This appeal involves the scope of an insurance company's duty to defend under a debt collector's professional liability insurance policy against an action brought by the state under the Alaska Unfair Trade Practices and Consumer Protection Act. AS 45.50.471 — AS 45.50.561. Also at issue is whether, in the event no duty is found, the insurance company is estopped from denying coverage.
The facts are undisputed. On March 17, 1977, the attorney general issued a complaint against O'Neill Investigations, Inc., a debt collection agency, alleging numerous violations of the Consumer Protection Act and seeking injunctive relief, civil penalties, and an order "for restoration to individuals of monies or property acquired by defendants as the result of conduct complained of."
Initially O'Neill contends that the trial court improperly resolved material issues of fact in granting summary judgment in favor of Employers. There is no merit to
I. THE INSURANCE CONTRACT
O'Neill's main objection on appeal is with the trial court's interpretation of the insurance contract as providing no coverage, and thus no duty to defend in the state's suit against O'Neill. An insurer is obligated to provide a defense whenever the allegations in the complaint state facts which create an action within, or potentially within, the ambit of protection promised the policyholder. Afcan v. Mutual Fire, Marine & Inland Insurance Co., 595 P.2d 638, 645 (Alaska 1979); Theodore v. Zurich General Accident & Liability Insurance Co., 364 P.2d 51, 55 (Alaska 1961). Thus, the scope of an insurer's duty to defend is determined by construing the terms of the insurance contract in reference to the allegations in the complaint. Id.; 7C J. Appleman, Insurance Law and Practice § 4683, at 50 (1979). The defense provision of the liability insurance policy purchased by O'Neill from Employers provides in relevant part:
The state's complaint charges O'Neill with engaging in a course of unfair and deceptive trade practices designed to collect payments from alleged debtors. The proscribed acts pleaded include the making of various misrepresentations to alleged debtors, threatening alleged debtors with exposing their debts to employers and business associates, telephoning employers of alleged debtors before entry of judgment, and impersonating law enforcement officers. In its complaint, the state seeks an injunction against the alleged unlawful practices,
Employers has consistently argued, both before the superior court and this court, that it has no duty under the policy to defend O'Neill against the state's suit since the complaint does not allege a "negligent act, error, or omission" or "seek damages."
O'Neill does not argue that the policy covers claims for injunctive relief or civil penalties, but contends that the state's prayer for restoration of monies to injured individuals brings the action within the coverage of the policy. Relying heavily on the oft-stated principle that ambiguities in an insurance contract must be construed in favor of coverage,
This is the first case in Alaska concerning the scope of an insurance company's duty to defend under a professional liability insurance policy against a suit brought by the state under the Consumer Protection Act. Two courts in other jurisdictions which have addressed this or a closely related question have found no coverage to exist under similar defense provisions. The Washington Supreme Court held that an insurer was not obliged to defend against a suit brought by the attorney general against an automobile dealer for violations of Washington's Consumer Protection Act under a policy which provided that the insurer would defend any suit "seeking damages for [unfair competition], even if such suit is groundless, false or fraudulent." Seaboard Surety Co. v. Ralph Williams' Northwest Chrysler Plymouth, Inc., 81 Wn.2d 740, 504 P.2d 1139, 1140 (1973). The court concluded that the state's complaint for injunctive relief, civil penalties and "such additional orders or judgments as may be necessary to restore to any person in interest any monies or property" acquired by violations of the Act, was not a suit "seeking damages" within the coverage of the policy. In Haines v. St. Paul Fire & Marine Insurance Co., 428 F.Supp. 435 (D.C.
Id. at 441.
O'Neill attempts to distinguish these cases on the ground that the government in both Ralph Williams' and Haines sought return to the status quo by restoring wrongfully withheld property to its rightful owners; whereas in the present case, O'Neill maintains, the state sought restoration of money which was legally owed by the debtors and passed on to the creditors, and thus was not wrongfully withheld. Accordingly O'Neill asserts that, unlike Ralph Williams' and Haines, the relief actually sought by the state here cannot properly be termed restitution, but is in fact "within the range of reasonable interpretations of which the word `damages' is susceptible."
While the state's claim for "restoration to individuals of monies or property acquired by the defendant" by its alleged wrongful practices may not be within a strict definition of restitution, we believe that it does not constitute a claim for damages. Since there is no contention that the debtors paid sums which are not owed to O'Neill's clients, any claim for damages would have to be based on a contention that the debtors were wrongfully embarrassed, their privacy wrongfully invaded, or similar tortious conduct. The complaint does not allege such torts, and the demand for return of the entire amount collected has no relationship to any such damages. We conclude that under the terms of the policy there was no coverage, and no duty to defend.
This conclusion, however, does not end our inquiry for, as O'Neill correctly maintains, language in an insurance policy should be interpreted as understood by reasonable laypersons and not according to the interpretation of sophisticated underwriters. See R. Keeton, Insurance Law § 6.3, at 351 (1971). Consistent with this principle, we have held that an insurance policy must be construed so as to "provide the coverage which a layperson would have reasonably expected, given a lay interpretation of the policy language." Stordahl v. Government Employees Insurance Co., 564 P.2d 63, 65-66 (Alaska 1977). Accord, United States Fire Insurance Co. v. Colver, 600 P.2d 1, 3 (Alaska 1979); Hahn v. Alaska Title Guaranty Co., 557 P.2d 143, 145 n. 5 (Alaska 1976); Continental Insurance Co. v. Bussell, 498 P.2d 706, 710 (Alaska 1972). We recognize
The policy viewed in its entirety
In addition, the deductible provisions apply to individual claims. We believe that the average insured reading these provisions would expect to be protected against liability arising out of claims by individual debtors alleging tortious misconduct on the part of O'Neill's employees. The state's suit, although based on a series of individual acts of employee misconduct which allegedly constitute unfair trade practices, is of a different nature than an individual tort claim; it is primarily an injunctive action against a deceptive course of conduct on the part of O'Neill.
504 P.2d at 1143.
Moreover, the exclusions are such as to put the insured on notice that this type of suit by the state does not come within the coverage. The exclusions include the following provisions:
We do not believe that a reasonable lay interpretation of the Employers policy would encompass coverage for this type of action, and, therefore, find no ambiguity.
Alternatively, O'Neill argues that regardless of whether the policy is ambiguous, as an adhesion contract it must be interpreted so as to effectuate the reasonable expectations of the parties. Because of the inherent disparity in bargaining power between the insured and insurer, we have applied a more flexible approach to contract interpretation in the context of insurance law. Thus, we will honor the expectations of the parties as to coverage when those expectations are objectively reasonable. See Wright v. Vickaryous, 598 P.2d 490, 497 (Alaska 1979); Guin v. Ha, 591 P.2d 1281, 1284-85 (Alaska 1979); Stordahl v. Government Employees Insurance Co., 564 P.2d 63, 66 (Alaska 1977); INA Life Insurance Co. v. Brundin, 533 P.2d 236, 241-42 (Alaska 1975); R. Keeton, Insurance Law § 6.3, at 351-57 (1971). This principle reflects our awareness that long and complicated insurance policies are not always thoroughly examined by policyholders and that a "lay person's expectation of insurance coverage ... [is] formed by many factors besides the language of the policies themselves." INA Life Insurance Co. v. Brundin, 533 P.2d 236, 242 (Alaska 1975); see also R. Keeton, Insurance Law § 6.3, at 351-52 (1971). For example, a policyholder may be led to expect coverage by advertisements or oral representations of an insurance salesperson. 533 P.2d at 242.
A finding of coverage beyond the clear terms of the policy will not be made, however, on the bare allegations of the policyholder that it expected such coverage. The insured must demonstrate through extrinsic evidence that its expectation of coverage was based on specific facts which make these expectations reasonable. In the present case, O'Neill has offered no extrinsic evidence in support of its alleged expectation of coverage. In the absence of any evidence to the contrary, we have no reason to believe that O'Neill expected, or even contemplated, that its liability policy would cover claims such as those brought by the state. Therefore, we affirm the superior court's interpretation of the policy as providing no coverage and no duty to defend.
O'Neill next argues that in the event no coverage is found under the policy, Employers should be estopped to deny its duty to defend by its initial offer to pay fifty percent of O'Neill's defense costs and its failure to deny total coverage within a reasonable time.
Applying Alaska law, the Ninth Circuit Court of Appeals in Bequette v. National Insurance Underwriters, Inc., 429 F.2d 896 (9th Cir.1970), defined the four necessary elements of estoppel:
429 F.2d at 900. Quoting California State Board of Equalization v. Coast Radio, 228 F.2d 520 (9th Cir.1955). Most courts apply the doctrine of estoppel to extend insurance coverage where none exists, when the insurer, with knowledge of the facts and without reservation of rights, assumes an obligation to defend and later disclaims it.
O'Neill urges that prejudice should be presumed here by virtue of Employers' initial acceptance of a partial duty to defend. Some courts presume prejudice from an insurer's assumption of control of the defense. Annot., 38 A.L.R.2d 1148, 1160. See also Fidelity & Casualty Co. of New York v. Riley, 380 F.2d 153 (5th Cir.1967); Pendleton v. Pan American Fire and Casualty Co., 317 F.2d 96 (10th Cir.1963); Vornado, Inc. v. Liberty Mutual Insurance Co., 106 N.J.Super. 111, 254 A.2d 325, 328 (1969). Most of the courts which have taken this position have dealt with factual situations in which the insurance company assumed full control of the defense without making a reservation of its rights, employed its own attorneys, and then disclaimed coverage after judgment was taken against the insured. In this situation, the court presumes prejudice on the theory that evidence of prejudice would be in the hands of the insurer and that it would be futile to attempt to prove or disprove that the insured could have better investigated, negotiated or defended.
The present case is distinguishable in many ways from the standard estoppel situation. First, Employers never actually assumed an obligation to provide full defense coverage to O'Neill, nor did it even commence fulfilling its partial acceptance of the defense. O'Neill waited over four months to reject Employers' fifty percent offer and knew that the matter of coverage was unresolved. Thus, it cannot be said that O'Neill desired or relied in good faith on the offer of a fifty percent defense.
Second, O'Neill at all times retained its own attorney and never relinquished control of its own defense. In those cases where the insured has been represented by its own attorney, courts have generally refused to apply estoppel on the grounds that there could be no prejudice. For instance, in Thompson v. Roadway Express, Inc., 179 F.Supp. 254 (E.D.Mich. 1959), the court found that no prejudice resulted from the insurer's unreserved assumption of defense and subsequent denial of liability on grounds of noncoverage where the insured's personal attorneys conducted every phase of the litigation, with the exception of filing an answer. Another example is provided by American Legion Tri-County Memorial Hospital v. St. Paul Fire and Marine Insurance Co., 106 N.J.Super. 393, 256 A.2d 57 (1969). There, in a factually similar situation, the court rejected the insured's estoppel theory. There a private action seeking an injunction and damages was
Here, O'Neill was represented in the state's action by attorneys of its own choice. Thus it cannot allege that it was denied the valuable right to select and retain its own counsel. Moreover, these attorneys are the same attorneys who represent O'Neill in this action. It cannot be asserted that there was a conflict of interest so that the attorneys were not adequately representing O'Neill's interests.
R.A. Hanson Co., Inc. v. Aetna Casualty & Surety Co., 15 Wn.App. 608, 550 P.2d 701, 703-04 (1976). In the present case, O'Neill has not shown any specific prejudice. Rather, it makes general allegations that it has been deprived of control and a firm basis for deciding what course of action to take in the underlying action.
Having concluded that Employers has no contractual duty to defend under the liability insurance policy, and is not estopped from denying an obligation to defend, we affirm the superior court's entry of summary judgment in favor of Employers.
MATTHEWS, Justice, dissenting.
The state has sued O'Neill for "unfair and/or deceptive acts or practices" under the Alaska Unfair Trade Practices and Consumer Protection Act, AS 45.50.471-.561. The relief sought by the state includes, among other things, "restoration to individuals of monies or property acquired by [O'Neill] as the result of conduct complained of herein." In my opinion, this aspect of the state's claim falls within the coverage afforded under the insurance policy in question and therefore the appellee had the obligation to defend O'Neill.
The state's claim falls within the above language. Misrepresentation is an important aspect of the state's claim. State v. O'Neill Investigations, Inc., 609 P.2d 520, 535, 536 (Alaska 1980). Misrepresentations are acts or omissions. Further, the misrepresentations alleged by the state, to be actionable, need only be negligent. "Intent to deceive need not be proved. All that is required is a showing that the acts and practices were capable of being interpreted in a misleading way." Id. at 535 (footnotes omitted). Thus the state's claim is, in part, one for negligent acts or omissions. Moreover, the policy covers invasions of privacy. Among the acts with which O'Neill is being charged are making telephone calls to employers and other third parties standing in a close relationship to debtors concerning their debts. We have noted that such acts may give rise to liability on the state's complaint. Id. at 536. The essence of the wrong for which such liability is imposed is, it seems to me, invasion of privacy. This aspect of the state's claim is, therefore, also covered by the policy.
The majority opinion does not take direct issue with the foregoing conclusions. Instead, it argues that the "restoration of monies" which the state has sued for is somehow different from "damages" as that term is used in the insuring agreement. We have held that an insurance policy must be construed to "provide the coverage which a layperson would have reasonably expected, given a lay interpretation of the policy language." Stordahl v. Government Employees Insurance Co., 564 P.2d 63, 66 (Alaska 1977). In my view, it is entirely unrealistic to suppose that a layperson would reasonably expect that damages do not include the restoration of monies.
A layperson interested in determining whether the term "damages" encompassed "restoration to individuals of monies" might reasonably refer to a standard dictionary. Webster's New International Dictionary defines "damages" in terms that clearly include what the state seeks in this case: "compensation or satisfaction imposed by law for a wrong or injury caused by a violation of a legal right."
Having concluded that some of the state's claims are within the liability coverage clause of the insurance policy, it is necessary to turn to the exclusions portion of the policy to see whether there is an applicable exclusion. The majority opinion mentions two, but does no more than set them out and conclude with no discussion of them that they bar coverage. In fact, neither exclusion applies.
The second exclusion mentioned is an exclusion as to "liability arising out of the wilful violations of any statute applicable to the Insured Member as a Collection Agency or Credit Bureau...." Again, this exclusion does not bar coverage because O'Neill is not being charged only with willful violations. Id. Indeed, the state's complaint contains no allegation of willfulness with respect to any of the alleged misrepresentations made by O'Neill.
The majority opinion suggests that it is important that this suit was brought by the state rather than by a private individual, without specifying how that fact relates either to any condition of coverage or to any exclusion in the policy. Under neither the coverage conditions nor the exclusions are suits brought by government agencies or class actions precluded. Likewise, nothing in the deductible clause of the policy states that such clause is inapplicable to claims asserted by an entity in a representative capacity.
For the foregoing reasons, I dissent.