Fire Ins Exchange v. Oltmanns
2017 UT 81
| Utah | 2017Background
- In 2006 Oltmanns injured a third party while operating a Honda F-12 Aquatrax; the third party sued Oltmanns and Oltmanns tendered defense to his homeowner carrier, Fire Insurance Exchange.
- Fire Insurance investigated, obtained outside counsel coverage advice, and filed a declaratory judgment action disputing coverage under a policy exclusion for “jet skis”/personal watercraft rather than immediately defending.
- The district court granted summary judgment for Fire Insurance, but the Utah Court of Appeals reversed, concluding the exclusion was ambiguous and coverage applied; Fire Insurance then paid the policy limit to the claimant and paid defense fees in the underlying suit.
- Oltmanns counterclaimed seeking attorney fees and damages for bad faith, arguing the coverage question was not "fairly debatable" and the declaratory action (and refusal to defend) breached the insurer’s duties.
- The district court entered summary judgment for Fire Insurance on Oltmanns’s counterclaims; the court of appeals affirmed; the Utah Supreme Court granted certiorari and affirmed, holding Fire Insurance’s coverage position was fairly debatable and its conduct reasonable.
Issues
| Issue | Plaintiff's Argument (Oltmanns) | Defendant's Argument (Fire Ins.) | Held |
|---|---|---|---|
| Whether insurer breached implied covenant/good faith by filing declaratory judgment and denying defense | Insurer’s position that Aquatrax falls within “jet ski” exclusion was not fairly debatable, so filing DJ and refusing to defend was bad faith; seek attorney fees | Insurer had reasonable basis (outside counsel, usage evidence, generic reading of “jet ski”) and was entitled to seek declaratory relief; no bad faith | Held: No breach; coverage question was fairly debatable and DJ was permissible; no attorney fees awarded |
| Whether insurer may reasonably rely on outside counsel coverage opinion | Reliance on flawed outside counsel cannot excuse bad faith | Reliance on qualified outside counsel during thorough investigation is reasonable | Held: Reasonable to rely on outside counsel initially; not bad faith |
| Whether Oltmanns preserved a separate claim for breach of the duty to defend | Oltmanns argues insurer should have assumed defense pending coverage resolution | Insurer notes Oltmanns did not properly present the duty-to-defend issue in summary judgment opposition | Held: Duty-to-defend claim was not preserved for summary judgment review (waived) |
| Standard to evaluate insurer conduct in this context: "fairly debatable" vs. third-party reasonableness/fiduciary standard | "Fairly debatable" standard should control because parties litigated as first-party denial of coverage | Insurer argues its declaratory action was proper under third-party practice and statute | Held: Court affirms on "fairly debatable" ground (coverage fairly debatable). The majority declines to decide broader third-party framework here and flags questions for future cases; concurrence addresses third-party fiduciary framework but does not change result |
Key Cases Cited
- Farmers Ins. Exch. v. Call, 712 P.2d 231 (Utah 1985) (insurer entitled to seek declaratory judgment regarding defense/coverage)
- Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985) (insurer’s implied duty of good faith; heightened fiduciary-like duties in third-party cases)
- Black v. Allstate Ins. Co., 100 P.3d 1163 (Utah 2004) (insurer must act in good faith toward insured when processing third-party claims)
- Deseret Fed. Sav. & Loan Ass'n v. U.S. Fid. & Guar. Co., 714 P.2d 1143 (Utah 1986) (duty to defend arises when facts give potential for liability; insurer may seek declaratory relief when no potential liability)
- Campbell v. State Farm Mut. Auto Ins. Co., 65 P.3d 1134 (Utah 2001) (differences between first- and third-party duties; third-party breach can give rise to tort remedies)
- Fire Ins. Exch. v. Oltmanns, 370 P.3d 566 (Utah Ct. App. 2016) (court of appeals decision holding the exclusion ambiguous and coverage applied; appellate posture relevant to this appeal)