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Dep't. of Transportation v. State Farm Ins. Co. (5/16/97), 939 P 2d 788
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE OF ALASKA, DEPARTMENT )
OF TRANSPORTATION AND PUBLIC ) Supreme Court No. S-7513
) Superior Court No.
v. ) 3AN-94-11043 CI
STATE FARM FIRE AND CASUALTY ) O P I N I O N
COMPANY, an Illinois )
Appellee. ) [No. 4819 - May 16, 1997]
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Anchorage,
Peter A. Michalski, Judge.
Appearances: Michael C. Geraghty, Sarah Diemer Moyer, DeLisio
Moran Geraghty & Zobel, Anchorage, for Appellant. Rod R. Sisson, Crosby &
Sisson, P.C., Anchorage, for Appellee.
Before: Compton, Chief Justice, Rabinowitz, Matthews,
Eastaugh, and Fabe, Justices.
Adrian Sanders sued the State of Alaska for injuries suffered
when he collided with a train of baggage carts on a public road at Anchorage
International Airport. The carts were travelling from a warehouse on state land
that had been leased and subleased. As required by the lease, the lessees
obtained a liability insurance policy naming the State as an insured. The
question in this case is whether the liability insurer has a duty to defend the
State in the Sanders litigation. Based on the language of the policy and the
nexus between the accident and the use of the leased premises, we answer in the
I. FACTS AND PROCEEDINGS
The State of Alaska leased an airport lot on which a warehouse
was located to B and R Properties, Inc. The authorized use for the property was
"Warehouse for air freight forwarding." The lease was assigned to Sam and
Rebecca Fox-Krogstad who sublet warehouse and office space to United Airlines.
As required by the lease, the Krogstads purchased a liability insurance
policy from State Farm in which the State was named as an additional insured.
A complaint was filed against the State and United Airlines by
Adrian Sanders. Summarized, the complaint alleges that on July 2, 1992, at
12:30 a.m., Sanders was injured when his motorcycle crashed into a United
Airlines baggage train on a public road. The baggage train was being operated
"without any warning lights, tail lights, brake lights, turn signals, or
adequate reflectors, or other indicia of slow-moving vehicles, and without any
other warning devices." The complaint further alleges the road did not have
adequate warning or advisory signs, and had no signs warning of slow-moving
vehicles. The State knew of the practice of driving such vehicles without
warning lights and condoned it. At the time of the accident, United Airlines
was transporting cargo from what has now been identified as the leased premises
to the airport ramp area to load the cargo onto aircraft. The complaint further
alleges that the State failed "to provide for adequate ingress, egress, and
transportation procedures from the [leased premises] which [United Airlines was]
using to consolidate and to forward the cargo in question to the airport ramp
and/or the airport apron area." Finally, the complaint alleges that the State
and United Airlines forced or coerced law enforcement personnel to refrain from
enforcing the applicable traffic laws.
The complaint alleges a number of causes of action against the
State which are relevant to this case: negligence, defective product and/or
defective systems, negligent design of the roadway system, and breach of the
duties owed by a landlord to a tenant.
The State tendered the defense of the case to State Farm.
State Farm agreed to defend subject to a reservation of rights to later disclaim
coverage. Two potential coverage defenses were asserted: First, that the "acts
and omissions of [the State] alleged by Sanders' complaint . . . are outside of
the scope of the risk for which [the State] could reasonably expect coverage
under the policy and, therefore, are not covered by the policy." Second, that
the claims are excluded from coverage by the professional services exception.
State Farm offered to defend the State with counsel selected by State Farm or,
in view of CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113
(Alaska 1993), with independent counsel chosen by the State. The State elected
to be defended by independent counsel which it selected.
During the pendency of the Sanders litigation, State Farm
filed a complaint against the State seeking a declaratory judgment that it did
not have a duty to defend or indemnify the State. The State moved for partial
summary judgment with respect to State Farm's duty to defend and State Farm
filed a cross-motion. The superior court granted summary judgment to State
Farm, and entered a judgment declaring that State Farm has no duty to defend or
obligation to indemnify the State in the Sanders litigation. The State appeals.
A. Standard of Review
This court reviews a grant of summary judgment using its
independent judgment. K&L Distributors, Inc. v. Kelly Electric, Inc., 908 P.2d
429, 431 (Alaska 1995). Summary judgment is to be granted only when the record
indicates that "there is no genuine issue as to any material fact and that any
party is entitled to a judgment as a matter of law." Alaska R. Civ. P. 56(c);
Hale v. Fireman's Fund Ins. Co., 731 P.2d 577, 579 (Alaska 1987). "The
construction of an insurance contract is a matter for the court, unless its
interpretation is dependent upon the resolution of controverted facts." O'Neill
Investigations, Inc. v. Illinois Employers Ins. of Wausau, 636 P.2d 1170, 1173
(Alaska 1981). Neither party argues that there are any genuine issues of
material fact concerning the duty to defend. The State argues that the duty to
indemnify cannot be determined until the facts of the underlying litigation are
determined, therefore precluding summary judgment on this issue at this time.
B. Relevant Policy Provisions
The basic insuring agreement is found in Coverage L --
Business Liability. It provides:
We will pay those sums that the insured becomes legally
obligated to pay as damages because of bodily injury . . . to which this
insurance applies. . . . This insurance applies only:
1. to bodily injury . . . caused by an occurrence
which takes place in the coverage territoryduring the policy period;
2. to personal injury caused by an occurrence
committed in the coverage territory during the policy period. The
occurrencemust arise out of the conduct of your business . . . .
The policy period includes the date of the accident in
question and the coverage territory is defined to include "the United States of
The defense clause of the policy provides as follow:
RIGHT AND DUTY TO DEFEND
We will have the right and duty to defend any claim or suit
seeking damages payable under this policy even though the allegations of the
suit may be groundless, false or fraudulent.
Exclusion 10 to Coverage L relates to "professional services
or treatments." It provides:
Under Coverage L, this insurance does not apply:
10. to bodily injury . . . due to rendering or failure
to render any professional services or treatments. This includes but is not
a. legal, accounting or ad vertising services;
b. engineering, drafting, surveying or architec
tural services, including preparing, approving, or failing to prepare or approve
maps, drawings, opinions, reports, sur veys, change orders, de signs or
c. supervisory or inspection services;
"Personal injury"and "bodily injury"have different meanings
under the policy:
11. personal injury means injury, other than bodily injury,
arising out of one or more of the following offenses:
a. false arrest, detention or imprison ment;
b. malicious prosecution;
c. wrongful eviction from, wrongful entry into, or
invasion of the right of private occupancy of a room, dwelling or premises that
a person occupies, by or on behalf of its owner, landlord or lessor;
d. oral or written publication of material that
slanders or libels a person or organization or disparages a person's or
organization's goods, products or services; or
e. oral or written publication of material that
violates a person's right of privacy[.]
"Bodily injury"is defined as follows:
3. bodily injury means bodily injury, sickness or disease
sustained by a person, including death resulting from the bodily injury,
sickness or disease at any time[.]
C. Relevant Lease Provisions
The following are relevant portions of the lease:
2. This lease is issued for the following authorized
Warehouse for air freight forwarding
16. The Lessee shall indemnify, defend, and hold the
Lessor harmless from any liability, action, claim, suit, loss, property damage,
or personal injury of whatever kind resulting from or arising out of any act of
commission or omission by the Lessee, his agents, employees, or customers or
arising from or connected with the Lessee's use and occupation of the Premises
or the exercise of the rights and privileges granted by this lease.
17. (a) At no expense to the Lessor, the Lessee shall
secure and keep in force during the term of this lease adequate insurance to
protect both the Lessor and the Lessee against comprehensive public liability
and property damage in no less than the following amounts
(i) Property damage arising from one occurrence in the
amount of not less than $50,000.
(ii) Personal injury or death in an amount of not less
than $100,000 per person and $300,000 per occurrence.
(b) The Lessee shall provide the Lessor with proof of
insurance coverage in the form of an insurance policy or a certificate of
insurance, together with proof that the premiums have been paid. All insurance
required by this covenant must:
(i) name the Lessor as an additional assured;
(ii) provide that the Lessor be notified at least
thirty (30) days prior to any termination, cancellation, or material change in
the insurance coverage; and
(iii) include a waiver of subrogation by which the
insurer waives all rights of subrogation against the Lessor for payments made
under the policy.
(c) The requirement of insurance coverage does not
relieve the Lessee of any other obligations under this agreement.
ASSIGNMENT OR SUBLEASE
20. The Lessee may not assign nor sublet, either by
grant or implication, the whole or any part of the Premises or any improvements
thereon without the written consent of the Lessor. Any proposed assign ment,
lease, or sublease must be submitted to the Lessor for approval in five (5)
copies, each bearing the original notarized signature of all parties. All
covenants and provisions in this agreement extend to and bind the legal
representatives, successors, and assigns of the parties.
3. The Lessee covenants and agrees that no less than
ninety per cent (90%) of the material stored and handled on the premises shall
be material being shipped in and/or out of Anchorage International Airport by
The consent to sublease to United Airlines provided in relevant part:
The State of Alaska, Lessor in Agreement ADA-30091, by
and through its Administrative Officer, Anchorage International Airport,
Department of Transportation and Public Facilities, acknowledges a sublease
dated November 17, 1988, between Sam Krogstad and Rebecca Fox-Krogstad, the
Lessee, and United Airlines, hereinafter called the Sublessee for 5,072 square
feet of warehouse space and 1,496 square feet of office space in the building
located on Lot 6, Block 5 on Anchorage Inter national Airport. The Lessor
consents to the Lessee entering into this sublease provided that the Lessee
remain responsible to the Lessor for compliance with all the terms of Lease
Agreement ADA-30091. This consent specifically excludes activity not related to
aviation and use of office space for any business not directly related to
D. State Farm Has a Duty to Defend the State
"Liability insurers have separate duties to defend and
indemnify their insureds." CHI of Alaska, Inc. v. Employers Reinsurance Corp.,
844 P.2d 1113, 1115 (Alaska 1993). "[An] insurer may have an obligation to
defend although it has no ultimate liability under the policy." Afcan v. Mutual
Fire Marine & Inland Ins. Co., 595 P.2d 638, 645 (Alaska 1979). Under a
standard duty to defend clause like that set out in State Farm's policy in this
case, the insurer must defend the insured "whenevera complaint states a cause of
action within, or potentially within, the policy coverage." Id. The factual
allegations made in the complaint of the underlying litigation determine whether
there is a duty to defend. Id. at 644. Where the facts alleged in the
complaint, if proven, would give rise to a finding of liability covered by the
policy, the insurer must defend the insured. Id. at 645. [Fn. 1] The duty to
defend is triggered if there is at least one cause of action alleged in the
complaint for which there is a possibility of coverage under the policy. Sauer
v. Home Indem. Co., 841 P.2d 176, 181 (Alaska 1992). The presence of additional
causes of action not covered by the policy does not defeat the duty to defend.
Under the bodily injury coverage of State Farm's policy,
Sanders's negligence claims against the State are within policy coverage. The
only limitations on coverage relevant to these claims are that the accident must
have taken place somewhere in the United States during the policy period. [Fn.
State Farm argues, however, that interpreting the policy
literally would be unreasonable, for coverage would extend to all conduct of the
State within the United States. State Farm contends that an implied limitation
should be read into the policy limiting coverage to "risks that arise from the
use of the premises by the lessee." State Farm argues:
The scope of coverage question may be stated thus: Is
the coverage of [the State] under the policy limited in some fashion to
parameters of location and conduct, or does it extend to all of the premises and
conduct of [the State], wherever located and whatever involved? If the policy
is read as broadly as possible in favor of [the State], then the covered risks
would arguably include all of the activities of [the State], no matter what and
no matter where, limited only by the policy's conditions and exclusions.
Normally, the rule for construing insurance agreements is that they should be
read broadly in favor of the insured. Yet, under the circumstances here,
requiring the policy to cover [the State] for all of its activities cannot be
the reasonably expected result of State Farm issuing a certificate of insurance
to help Krogstad comply with the lease. Logic and fairness would dictate some
limitation on the risk of an insurer that issues a certificate of insurance
under these circumstances.
We agree with State Farm that construing the policy literally
would lead to unreasonably broad coverage. [Fn. 3] Coverage should be limited
to claims that have a fair relationship to the use of the leased premises.
Absent evidence the parties clearly intended to impose such a broad obligation,
a lease clause requiring the lessee to buy insurance protecting the lessor
cannot reasonably be read to require the lessor to provide insurance coverage
for claims which do not arise out of or are not incidental to such uses. [Fn. 4]
We thus limit the application of the policy in this case to claims which arise
out of or are incidental to uses of the premises under the lease. [Fn. 5] We
impose this limit as an exercise of the court's power to "limit the application
of any unconscionable term as to avoid any unconscionable result." Restatement
(Second) of Contracts 208 (1979).
The accident out of which Sanders's claims arise readily falls
within these limits. The baggage train he collided with was moving baggage to
the airport from the warehouse on the leased premises. The premises were being
used for their authorized purpose, as a "warehouse for air freight forwarding,"
for "materials shipped in and/or out of Anchorage International Airport by air."
See authorized uses and special covenants lease clauses supra, pp. 7-8. Moving
baggage from the warehouse to the airport is an activity which arises out of the
use of the premises for their authorized purpose and is, to say the least,
incidental to their use. [Fn. 6]
The fact that the premises were subleased does not sever the
required connection between the claim and the use of the premises. The lessees
were not exonerated by the sublease from performance of their duties under the
lease. See covenant to sublease, supra, p. 9. One such duty was maintaining
liability insurance. Further, subleasing was a privilege "granted by this
lease"under the liability clause of the lease and the sublessee's uses were, as
noted, consistent with the purposes of the lease.
State Farm's claim that the professional services exclusion
excludes coverage lacks merit with respect to all of the claims against the
State except for the negligent design claim. [Fn. 7] As noted above, the fact
that one claim may be excluded by a policy provision does not relieve an insurer
from its obligation to defend where there are other claims which are not
excluded. Sauer, 841 P.2d at 181. [Fn. 8]
For these reasons the judgment of the superior court is
reversed. This case is remanded with directions to enter a declaratory judgment
in favor of the State, declaring that State Farm has a duty to defend the State
in the Sanders litigation.
REVERSED and REMANDED.
Extrinsic facts known by the insurer which would defeat the duty to
defend are not considered by the court in determining the duty to defend. Sauer
v. Home Indem. Co., 841 P.2d 176, 182 (Alaska 1992). However, extrinsic facts
known by or reasonably ascertainable to the insurer which would bring an
otherwise uncovered complaint within the policy's coverage are considered by the
court. Afcan v. Mutual Fire, Marine & Inland Ins. Co., 595 P.2d 638, 646
(Alaska 1979). There are no such facts alleged in this case.
Claims resulting in personal injury have an additional limitation.
They must arise out of the conduct of the State's business. See supra p. 5.
However, Sanders's claims are for bodily injury (injuries to the body) rather
than personal injury (injuries to personal rights) as those terms are used in
See State, Dep't of Transp. & Pub. Facilities v. Houston Casualty
Co., 797 P.2d 1200, 1206 n.5 (Alaska 1990) (Matthews, J., concurring)
(construing State lessee's policy to insure the State with no geographical
limitation would result in "unreasonably broad"coverage).
See Houston Casualty, 797 P.2d at 1206 (Matthews, J. concurring)
("[T]he core purpose of this provision was to provide coverage to the State for
claims related to [the lessee's] use of the leased premises."); State v.
Underwriters at Lloyds, London, 755 P.2d 396, 399-400 (Alaska 1988) (claim
arising out of operations "necessary or incidental"to lessee's use of leased
premises held covered).
Stricter limits could be imposed. However, in view of the rule that
insurance contracts should be read most favorably to the insured, e.g., Bering
Strait Sch. Dist. v. RLI Ins. Co., 873 P.2d 1292, 1295 (Alaska 1994), we believe
that the policy should be limited only to the extent necessary to avoid an
See Underwriters at Lloyds, 755 P.2d at 400 (airplane taxiing is an
operation "necessary or incidental"to airline's use of leased gates, ticket
counter and baggage area); Hale v. Fireman's Fund Ins. Co., 731 P.2d 577, 579-80
(Alaska 1987) (unloading produce away from leased premises is an operation
"necessary or incidental"to use of a produce stand).
Even as to the defective design claim, it is questionable whether
the professional services exclusion applies. The cases to which we have been
cited concerning this exclusion refer to services which are performed for others
and for which actions in the nature of malpractice may be brought.
Hollingsworth v. Commercial Union Ins. Co., 208 Cal. App. 3d 800 (1989)
(applying exception to ear piercing done by retail cosmetic store); Merchants
Mut. Ins. Co. v. City of Concord, 374 A.2d 945 (N.H. 1977) (applying exception
where city failed to provide medical or psychiatric care to detainee); Multnomah
County v. Oregon Auto. Ins. Co., 470 P.2d 147 (Or. 1970) (applying exception
where medical attendant failed to give insulin to diabetic inmate). No case
has been cited which holds that the professional services exclusion applies to
services which an insured performs for itself which result in a dangerous
State Farm argues that construing the insurance policy to cover off-
premise accidents on public roads would violate the public duty exception. This
argument fails. The indemnification agreement does not give the State a general
disincentive regarding the maintenance of public streets. See Burgess Constr.
Co. v. State, 614 P.2d 1380, 1381-82 (Alaska 1980).