Northfield Insurance v. Montana Ass'n of Counties

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No. 00-072
IN THE SUPREME COURT OF THE STATE OF MONTANA
2000 MT 256301 Mont. 47210 P.3d 813NORTHFIELD INSURANCE COMPANY, and
LLOYDS OF LONDON,
Plaintiffs and Appellants,
v.
MONTANA ASSOCIATION OF COUNTIES,
Defendant and Respondent.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Jeffrey M. Sherlock, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Michael J. Milodragovich, G. Patrick Hagestad; Milodragovich, Dale,
Steinbrenner & Binney, Missoula, Montana
For Respondent:
Stuart L. Kellner; Hughes, Kellner, Sullivan & Alke, Helena, Montana
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Submitted on Briefs: April 27, 2000
Decided: September 26, 2000
Filed:
__________________________________________
Clerk
Justice Karla M. Gray delivered the Opinion of the Court.
¶1 Northfield Insurance Company (Northfield) and Lloyds of London (Lloyds) appeal
from the order entered by the First Judicial District Court, Lewis and Clark County,
granting the motion filed by the Montana Association of Counties, Joint Powers Insurance
Authority (MACO) to dismiss their complaint for declaratory judgment. We affirm.
¶2 The sole issue on appeal is whether the District Court abused its discretion in
dismissing the complaint seeking declaratory relief for lack of a justiciable controversy.
BACKGROUND
¶3 The present case stems from a class action lawsuit entitled Alan Doe, et al. v. Park
County, et al., currently pending before the United States District Court for the District of
Montana, Billings Division, in which the plaintiffs allege they were sexually abused while
incarcerated at the Park County Detention Center (Detention Center). The Doe plaintiffs
have asserted claims for negligence, violation of their constitutional rights, and intentional
and negligent infliction of emotional distress against the Park County Sheriff and several
jailers at the Detention Center.
¶4 MACO's self-insurance fund is the primary insurer for numerous public entities in
Montana, including Park County. Pursuant to its primary insurance policy, MACO has
assumed the defense and indemnification of Park County and the individual Park County
officials named in the federal suit. Northfield and Lloyds are secondary assurance
companies under a Public Entities All Lines Aggregate Insurance Policy (Policy) issued to
MACO. Northfield and Lloyds brought the present action seeking a declaratory judgment
that, under the terms of the Policy, they have no duty to indemnify MACO in connection
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with the claims pending in federal court against MACO's insureds.
¶5 Among other things, Section II of the Policy provides comprehensive general liability
indemnification for all sums which the assured becomes obligated to pay by reason of
errors, omissions or negligent acts arising out of the performance of employment duties,
including law enforcement duties. Section II states that any claim for damages "which the
Assured intended or expected or reasonably could have expected" is excluded from
coverage, as is "any claim resulting from the sexual or physical abuse or molestation of
any person by the Assured."
¶6 Section IV of the Policy provides errors and omissions indemnity for any loss incurred
by reason of a "Wrongful Act." The term "Wrongful Act" is defined to include any "act of
neglect or breach of duty including misfeasance, malfeasance, and non-feasance by the
Assured." Section IV states that any claim for damages "for bodily injury" or "arising out
of law enforcement activities" is excluded from coverage.
¶7 MACO moved to dismiss Northfield's and Lloyds' complaint for declaratory judgment
pursuant to Rule 12(b)(6), M.R.Civ.P., on the ground that it failed to state a claim upon
which relief may be granted. The District Court granted MACO's motion and dismissed
the complaint for lack of a justiciable controversy. Northfield and Lloyds moved to alter
or amend the order, the District Court denied their motion, and Northfield and Lloyds
appeal.
STANDARD OF REVIEW
¶8 In evaluating a Rule 12(b)(6) motion to dismiss, a district court is required to construe
the complaint in the light most favorable to the plaintiff and should not dismiss the
complaint unless it appears the plaintiff is not entitled to relief under any set of facts which
could be proved in support of the claims. Loney v. Milodragovich, Dale & Dye, P.C.
(1995), 273 Mont. 506, 509, 905 P.2d 158, 160. The decision to dismiss a complaint for
declaratory judgment is within the sound discretion of the district court. Brisendine v.
State, Dept. of Commerce (1992), 253 Mont. 361, 364, 833 P.2d 1019, 1020 (citations
omitted). "When a district court determines that declaratory relief is not necessary or
proper, we will not disturb the court's ruling absent an abuse of discretion." Ridley v.
Guaranty Nat. Ins. Co. (1997), 286 Mont. 325, 329, 951 P.2d 987, 989 (citations omitted).
However, we review the conclusions upon which that decision is based to determine
whether the court's interpretation of the law is correct. Ridley, 286 Mont. at 329, 951 P.2d
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at 989 (citations omitted). A district court's ruling on whether a justiciable controversy
exists is a conclusion of law. See generally Ridley, 286 Mont. at 332, 951 P.2d at 991;
Brisendine, 253 Mont. at 365, 833 P.2d at 1021.
DISCUSSION
¶9 Did the District Court abuse its discretion in dismissing the complaint seeking
declaratory relief for lack of a justiciable controversy?
¶10 The remedial purpose of the Uniform Declaratory Judgments Act (Act), "to settle and
to afford relief from uncertainty and insecurity with respect to rights, status, and other
legal relations," is to be liberally construed. Section 27-8-102, MCA. Nevertheless, liberal
interpretation of the Act is tempered by the necessity that a justiciable controversy exist
before courts exercise jurisdiction. See Marbut v. Secretary of State (1988), 231 Mont.
131, 135, 752 P.2d 148, 150. Indeed, "this Court has on occasion refused to entertain a
declaratory judgment action on the ground that no controversy is pending which the
judgment would affect." Hardy v. Krutzfeldt (1983), 206 Mont. 521, 524, 672 P.2d 274,
275. Furthermore, § 27-8-206, MCA, of the Act authorizes a district court to "refuse to
render or enter a declaratory judgment or decree where such judgment or decree, if
rendered or entered, would not terminate the uncertainty or controversy giving rise to the
proceeding."
¶11 In granting MACO's motion to dismiss in the present case, the District Court
determined that a declaratory ruling as to Northfield's and Lloyds' duty to indemnify in the
early stages of the underlying federal litigation, and based on the current status of the
federal complaint, would be premature. Because a ruling that Northfield and Lloyds have
no duty to indemnify MACO might need to be modified later if liability ultimately were
imposed on MACO as a result of a settlement or judgment actually entered, the District
Court concluded that any declaratory relief granted in their favor would be "ineffectual
and mere speculation." As a result, the court further concluded no justiciable controversy
existed.
¶12 The test of whether a justiciable controversy exists contains three elements:
First, a justiciable controversy requires that parties have existing and genuine, as
distinguished from theoretical, rights or interest. Second, the controversy must be
one upon which the judgment of the court may effectively operate, as distinguished
from a debate or argument invoking a purely political, administrative, philosophical
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or academic conclusion. Third, [it] must be a controversy the judicial determination
of which will have the effect of a final judgment in law or decree in equity upon the
rights, status or legal relationships of one or more of the real parties in interest, or
lacking these qualities be of such overriding public moment as to constitute the legal
equivalent of all of them.
Brisendine, 253 Mont. at 364, 833 P.2d at 1020-21 (quoting Lee v. State (1981), 195 Mont. 1, 6, 635
P.2d 1282, 1284-85 (quoting Matter of Secret Grand Jury Inquiry (1976), 170 Mont. 354, 357, 553 P.2d
987, 990). We apply the justiciable controversy test to actions for declaratory judgment to prevent
courts from determining purely speculative or academic matters, entering anticipatory judgments,
providing for contingencies which may arise later, declaring social status, dealing with theoretical
problems, answering moot questions, or giving abstract or advisory opinions. See Brisendine, 253 Mont.
at 365, 833 P.2d at 1021; Montana Dept. of Nat. R. & C. v. Intake Water Co. (1976), 171 Mont. 416,
440, 558 P.2d 1110, 1123 (citations omitted).
¶13 In Brisendine, for example, a denturist sought a judicial declaration that he was not
prohibited from entering into a professional relationship with a dentist while the issue was
still pending before the Board of Dentistry. Brisendine, 253 Mont. at 362-63, 833 P.2d at
1019-20. We upheld the district court's determination that no justiciable controversy
existed because the complaint lacked specificity regarding his proposed business
association and because Brisendine had not exhausted his administrative remedies. We
determined that an action for declaratory judgment while the underlying controversy was
still pending before an administrative board was premature and would serve only as an
impermissible advisory opinion. Brisendine, 253 Mont. at 365, 833 P.2d at 1021.
¶14 Applying the justiciable controversy test to the present case, Northfield and Lloyds do
not have an existing and genuine interest at stake at this time, even under the broad
language of the Act. Northfield and Lloyds seek a declaration that they have no duty to
indemnify MACO pursuant to the secondary Policy, even though the record fails to
establish anything more than a hypothetical controversy regarding indemnification. While
it is true that § 27-8-202, MCA, specifically affords any person whose rights, status or
other legal relations are affected by a contract the right to have any question of
construction or validity of such a contract determined under the Act, a justiciable
controversy cannot exist based on hypothetical facts and abstract propositions. Hardy, 206
Mont. at 525, 672 P.2d at 276.
¶15 In Hardy, the plaintiffs sought a judicial declaration that several preemptive rights of
first refusal pertaining to real property were unreasonable restraints on alienation. Hardy,
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206 Mont. at 523, 672 P.2d at 275. We held that no justiciable controversy existed because
the record did not reflect an intent by any party to sell property outside the first refusal
clause; nor was any third party seeking relief from the clause.
No litigant before us is in immediate danger of sustaining direct injury from the pre-
emptive clause. Therefore we do not have a justiciable controversy over which the
judicial power to determine real controversies may be exercised. Broad language in
the Uniform Declaratory Judgments Act, section[s] 27-8-101, et seq., MCA, may
not be used as a platform for courts in this state to plunge into indefinite amorphous
ponds of contract interpretation.
Hardy, 206 Mont. at 525, 672 P.2d at 276.
¶16 Similarly here, Northfield and Lloyds can claim no immediate danger of direct injury
from the indemnification provisions of the Policy. First, MACO has made no formal
request for indemnification. In this regard, Northfield and Lloyds contend that a justiciable
controversy exists because MACO forwarded them the Doe complaint, thereby implicitly
claiming a right of indemnification. However, putting a secondary insurer on notice of a
lawsuit does not constitute a claim for indemnification. Thus, any determination of
Northfield's and Lloyds' duty to indemnify would require us to speculate that MACO will
eventually seek indemnification.
¶17 Moreover, MACO has not exhausted its self-insured retention funds vis-a-vis the
federal litigation. Consequently, while the parties advance opposing arguments on whether
the duty to indemnify arises when a complaint is filed or when a final settlement or
judgment is entered, we need not resolve that question here. A secondary insurer's duty to
indemnify cannot be said to exist if primary coverage has not been exhausted. See 16
Ronald A. Anderson, Couch on Insurance 2d § 62:41, at 55-56 (rev. ed. 1999 Supp.).
Thus, a final settlement or adjudication of the underlying federal case within MACO's
primary coverage funds would render any determination as to Northfield's and Lloyds'
duty to indemnify moot. Similarly, if the underlying federal case is adjudicated in favor of
MACO's insureds, no liability will exist on which indemnification could be sought. In that
event, any determination as to Northfield's and Lloyds' duty to indemnify via this
declaratory relief action also would be moot.
¶18 The judicial determination Northfield and Lloyds seek involves a contractual duty
which has not yet arisen and which may, in fact, never arise. A determination of the issue,
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therefore, would constitute an advisory opinion and courts have no jurisdiction to issue
such opinions. See Brisendine, 253 Mont. at 365, 833 P.2d at 1021; Hardy, 206 Mont. at
524, 672 P.2d at 275.
¶19 Generally, a justiciable controversy also must be a controversy on which a judicial
determination will have the effect of a final judgment regarding the rights, status or legal
relations of one or more of the parties. Brisendine, 253 Mont. at 364, 833 P.2d at 1021.
The declaratory relief Northfield and Lloyds seek here regarding their indemnification
obligations under the Policy does not satisfy this standard. The underlying federal case
which is the subject of any potential indemnification under the Policy has yet to be settled
or tried. Assuming arguendo that coverage and indemnification under the Policy are
precluded on the facts alleged in the federal complaint, the plaintiffs in that action could
still amend their complaint to add claims and legal theories which would trigger coverage.
In addition, facts may still emerge during the course of the litigation which would give rise
to Northfield's and Lloyds' duty to indemnify MACO under the Policy. Either event would
nullify any declaratory judgment that Northfield and Lloyds have no duty to indemnify.
As a result, either event would require the District Court to amend or withdraw the
declaratory judgment.
¶20 Notwithstanding, Northfield and Lloyds contend that declaratory judgment is
appropriate because all the federal claims in the underlying case arise from alleged
intentional acts of sexual abuse. They posit that, because Montana law recognizes the
validity of both sexual abuse exclusions and intentional act exclusions as contained in the
Policy, MACO can obtain indemnification as a result of the federal litigation under no set
of facts nor under any legal theory ultimately pled or moved. As discussed above,
however, it would be premature at this stage in the underlying federal litigation to
determine conclusively that any claims upon which the plaintiffs there might prevail arise
from conduct which would preclude coverage under the Policy. The underlying federal
record contains only unproven, and perhaps incomplete, allegations of fact.
¶21 In addition and importantly, the cases Northfield and Lloyds cite-but do not analyze or
discuss-do not support their position. For example, in New Hampshire Ins. Group v.
Strecker, an insured sought defense and indemnification pursuant to an umbrella
commercial liability policy when he was named as a defendant in a civil suit after pleading
guilty to three counts of felony sexual assault of his daughter. New Hampshire Ins. Group
v. Strecker (1990), 244 Mont. 478, 798 P.2d 130. The insurer filed an action for
declaratory judgment that policy exclusions for willful violation of a statute and for
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intentional acts precluded coverage. We upheld the district court's declaratory judgment in
favor of the insurer after concluding that the undisputed facts established that the insured
intentionally molested his daughter. New Hampshire Ins., 244 Mont. at 479-80, 798 P.2d
at 130-32.
¶22 Similarly, in Farmers Union Mut. Ins. v. Kienenberger, we upheld a declaratory
judgment that an insurance company had no duty to defend or indemnify its insured in a
civil suit filed against the insured after the insured's 13-year-old son pled guilty to sexual
intercourse without consent. Farmers Union Mut. Ins. v. Kienenberger (1993), 257 Mont.
107, 108-09, 847 P.2d 1360, 1360-61. There again, we were willing to interpret and apply
an intentional act policy exclusion only after first concluding that the relevant underlying
fact-that the insured committed an intentional crime-was undisputed. Farmers Union, 257
Mont. at 109, 847 P.2d at 1360-61.
¶23 In contrast to these cases cited by Northfield and Lloyds, the underlying facts in the
present case are disputed and the underlying litigation has not been finally adjudicated or
settled. It simply is not appropriate to determine whether the conduct of the insureds in the
present case falls within the exclusions of the Policy prior to a determination or stipulation
as to the underlying facts, and the cases relied upon by Northfield and Lloyds do not
suggest otherwise.
¶24 Northfield and Lloyds also rely on Ridley for the proposition that the declaratory
judgment they seek need not act as a final resolution of all issues between them and
MACO. In Ridley, we construed the plain language §§ 27-8-201 and 27-8-202, MCA,
determining that "it is not a basis for denying declaratory relief that all of the 'rights,
status, or other legal relations' of the parties cannot be decided in the same proceeding."
Ridley, 286 Mont. at 331, 951 P.2d at 990. However, while Northfield's and Lloyds'
interpretation of Ridley is correct, Ridley does not cure the lack of a justiciable controversy
in the present case.
¶25 In Ridley, a tortfeasor's insurer refused to pay any medical expenses to a third-party
tort victim prior to final settlement of his claims, even though the insurer had admitted
ninety percent liability. Consequently, Ridley sought a declaration that the insurer was
obligated to pay his medical expenses pursuant to § 33-18-201, MCA, of the Montana
Unfair Trade Practices Act (UTPA). Ridley, 286 Mont. at 327-28, 951 P.2d at 988-89. The
district court dismissed the action, in part because the insurer contested the extent of the
causal relationship between the accident and Ridley's injures. It determined that a
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declaratory judgment was not appropriate because the judgment would not resolve all
issues between the parties and, therefore, would not have the effect of final adjudication.
Ridley, 286 Mont. at 329-30, 951 P.2d at 989-90. We reversed on the basis that the Act
does not require a party seeking declaratory judgment to establish that the relief sought
will resolve all issues between the parties before he or she is entitled to declaratory relief.
Ridley, 286 Mont. at 331-32, 951 P.2d at 991. See also § 27-8-202, MCA.
¶26 Here, unlike in Ridley, the District Court did not dismiss Northfield's and Lloyds'
declaratory action on the grounds that a declaratory judgment would not resolve all issues
between the parties. It dismissed the action because any relief granted would be mere
speculation and because subsequent proceedings in the federal litigation might require any
declaratory judgment rendered now to be modified later.
¶27 Moreover, the essential fact necessary to the declaratory judgment in Ridley-namely
that the insured was at least ninety percent at fault for the accident-was admitted by the
insurer in that case, and the primary remaining factual issue was the causal relationship
between the accident and the extent of the victim's injuries. Ridley, 286 Mont. at 328-29,
951 P.2d at 988-89. The legal issue presented for declaratory judgment-whether the UTPA
required the insurer to pay the victim's medical expenses in advance of a full and final
settlement of all his claims-was separate from, and would not be affected by, a final
resolution of the liability issue. Consequently, the controversy was one on which the
judgment of the court could effectively operate. See Brisendine, 253 Mont. at 365, 833
P.2d at 1021. Thus, while a declaratory judgment need not resolve all issues between the
parties, it must resolve those issues addressed in a manner that will have the effect of a
final adjudication. Cf. Ridley, 286 Mont. at 331, 951 P.2d at 990; and Brisendine, 253
Mont. at 364, 833 P.2d at 1020-21.
¶28 Here, Northfield and Lloyds seek a declaratory judgment as to their duty to indemnify
under the Policy at some future time which might never arrive and on the basis of largely
disputed factual allegations which may yet be modified and legal theories which may yet
change. The judicial determination Northfield and Lloyds seek would serve only as
speculative advice, subject to possible amendment or nullification upon final resolution of
the underlying federal case; it would not act as a final adjudication on the indemnification
issue. The justiciable controversy test is designed to prevent judgments from resting on
such shifting sands.
¶29 We hold that the District Court correctly concluded that no justiciable controversy
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exists. As a result, we further hold that the court did not abuse its discretion in dismissing
Northfield's and Lloyds' complaint for declaratory judgment.
¶30 Affirmed.
/S/ KARLA M. GRAY
We concur:
/S/ J. A. TURNAGE
/S/ WILLIAM E. HUNT, SR.
/S/ JAMES C. NELSON
/S/ JIM REGNIER
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