas. Co. v. Hilderbrandt, 119 F2d 291 (10th Cir. 1941); University Club v. American Mutual Liability Ins. Co. of Boston, 124 Pa. Super. 480, supra; Trinity Universal Ins. Co. v. R. J. Bethancourt (Tex. Civ. App.) 331 SW2d 943; Massachusetts Bonding & Ins. Co. v. Roessler (Tex. Civ. App.) 112 SW2d 275, 280, 281; State Ex rel. Inter-State Oil Co. v. Bland, 354 Mo. 622 (190 SW2d 227); see Marshall’s U. S. Auto Supply v. Maryland Cas. Co., 354 Mo. 455 (189 SW2d 529, 531); Comunale v. Traders & Gen. Ins. Co., 50 Cal.2d 654 (328 P2d 198). Under the circumstances alleged in the plaintiff’s petition, we must leave to the jury the determination of the defendant’s duty to defend. Liberty Mutual Ins. Co. v. Atlantic C. L. R. Co., 66 Ga. App. 826 (19 SE2d 377).

Our decision is not out of line with Morgan v. New York Cas. Co., 54 Ga. App. 620 (188 SE 581). There the complaint against the insured showed that the injuries sued for did not result from the maintenance or use of the automobile truck insured; it showed on its face that they were not covered by the policy; the allegations of the complaint were not shown to be in conflict with the true facts.

In many cases, where the facts alleged in the complaint and the true facts are not in conflict, and where the complaint falsely alleges facts within coverage, but the insurer, with the duty to defend groundless suits, has knowledge of the true facts not within coverage, a correct result has been reached by holding that the allegations of the complaint determine the duty to defend. 50 ALR2d 458, 463. These cases are compatible with this decision.

The facts alleged by the plaintiff do not as a matter of law show that the defendant had no obligation to defend the alleged claim. The trial court erred in sustaining the defendant’s general demurrer.

Judgment reversed.

All the Judges concur, except Felton, C. J., and Frankum, J., who dissent.