Fire Ins Exchange v. Oltmanns, 2018 UT 10

Background

In 2006 Oltmanns operated a Honda F-12 Aquatrax personal watercraft; his brother-in-law was injured and sued him. Oltmanns tendered defense to his homeowner insurer, Fire Insurance Exchange.
The policy excluded liability for injuries resulting from "jet skis and jet sleds" and "any other watercraft" meeting certain power/size thresholds; applicability to an Aquatrax was disputed.
Fire Insurance investigated, obtained outside counsel coverage advice, and filed a declaratory judgment action rather than immediately denying coverage or assuming defense; outside counsel recommended filing because duty to defend is broader than duty to indemnify and settlement risks existed.
The district court granted summary judgment for Fire Insurance; the Utah Court of Appeals reversed as to coverage (finding “jet ski” ambiguous); this Court granted certiorari and ultimately affirmed the court of appeals on the narrow ground that the coverage question was "fairly debatable."
Oltmanns counterclaimed seeking attorney fees and bad-faith damages for Fire Insurance’s filing of the declaratory action and for refusing to defend; the courts below and this Court rejected those claims because the coverage issue was fairly debatable and Fire Insurance reasonably relied on counsel.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether insurer breached implied duty/good faith by filing declaratory judgment instead of defending	Oltmanns: the "jet ski" exclusion clearly did not cover an Aquatrax, so coverage question was not "fairly debatable"; filing suit was bad faith and warrants attorney fees	Fire Ins.: reasonable to seek declaratory relief when coverage is uncertain; relied on outside counsel; question was fairly debatable	Court: Coverage was "fairly debatable," so no bad-faith award; summary judgment for insurer affirmed
Whether insured can recover attorney fees for declaratory judgment action	Oltmanns: seeks fees as damages for insurer's alleged bad faith litigation	Fire Ins.: fees unavailable absent statute/contract or a finding of bad faith/stubborn litigiousness; insurer had right to seek declaratory relief	Court: Fees denied—declaratory action was permissible and not shown to be in bad faith; Oltmanns also waived parts of this claim
Whether insurer unreasonably relied on outside counsel	Oltmanns: outside counsel’s opinion was patently flawed, so reliance was unreasonable	Fire Ins.: reasonable to rely on qualified outside counsel during investigation	Court: Reasonable reliance on outside counsel is acceptable; claim fails
Whether insurer breached duty to defend by declining to assume defense during coverage dispute	Oltmanns: insurer should have defended while disputing coverage	Fire Ins.: entitled to seek declaratory judgment; no duty to defend if there is no potential liability or when seeking declaratory relief is warranted	Court: Oltmanns failed to preserve this argument in opposition to summary judgment; not decided on the merits here (waived)

Key Cases Cited

Orvis v. Johnson, 177 P.3d 600 (Utah 2008) (standard of review for court of appeals decisions)
Torian v. Craig, 289 P.3d 479 (Utah 2012) (appellate review and summary judgment correctness)
Farmers Ins. Exch. v. Call, 712 P.2d 231 (Utah 1985) (insurer entitled to seek declaratory judgment on coverage)
Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985) (distinguishing first-party and third-party duties; insurer's fiduciary duties in third-party context)
Black v. Allstate Ins. Co., 100 P.3d 1163 (Utah 2004) (insurer must diligently investigate and reasonably evaluate third-party claims)
Campbell v. State Farm Mut. Auto Ins. Co., 65 P.3d 1134 (Utah 2001) (third-party duties can give rise to tort liability and punitive damages)
Deseret Fed. Sav. & Loan Ass'n v. U.S. Fid. & Guar. Co., 714 P.2d 1143 (Utah 1986) (duty to defend is broader than duty to indemnify)