Peggy Troutt, Dba Little Joe's Tavern v. Colorado Western Insurance Company, Peggy Troutt, Dba Little Joe's Tavern,plaintiff-Appellant v. Colorado Western Insuran Cecompany

Citation: 246 F.3d 1150Docket: 99-35022

Court: Court of Appeals for the Ninth Circuit; April 2, 2001; Federal Appellate Court

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Colorado Western Insurance Company (CWIC) appeals a district court judgment affirming coverage under a policy it issued to Peggy Troutt, owner of Little Joe's Tavern, for injuries sustained by Terry Engstrand during a wood-splitting job for the tavern. Troutt cross-appeals, asserting that CWIC had no duty to defend her against Engstrand's lawsuit and did not breach their agreement by failing to investigate and settle the claim prior to trial. The incident, which occurred in October 1993, involved Engstrand suffering severe finger amputations while working with a team that included Lee Troutt and patrons of the tavern, who were reportedly promised free alcohol in exchange for their labor. 

There is conflicting testimony regarding alcohol consumption that day; CWIC claims only moderate drinking occurred, while Troutt asserts excessive consumption contributed to the accident. A week post-accident, Lee Troutt's statement did not attribute the incident to alcohol, and CWIC's investigation revealed no evidence linking alcohol to the accident, leading to a denial of coverage in June 1994. The Engstrands filed a personal injury lawsuit in June 1995, omitting any mention of alcohol in their complaint. However, deposition testimony from Vickie Engstrand, a bartender, indicated that Lee Troutt and another team member appeared intoxicated prior to the accident, and other witnesses confirmed that beer was consumed shortly before the incident occurred. The court affirmed CWIC's denial of coverage and Troutt's cross-appeal on all issues.

In March 1996, Troutt requested CWIC to defend her against the Engstrands' lawsuit, providing the complaint and her policy as evidence of coverage. CWIC denied the request, stating that the complaint lacked allegations of injury related to alcohol. Shortly thereafter, the Engstrands proposed a settlement of $150,000, the policy limit, which CWIC did not accept, leading to a trial in November 1996. During the trial, Troutt admitted liability, and the court awarded the Engstrands $1,154,262.29 after finding that the accident was partially caused by alcohol served at a tavern, where team members had consumed free drinks prior to the incident.

Following the judgment, Troutt filed a federal lawsuit against CWIC, seeking a declaration of coverage under her liquor liability policy, while the Engstrands initiated a similar suit. The cases were consolidated after CWIC removed the Engstrands' case to federal court. Troutt accused CWIC of breach of contract and bad faith under the Montana Unfair Trade Practices Act for not investigating the claim or providing a defense. Both parties moved for summary judgment, asserting that the state court judgment was binding; however, the district court denied these motions, stating that the critical issue—whether negligent alcohol service contributed to the accident—had not been litigated.

The district court ruled that CWIC's liquor policy was not ambiguous and was broader than the Montana Dram Shop Act, ultimately finding that the policy covered Troutt’s obligations from the Engstrand judgment. The court ruled in favor of CWIC on other issues. Both parties appealed the unfavorable outcomes, with factual findings subject to clear error review and legal conclusions reviewed de novo.

CWIC contends that the state court judgment in favor of the Engstrands precludes further litigation regarding Troutt's liability in the current federal court proceedings based on the doctrine of res judicata. CWIC asserts that since Troutt's liability was adjudicated in state court, all related issues are barred from being re-litigated. However, the argument conflates res judicata with collateral estoppel, as the former applies to the same cause of action while the latter pertains to issues resolved in different causes of action. 

Res judicata prevents parties from relitigating the same cause of action and applies only when the parties, subject matter, and issues are the same, which is not the case here since CWIC was not a party in the original suit. The causes of action differ significantly: the state court case was a personal injury tort, while the federal case involves a declaratory judgment regarding an insurance contract breach. Consequently, the first two elements necessary for res judicata do not apply.

Conversely, collateral estoppel, or issue preclusion, could apply, barring re-litigation of previously decided issues in a different cause of action. It requires that the same issue was decided in the prior case, a final judgment was rendered, and the party against whom it is asserted was involved in the earlier case. The identity of the issues is key, necessitating a comparison of pleadings, evidence, and circumstances from both actions to determine whether the same issue was litigated.

CWIC insured Troutt for liabilities resulting from alcohol-related incidents. The core issue is whether Engstrand's injury stemmed from the sale, service, or furnishing of alcohol and whether this issue was litigated and resolved in state court. Evidence is conflicting: the Engstrands' state court complaint did not mention alcohol; Troutt admitted liability early in the trial, limiting discussion on alcohol. However, depositions included inquiries about alcohol consumption, and the state court found that alcohol was consumed before the accident, linking it to Troutt's business practices. The court concluded that the accident partially arose from the tavern's alcohol service, suggesting the alcohol issue was litigated.

For collateral estoppel to apply, two criteria must be met: (1) the issue must have been effectively raised and developed in the trial, and (2) the opposing party must have had a full and fair opportunity to contest it. The alcohol issue failed the first criterion, as it wasn't adequately raised or addressed in pleadings or trial. Troutt's admission of liability hindered determining the issue as fully litigated on its merits.

Consequently, the collateral estoppel analysis indicates that while the alcohol consumption issue was litigated, it was not decided on its merits, allowing it to be revisited. CWIC's policy covers damages from liabilities linked to alcohol sales, and the Montana Dram Shop Act establishes standards for liability when furnishing alcohol, emphasizing the conditions under which a provider can be held liable for injuries related to alcohol consumption.

CWIC contends that Troutt's liability for an alcohol-related tort is contingent upon the Montana Dram Shop Act, asserting that if liability exists under the Act, coverage is provided by their policy; conversely, if no liability exists, there is no coverage. Troutt disputes this, maintaining that coverage is independent of the Act, a position supported by the trial judge's findings in the state court, which indicated that alcohol consumption by team members was a contributing factor to the accident. However, Troutt cannot invoke collateral estoppel against CWIC due to Montana law prohibiting offensive non-mutual collateral estoppel and because CWIC was not a party in the previous suit. The court clarifies that privity, which could allow such use, does not apply here as the interests of CWIC and Troutt in the prior suit were directly opposed. Despite this inability to use collateral estoppel, Troutt can reference the state court's findings to argue that CWIC's liquor liability insurance extends beyond the Act. The policy does not explicitly limit coverage to situations arising solely under the Act, which is evident as CWIC could have included such a limitation if intended. Therefore, the court interprets CWIC's policy to cover all liability connected to alcohol service, regardless of the Act, and any ambiguity in the policy language must be resolved in favor of Troutt. Troutt argues that the district court erred by not recognizing the ambiguity in the term "arising out of," which could encompass injuries connected to alcohol service, thus warranting summary judgment in Troutt's favor. CWIC counters that the case cited by Troutt is inapplicable as it pertains to a different phrasing.

CWIC's interpretation of the term "arising out of" in relation to Troutt's liability is supported by the Montana Supreme Court's recent extension of the Wendell analysis, indicating that the term is ambiguous in insurance contexts and must be construed in favor of the insured. Troutt argues that this term should mean "having a connection with," and while this interpretation is plausible and adopted in other contexts, it does not allow Troutt to reverse the district court's denial of her summary judgment motion. Troutt contends that since state court findings linked alcohol to the accident, CWIC should be liable under its liquor liability policy, but this assertion relies on offensive non-mutual collateral estoppel, which is prohibited in Montana. The district court's denial of Troutt's motion was appropriate as it only had access to the state court judgment at that time, without considering testimony regarding alcohol consumption. The timeline of events, including the investigation conducted by CWIC and the subsequent court proceedings, reveals that alcohol was not initially cited as a contributing factor in the accident. The court emphasized that any assessment of the insurer's conduct must be based on the circumstances at the time the insurer made its decisions, without hindsight bias.

Under Montana law, the duty to defend is dictated by the insurance policy's coverage. If a complaint does not allege facts that trigger coverage, there is no obligation to defend. In this case, the Engstrands' complaint did not mention alcohol, which aligned with CWIC's prior investigation that found no connection to alcohol in the accident. When CWIC received a request to defend from Troutt on March 5, 1996, it had already conducted a thorough investigation, including interviews and written statements, none of which indicated alcohol involvement. Although Vickie Engstrand later suggested possible alcohol involvement, this information was not conveyed to CWIC, nor did the Engstrands amend their complaint. The omission of such a significant detail was not merely an oversight. Given the findings from its investigation and the content of the complaint, CWIC reasonably concluded that no further investigation was warranted. Despite hindsight suggesting a potential error in judgment, CWIC's actions at the time of the defense request were justified, and thus it did not breach its duty to investigate or defend.

CWIC received the Engstrands' settlement offer without sufficient evidence indicating the accident involved alcohol, despite Vickie's deposition hinting at this possibility. Troutt presents three main arguments against CWIC: 1) CWIC allegedly violated a Montana statute by failing to negotiate a settlement in good faith, as liability appeared reasonably clear; 2) the district court's finding of coverage indicates CWIC's improper actions; and 3) CWIC misinterpreted its policy regarding the "arising out of" language, as evidenced by a subsequent ruling from the Wendell court. The ruling from the Montana Supreme Court acknowledged the ambiguity of CWIC's policy language, but this determination came after Troutt's contract with CWIC, making it unreasonable to hold CWIC liable for not foreseeing this ruling. CWIC's refusal to settle was primarily based on the absence of alcohol-related allegations at that time. Troutt's second argument relies on hindsight, as CWIC's belief that there was no coverage was reasonable at the time of the settlement offer. Furthermore, Troutt's first argument is intertwined with claims of CWIC's failure to defend her against the Engstrands, which were found to be without merit. Consequently, Troutt's tort claims fail due to CWIC's lack of liability. Under Montana law, attorneys' fees in declaratory judgment actions can only be awarded if an insurer breaches its duty to defend; since CWIC did not breach this duty, the district court properly denied Troutt's request for costs and fees. The district court's decision is therefore affirmed, with each party bearing its own appeal costs. Additionally, Montana law governs the application of res judicata and collateral estoppel in federal cases, and the court did not address whether the Montana Dram Shop Act preempts common law in this context.

Troutt's liquor liability policy raises questions about the waiver of her partial statutory immunity under Montana law, particularly referencing the case of Pablo v. Moore, which identifies the phrase "arising out of" as ambiguous. Circuit Judge B. Fletcher concurs with much of the majority's reasoning but dissents regarding the insurer's breach of duty to investigate and defend. The judge argues that Colorado Western Insurance Company (CWIC) failed to conduct a proper investigation concerning a claim made by a tavern where a man severely injured his fingers while chopping firewood. The incident occurred when Lee Troutt, acting as a lookout, mistakenly signaled the equipment operator, leading to the accident. 

CWIC assigned the claim investigation to Crawford and Company, specifically an adjuster, Charles Keady, who lacked experience with liquor liability policies. Keady did not receive the insurance policy or relevant coverage information, nor did he conduct a thorough investigation as mandated by Montana law, which requires insurers to investigate claims reasonably before denying them. Keady's investigation was inadequate, involving only three interviews, during which he gathered limited information about alcohol consumption on the day of the accident but failed to probe further into the specifics. The district court noted that Keady did not actively seek to uncover potential coverage for the claim.

The district court concluded that neither bar owner indicated that alcohol was a factor in the incident that caused injury, overlooking the fact that Peggy Troutt had filed a claim under a liquor liability policy, which implies that alcohol played a role. The court noted that there was substantial evidence linking alcohol to the events, but Keady's investigation failed to uncover this, as he neglected to interview key witnesses, including the injured party and the bartender on duty. The bartender could have provided critical information about Lee Troutt's intoxication and his behavior before the incident, as well as that of Gary Keeper, the front-end loader operator. The court criticized the majority opinion, arguing that Keady’s lack of thoroughness, not Lee and Peggy's cooperation, was to blame for the oversight. It emphasized that an insurance adjuster is obliged to prioritize the insured's interests and to conduct a comprehensive investigation, especially in cases involving alcohol-related incidents. Keady’s insufficient investigation led him to erroneously conclude that there was no coverage for the incident, despite the policy's relevance. Ultimately, had the insurance company performed an adequate investigation, it would have recognized the role of alcohol and would have been obligated to indemnify Troutt for the damages and defend against the lawsuit related to Engstrand’s injuries.

Insurers are obligated under Montana law (S 33-18-201(6)) to attempt in good faith to settle claims when liability is reasonably clear, regardless of whether the complaint explicitly addresses all relevant factors, such as the role of alcohol in an incident. The focus should be on the actions leading to insurance coverage rather than solely the complaint's language. The dissent argues that CWIC failed its responsibilities, which under Montana law entitles Troutt to attorney fees due to the insurer's breach of its duty to defend and settle. The dissent criticizes the majority's assessment of the initial investigation, asserting it encourages insurers to conduct inadequate investigations, ultimately disadvantaging claimants. It advocates for a policy shift that incentivizes thorough investigations by insurers to clarify indemnification and defense obligations early in the process, aligning with sound policy and Montana law (Mont. Code Ann. S 33-18-201(4)). The dissent notes that while other states have similar duties to investigate, Montana's statute is particularly comprehensive.