CITY OF MYRTLE POINT v. PACIFIC INDEMNITY COMPANY

EAST, District Judge.

ACTIONS AGAINST CITY

On December 14, 1960, Agnes E. Estelle (Agnes) instituted her action in the Circuit Court of the State of Oregon for Coos County against the City of Myrtle Point, a municipal corporation of the State of Oregon (City), seeking the recovery of damages for personal injuries. In the first count of the complaint Agnes alleged, inter alia:

and as a proximate result thereof she suffered injury to her person.

In the second count of the complaint, Agnes alleged that her personal injuries were proximately caused by "the active wrongdoing and negligence of" City of its operation of the sewage disposal plant in one or more of the following particulars:

At the same time, Agnes and her husband Vernon, as owners of the mentioned home property, instituted a separate action in the same court to recover damages to and depreciated value of their home property. They alleged in two separate counts the identical grounds of causation.

CONTRACT OF INSURANCE

Throughout the critical times, plaintiff City held a public liability insurance policy with defendant Pacific Indemnity Company (Pacific) and it appears from the agreed statement of facts of the pretrial order herein that by virtue of such public liability insurance Pacific agreed as follows:

PACIFIC'S DEFENSE

City timely tendered to Pacific the defense of the two Estelle actions, and on December 20, 1960, Pacific referred the file to its attorneys at Eugene, Oregon, who immediately entered upon the preparation of the defenses, and made timely appearances for City in each case.

I find from the evidence adduced herein that:

1) On June 19, 1961, Pacific's attorneys took discovery depositions of Agnes and Vernon at Eugene (a place of office of their attorneys) under stipulation for the use of the depositions in either or both of the actions;

2) Agnes' action reached issue and a setting for trial first, and Pacific's counsel entered upon the last days' preparation for trial and viewed the area of the disposal plant for the first time;

3) It was at this point that Pacific first questioned coverage under the policy as to either of the actions, as counsel then "decided the problem apparently to be one of a continuing situation," further, "that one action would not solve the problem and City would probably need an easement for fume dispersion;"

4) After the selection of the jury in Agnes' cause, Pacific settled her claim for $3,000 and that action was dismissed;

I further find that:

5) During negotiations for settlement of Agnes' claim, her counsel offered Pacific a "package deal" to settle both actions for $6,000, and Pacific's counsel conveyed this offer to City's attorney in this substance:

and advised City that Pacific would in any event, as it did, settle Agnes' personal injury claim for $3,000 but would deny liability on the property damage action, since damage alleged therein was not "caused by accident";

6) City refused to contribute $3,000 to effectuate the "package deal" and demanded that Pacific defend the real property damage action;

7) On July 24, 1961, Pacific's attorney advised City by letter, through its attorney:

On August 2, 1961, Pacific advised City by letter:

CITY'S DEFENSE

8) Agnes' and Vernon's amended complaint, pursuant to an order of the court granted upon motion of Pacific's attorneys that the complaint be made more definite and certain, added the metes and bounds description of their property and an allegation that the property, in addition to residential use, was used by them "for commercial purposes and rentals," and raised their demand for damages from $10,000 to $20,000;

9) City, under protest, assumed the defense of this amended complaint and cause, and on November 6, 1961, four days prior to trial, settled the action of Agnes and Vernon by the payment of $15,000, of which $5,000 was paid "in full and complete compromise and settlement of the litigation," and the sum of $10,000 for the lease-purchase of the real property involved; and

10) City incurred attorney's fees in the amount of $1,000 and appraiser's fees of $200 incident to the defense of the case and the transaction.

City contends in the pretrial order, inter alia, that the

and, further, that by reason of the part that Pacific played in the defense of Agnes' action and to the extent it defended the real property damage action, City was

At the outset, it is manifest that Pacific's contractual duty under its policy with City in connection with the real property damage action is two-phased—"to pay" under (b) and "to defend" under (c) (i) above, and the answer whether Pacific is liable under either or both of these duties depends "upon different considerations," respectively. Journal Publishing Co. v. General Casualty Co., 9 Cir., 210 F.2d 202, 208. We have no way of knowing what Agnes' and Vernon's proof as to causation would have ultimately been — whether they would have recovered upon the nuisance theory of the first count or upon the negligent mishap theory of the second count, as the cause of liability, if any, was and never will be tried. However, we do know from the evidence adduced at the hearing of this cause that the sewage disposal plant did suffer an explosion during the fall of 1958 which disrupted the plant's normal operation, and further, that during 1959 pumping and deodorizing facilities were overtaxed. In any event, and for the reasons hereinafter stated, it is not necessary for this court to determine either

1) Whether the alleged damages to the real property of Agnes and Vernon were "caused by accident" or

2) Whether Pacific is estopped to deny coverage under its promise "to pay" under (b) of its policy, as contended.

PACIFIC'S DUTY TO DEFEND

We turn now to Pacific's potential liability under its promise to "defend" (c) (i) above. This Circuit approves of the "view" of the Second Circuit that:

It seems that under this view and rule the insurer would be obliged to defend the suit "until it could confine the claim to a recovery that the policy did not cover." Journal, supra, p. 208.

Without oversimplyfying the judicial test of whether a given result is alleged to have been "caused by accident," it does seem safe to say that:

This could well be the situation complained of in count one of Agnes' and Vernon's complaint.

On the other hand, I suggest that negligent acts such as using malfunctioning or inadequate apparatus in a sewage disposal plant, in absence of intent to cause harm resulting in damage, do not in and of themselves negate a causation by accident. And, further, the element of an unforeseen or unexpected damage or consequence, as distinguished from a normal and probable consequence, from a negligent act is cardinal in describing a causation by accident. Kuckenberg, supra; Bundy Tubing Co. v. Royal Indemnity Co., 298 F.2d 151 (6th Cir. 1962); Hauenstein v. St. Paul, 242 Minn. 354, 62 N.W.2d 122.

Such negligent and unintentional acts with unforeseeable consequences on the part of City are well pleaded and alleged in count two of Agnes' and Vernon's amended complaint, i. e., malfunctioning of equipment; failure to use equipment efficiently. Of most importance is the fact that the alleged damage suffered was allegedly due to maloperation of the disposal plant rather than from "a normal and probable consequence of (owning and maintaining a sewage disposal plant) as the (City) undertook," as was the situation in Kuckenberg, 226 F.2d p. 226.

These allegations of count two frame "issues *** of negligence" and "(do) not remove them from the category of accident."

It is now manifest that when faced with the allegations of count two, Pacific had the contractual duty to defend City against Agnes' and Vernon's action "until it could confine the claim to a recovery that the policy did not cover." This duty Pacific did not perform, and thereby breached its agreement to defend and must be held liable for City's resulting provable damage.

Pacific withdrew at its own risk, but, of course, City had the duty to use reasonable means to prevent default and mitigate its potential liability of $20,000, albeit on an alleged loss covered by the policy. This duty City did perform in good faith, at a cost to it of $1,000 for legal representation, and $5,000 for a compromise settlement in lieu of further litigation.

I now borrow this language from Employers Mutual, supra, 199 F.2d at p. 58:

I find from the testimony of Mr. F. C. Meldrum, City's attorney, that his charge of $1,000 for services rendered in taking over the defense of the action following the repudiation thereof by Pacific is reasonable and was necessary for City to incur.

Now, as the propriety and reasonableness of the $5,000 settlement — City was placed in an almost impossible situation in face of the $3,000 settlement for Agnes' injuries arising from identical alleged causation and being abandoned to its own defenses on the threshold of trial. Pacific and City had acknowledged the high probability of injury and City knew there had been actual prior mishap in operation and control at the plant. City surely had to anticipate that this prior operational mishap would be part of Agnes' and Vernon's proof and the probability of liability must have loomed very high. And, again in the language of Employers Mutual, supra, 199 F.2d at p. 60:

So, I venture that the past history of mishap and malfunctioning at the plant, the settlement with Agnes and the apparent temperament of Agnes and Vernon made this law action a veritable Sword of Damocles over City. I conclude that the pretrial settlement of a potent $20,000 claim for $5,000 under these allegations and these circumstances was not only with propriety, but prudent and provident. I hold it to be a reasonable expense of defense in lieu of an improvident indulgence of defending a law suit to a sought-for and hoped-for, but yet evasive defendant's verdict.

Counsel for City may present proposed findings, conclusions and judgment.