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Lloyd's of London v. Fulton (5/12/00) sp-5271

     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


LLOYD'S & INSTITUTE OF        )
LONDON UNDERWRITING COMPANIES,)    
including JOHN CRAWLEY,       )    
individually and as Represen- )    
tative on Behalf of Certain   )    Supreme Court Nos. S-8136/8185
Underwriters at Lloyds of     )
London Subscribing to Policy  )    Superior Court No.
No. BH0150TAA, Excess         )    3AN-93-1883 CI
Insurance Company, Ltd.;      )
LONDON & HULL MARITIME        )
INSURANCE CO., LTD.; CORNHILL )
INSURANCE PLC 'M' A/C;        )
INSURANCE COMPANY OF NORTH    )
AMERICA 'GA' (UK); THE        )
PRUDENTIAL GROUP 9; and THE   )
BALTICA (UK) 'J A',           )
                              )    
          Appellants and      )    O P I N I O N  
          Cross-Appellees,    )    
                              )    
          v.                  )    [No. 5271 - May 12, 2000]
                              )
CHRISTOPHER FULTON,           )         
individually and as assignee  )
of Walter E. Clark,           )
                              )
          Appellee and        )
          Cross-Appellant.    )   
                              )


          Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
                    Dana Fabe, Judge, Pro Tem.


          Appearances: Brewster H. Jamieson and
          Michael B. King, Lane Powell Spears Lubersky
LLP, Anchorage, for Appellants/Cross-Appellees Lloyd's and
Institute of London Underwriting Companies.  Randall E. Farleigh,
Farleigh & Shamburek, Anchorage, for Appellee/Cross-Appellant.

          Before:  Matthews, Chief Justice, Compton,
Eastaugh, and Bryner, Justices. [Fabe, Justice, not participating.]


          BRYNER, Justice.
          EASTAUGH, Justice, dissenting.


I.   INTRODUCTION
          An accident aboard a fishing vessel in the Bering Sea
provoked a decade-long dispute between the vessel's owner and its
insurers.  The case raises two significant questions concerning an
insurer's duties toward its insured:  Upon discovering potential
reasons to deny coverage, must an insurer promptly inform its
insured of the problems?  And does the insurer estop itself from
denying coverage if it breaches this duty by withholding notice to
its insured while it investigates its coverage defenses?  The
superior court answered "yes" to both questions.  Because we agree
that the insurer in this case had a duty to give prompt notice and
because the record supports the court's findings of breach,
prejudice, and resulting estoppel, we affirm. 
II. FACTS AND PROCEEDINGS
          When we first considered this case four years ago, we
detailed the events and proceedings that brought it before us. [Fn.
1]  We summarize that history here and then update it.
          In March 1986 Christopher Fulton fell and injured himself
on board the fishing vessel JAMIE LYNN in the Bering Sea southeast
of the Pribilof Islands.  Christopher Clark was in command of the
JAMIE LYNN when the accident occurred.  Christopher Clark's father,
Walter Clark, owned the JAMIE LYNN and had a $500,000 protection
and indemnity insurance policy on the vessel. Under the policy,
Pacific Marine Insurance Company (PacMar) would cover the first
$200,000 of any loss, and Lloyd's & Institute of London
Underwriting Companies (Lloyds) would cover any additional loss up
to the $500,000 limit.  The policy's coverage was "confined to
waters of Bristol Bay and waters surrounding the Alaska Peninsula,
and connecting waters to Cordova."  
          Walter Clark notified his insurance agent of Fulton's
injury in July 1986.  PacMar received notice on August 4 and
immediately recognized potential coverage problems, including the
possibility that the vessel's location at the time of the accident
was in an area of the Bering Sea that was beyond the imprecisely
defined geographical coverage of the policy.  By late August,
PacMar decided to hire attorney Paul Daigle to handle all coverage
defenses.  
          In early September, Daigle hired marine investigator
George Barnum to investigate the claim.  Meanwhile, the Clarks
consulted attorney Michael Schneider about Fulton's potential claim
against them.  Also, in September, after Fulton had filed a
complaint and moved to arrest the JAMIE LYNN, PacMar, at Walter
Clark's request, hired attorney Robert Richmond to represent the
Clarks in defending against Fulton's actions. 
          At about the same time -- mid-September -- Barnum carried
out his coverage investigation.  In the course of his
investigation, Barnum interviewed both Walter and Christopher
Clark, obtaining specific information from Christopher suggesting
that the JAMIE LYNN had been outside the policy's geographical
limits at the time of Fulton's accident.  Barnum did not notify
either of the Clarks' attorneys of these interviews; nor did he
explain his purpose to the Clarks.  Barnum reported the results of
his investigation to PacMar, recommending that it defend the Clarks
under a reservation of rights and challenge coverage in a federal
declaratory judgment action.  PacMar agreed and, on September 22,
notified the Clarks by letter of its intent to reserve the right to
dispute coverage.  Until then, PacMar had given no notice to the
Clarks or their attorneys of its coverage investigation.   
          The Clarks refused to agree to PacMar's proposed
reservation of rights, but Richmond continued to represent them at
PacMar's expense.  The Clarks eventually resolved their dispute
with Fulton by confessing judgment for $450,000 and assigning
Fulton their right to proceed against their insurers.  In exchange,
Fulton promised not to execute against them. 
          In 1992, proceeding under the Clarks' assignment, Fulton
filed suit against PacMar's co-insurer, Lloyds, asserting the
Clarks' rights to coverage under the JAMIE LYNN's policy. [Fn. 2] 
Fulton alleged that PacMar had acted in bad faith by conducting its
coverage investigation without first informing the Clarks and that
Lloyds, as PacMar's co-insurer, was estopped from denying coverage. 
          Following trial, the superior court found that the JAMIE
LYNN had been outside the policy's geographical coverage when
Fulton's accident occurred, that this was a material policy breach,
and that the policy therefore did not cover the accident. 
Construing the terms of the policy, the court ruled that no agency
relationship existed between Lloyds and PacMar.  The court
concluded that without an agency relationship, PacMar's conduct
could not bind Lloyds.  Declaring that Lloyds had a valid defense
to coverage even if PacMar might be estopped by its own conduct
from denying coverage, the court entered judgment for Lloyds
without addressing Fulton's claim of estoppel.  
          Fulton appealed. [Fn. 3]  In Fulton v. Lloyds, we upheld
the superior court's findings that the accident occurred outside
the area covered by the JAMIE LYNN's insurance policy and that the
vessel's presence outside the covered area amounted to a material
policy breach. [Fn. 4]  But we rejected the superior court's
interpretation of the policy's terms governing the relationship
between PacMar and Lloyds. [Fn. 5]  We construed the policy to
require that PacMar and Lloyds be treated as a single party for
purposes of estoppel, reasoning that the policy should allow "only
one defense . . . , since there was only one policy." [Fn. 6]  We
thus remanded for consideration of Fulton's estoppel claim,
directing the lower court to determine "whether there were material
breaches of any defense duties under the policy." [Fn. 7]           
          On remand, the superior court made detailed findings
concerning PacMar's conduct from the time it initially learned of
Fulton's accident to the time it sent the Clarks its reservation of
rights letter.  Based on these findings, the court entered
conclusions of law resolving Fulton's claims.
          The court began by rejecting Fulton's contention that
PacMar breached its duty of defending the Clarks by conducting a
conditional defense and simultaneously denying coverage in a
federal declaratory judgment action.  Although the court
acknowledged that PacMar had a duty to provide independent counsel
once the Clarks rejected PacMar's reservation of rights letter,
[Fn. 8] it decided that PacMar met this duty by providing Walter
Clark with an attorney of his choice -- Robert Richmond -- who, in
the court's view, acted independently on the Clarks' behalf.  For
this reason, the court concluded that the defense PacMar provided
was not "conditional."
          The court next considered Fulton's argument that PacMar
breached the insurance policy by conducting its coverage
investigation and developing its coverage defenses before sending
the Clarks its reservation of rights letter.  Noting that PacMar
became aware of its potential coverage defenses in early
August 1986, the court faulted the company for failing to notify
the Clarks of these defenses until late September, when it sent
them its reservation of rights letter:
          Instead of taking immediate action to reserve
its rights and put the Clarks on full notice of the coverage
problem, [PacMar's] counsel began an investigation of the coverage
question.      

               . . . Even after being informed that the
Clarks had retained their own counsel, Michael Schneider, [PacMar]
did not call off its interviews, nor did it warn the Clarks of the
purpose of the interviews. [PacMar] did not even notify the
attorney which it had retained for the Clarks, Robert Richmond.

               . . . These actions allowed [PacMar] to
build its case against the Clarks before fully disclosing to them
the nature of the coverage dispute and their rights under Alaska
law. 
The court thus concluded that PacMar had committed two distinct
violations, the first contractual and the second sounding in tort. 
          Regarding the contractual violation, the court cited the
general rule that when a liability insurer identifies a potential
conflict, it "should promptly take steps to ensure that the insured
is made fully aware of and understands the problem." [Fn. 9]  The
court further observed that an insurer must communicate its intent
to deny coverage in time to protect its insured's interests. [Fn.
10]  The court reasoned that "[t]he same is true of an insurer's
decision to reserve its rights to contest coverage: the insured
must be allowed the chance to protect her own interests."  The
court thus concluded that once PacMar had reason to believe that a
coverage dispute existed, it owed a duty to "tak[e] immediate
action to reserve its rights and put the Clarks on full notice of
the coverage problem . . . ."  The court ruled that, until PacMar
had given this notice, it could not proceed with its coverage
investigation. 
          The court went on to find that PacMar's actions
presumptively prejudiced the Clarks. [Fn. 11]  In addition,
pointing to factual disputes over issues such as whether the JAMIE
LYNN was actually outside the policy's geographical coverage at the
time of the accident, the court found that PacMar had actually
prejudiced the Clarks by interviewing them about coverage outside
their counsel's presence and without fully informing them of their
rights.
          Finding that the Clarks had "relied to their detriment on
[PacMar's] actions," the court concluded: "As a result, PacMar
would have been estopped from denying coverage of Fulton's claim. 
As the Supreme Court indicated in Fulton, Lloyds is estopped to the
same extent as [PacMar]."  
          Upon concluding that PacMar had breached its contractual
obligation to give the Clarks prompt notice of the coverage
problems, the court separately addressed PacMar's duty under the
implied covenant of good faith and fair dealing, [Fn. 12] finding
that PacMar had breached the implied covenant by treating the
Clarks unfairly: 
          It was fundamentally unfair for [PacMar] to
continue to build its case for denying coverage without first
obtaining a reservation of rights from the Clarks.  It was also
unfair for [PacMar] to interview the Clarks without counsel
present, even after Walter Clark informed [PacMar] that he had an
attorney. 

          While the court characterized PacMar's failure to give
prompt notice as a contractual breach that would have resulted in
Lloyds paying only contract damages -- that is, damages not
exceeding Lloyds's $300,000 share of the $500,000 policy limits --
it characterized the implied-covenant breach as sounding in tort,
thereby rendering Lloyds fully liable for Fulton's judgment against
the Clarks. [Fn. 13]  After awarding Fulton costs, attorney's fees,
and prejudgment interest, the superior court entered a final
judgment against Lloyds totaling $763,290.42.
          Lloyds appeals; Fulton cross-appeals.
III. DISCUSSION
          Lloyds contends that the court erred in ruling that
PacMar should have suspended its investigation merely because it
had "reason to believe" that there might be a coverage dispute.
Lloyds further contends that, even if PacMar should have notified
the Clarks before investigating coverage, its failure to do so did
not warrant imposing coverage by estoppel.  In turn, Fulton
challenges the award of prejudgment interest and conditionally
disputes the court's conclusion that Richmond provided the Clarks
with independent representation.  We begin with Lloyds's appeal and
then consider Fulton's cross-appeal.
     A.   Lloyds's Appeal
          1.   Standards of review
          This court defers to the superior court's factual
findings, reviewing them only for clear error; [Fn. 14] but in
reviewing the superior court's application of legal doctrines, we
apply our independent judgment. [Fn. 15] 
          2.   The superior court properly concluded that PacMar
breached its duty of loyalty to the Clarks by conducting its
coverage investigation before fully informing the Clarks of its
potential coverage defenses.

          Lloyds contends that the superior court erred in holding
that, once PacMar had "reason to believe" that a coverage dispute
"may" exist, it should have suspended its investigation and then
denied coverage, waived the coverage issue, or sought a reservation
of rights.  According to Lloyds, neither case law nor policy
considerations support holding insurance companies to that standard
of conduct.  Specifically, Lloyds characterizes PacMar's actions as
necessary investigation that an insurer must complete before
deciding whether to reserve its rights.  Lloyds insists that the
court's prompt-notice requirement will discourage insurers from
pursuing initial claims investigations with the diligence required
of them by law.  We disagree.
          Our prior decisions support the superior court's ruling. 
In Sauer v. Home Indemnity Co., we held that an insurer has a duty
to give its insured prompt and full notice of its intention to deny
coverage:
          An insurer is required to give the insured
"such notice of its intention to deny liability and of its refusal
to defend as will give the insured a reasonable time to protect
himself."  Such notice must not only be prompt, but it must
"provide a reasonable explanation of the basis in the insurance
policy in relation to the facts or applicable law for denial of a
claim."[ [Fn. 16]]

          This requirement of prompt and adequate notice arises
from, and is integrally related to, an insurer's duty to defend. 
Timely notice "is essential so that the insured may promptly
undertake its own defense"; [Fn. 17] notice thus protects the
insured not only against third-party claims, but also against
potentially conflicting interests of the insurer, which "might gain
access to information, not otherwise properly available to it,
which it could use to its advantage later to establish the
insured's breach." [Fn. 18]  
          Because notice of potential conflict enables insureds to
protect themselves against their insurers, the duty to give this
notice should not depend on the insurer's final decision on
coverage.  Rather, it should attach when an insurer has good reason
to believe that a coverage dispute may exist.  In our view, the
superior court correctly recognized that "[w]hen a potential
conflict is identified, 'a liability insurer should promptly take
steps to ensure that the insured is made fully aware of and
understands the problem.'" [Fn. 19]
          Lloyds argues, however, that applying this rule in the
present case would make no sense because the trial court "held that
[PacMar] did not breach any duty relating to the defense of
Fulton's personal injury claim."  But while the duty to give prompt
notice is an aspect of the insurer's broader duty to defend its
insured, this court has previously regarded the prompt-notice duty
as independently enforceable. [Fn. 20]  Moreover, Lloyds is
mistaken in characterizing the superior court as having expressly
held that PacMar "breached no defense duties" by pursuing its
coverage investigation.  The court did find that PacMar complied
with its duty to defend the Clarks by providing them with
Richmond's independent representation.  But it carefully limited
this finding to the period after PacMar sent the Clarks its
reservation of rights letter and initiated its federal declaratory
judgment action -- in other words, the period after PacMar
completed its undisclosed coverage investigation. [Fn. 21]   
          Hence, the court did not declare, as Lloyds suggests it
did, that PacMar's coverage investigation never adversely affected
the Clarks' right to receive a conflict-free defense.  To the
contrary, in concluding that the investigation caused the Clarks
actual prejudice by precluding their attorney from participating
during Barnum's interview about coverage, the superior court
implicitly determined that PacMar had in fact impaired the Clarks'
right to a conflict-free defense.
          Lloyds also maintains that requiring insurers to give
notice as soon as they have reason to believe that a coverage
dispute might exist amounts to a "shoot first, ask questions later"
policy.  According to Lloyds, adopting such a policy would
undermine the insurer's duty to conduct prompt claims
investigations and would inevitably result in "a flurry of
premature, unsupported and improper 'reservation of rights' letters
any time an insurer 'suspects' a coverage problem . . . ." 
          Lloyds's argument is unpersuasive.  Lloyds posits that an
insurer cannot give notice of potential coverage problems or
propose to defend its insured under a reservation of rights before
conducting a coverage investigation.  But it cites no legal support
for this premise, which the superior court implicitly rejected by
holding PacMar to a duty of prompt notice.  Sound authority
supports the superior court's decision:
               Once the insurer has a reason to believe
. . . that there are coverage issues, it should not continue to
obtain information from the insured that the insured is not
obligated to provide pursuant to his or her duty to cooperate
without first notifying the insured of the potential coverage
problems.  Until such notice has been given, the insured will be
neither obligated nor in a position to look after his or her own
interests. . . . [T]o allow the insurer to attempt to obtain
information from the insured in order to bolster an undisclosed
policy defense would, in effect, allow the company to take
advantage of its fiduciary relationship with the insured in order
to strengthen its position against the insured.[ [Fn. 22]] 
          
          Lloyds nevertheless asserts that it is unrealistic to
expect that PacMar could have decided whether to proceed under a
reservation of rights "until Barnum completed his investigation of
the facts and circumstances surrounding Fulton's claim."  Lloyds
also asserts that requiring PacMar to give the Clarks immediate
notice would have interfered with its duty to conduct a prompt
claim investigation -- in Lloyds's words, its duty "to 'jump in
with both feet' once a notice of claim is received."
          But the facts belie these assertions.  PacMar adjustor
Kristy Bottomley first learned of potential coverage defenses in
early August 1986.  Almost immediately, Bottomley called
Christopher Clark, telling him that coverage could be a problem and
that the policy required him to cooperate with her.  Clark answered
Bottomley's questions, many of which related to whether the policy
had been breached at the time of Fulton's injury.  Specifically
Clark told her that the vessel was fifteen to sixteen hours from
the Pribilof Islands.
          By August 20 Bottomley had drafted a reservation of
rights letter, which listed as an alleged policy breach that the
JAMIE LYNN had been outside the geographical limits of coverage. 
Bottomley never sent this letter, evidently because it required
approval by PacMar's Large Loss Committee.  But later in August the
Large Loss Committee met and formally decided both to draft the
Clarks a new reservation of rights letter and to hire an attorney
to handle its coverage defenses.   
          By September 4 PacMar had hired Daigle as its coverage
counsel; he promptly launched a coverage investigation, using his
marine investigator, Barnum.  Without informing the Clarks'
attorney or disclosing his purpose, Barnum interviewed the Clarks
and JAMIE LYNN crew members from September 12th through the 15th. 
On the 15th, Barnum reported the results of these interviews to
PacMar.  PacMar failed to inform the Clarks and their attorneys of
the coverage problems and of its investigation until several days
later, when it sent its September 22 reservation of rights letter. 
          These events refute Lloyds's assertion that, before
September 22, PacMar lacked sufficient information to notify the
Clarks of their coverage problems.  Although PacMar did not commit
its course before the end of September, it was already unmistakably
steering toward denial of coverage a month earlier, in late August.
The knowledge it had acquired by then had prompted it to draft two
reservation of rights letters and to launch a full-blown coverage
investigation. Lloyds cannot plausibly maintain that the
information that caused PacMar to take these actions was too flimsy
to place its interests in conflict with the Clarks' or too vague to
warrant immediate notice.
          Nor can Lloyds plausibly maintain that giving immediate
notice would have impeded PacMar in fulfilling its obligation to
"jump with both feet" into its claim investigation.  PacMar
referred the issue of coverage to Daigle.  Acting as PacMar's
"outside coverage counsel," Daigle hired Barnum, who jumped with
both feet into an investigation of coverage defenses against the
Clarks.  While immediate notice undeniably might have delayed
PacMar's "outside" coverage investigation against the Clarks, the
record fails to show that this delay would have impaired the
investigation PacMar was required to pursue on their behalf -- an
"inside" claim investigation.
          Lloyds concedes that "once a liability insurer has a
proper basis for issuing a reservation of rights letter, the
interests of the insured and insurer are . . . in such conflict
that the insurer should cease gathering information from the
insured through informal investigative means, absent the insured's
express consent."  Our review of the record persuades us that the
evidence supports the superior court's finding that PacMar had a
proper basis to give the Clarks notice by the time it hired Daigle
to develop its coverage case.
          3.   The superior court did not err in concluding that
PacMar's conduct estopped it from denying coverage.

          Lloyds claims that even if the initial information PacMar
acquired should have prompted it to suspend its investigation and
notify the Clarks of the potential coverage issues, the superior
court erred in applying coverage by estoppel as the remedy for
PacMar's inaction.
          Lloyds begins by challenging the court's findings of
presumed and actual prejudice.  It asserts that the cases the
superior court relied on in finding presumptive prejudice -- CHI 
of Alaska, Inc. v. Employers Reinsurance Corp., [Fn. 23] Sauer v.
Home Indemnity Co., [Fn. 24] and Continental Insurance Co. v.
Bayless & Roberts, Inc. [Fn. 25] -- are inapposite.  Lloyds further
argues that presuming prejudice is unjustified here because the
Clarks received an independent defense and the absence of coverage
has clearly been established.  In Lloyds's view, "this case does
not present a circumstance warranting the application of the
draconian rule of presumed prejudice.  At most, Fulton is invoking
technical, procedural deficiencies in [PacMar's] handling of the
coverage investigation."
          But Lloyds's view of the facts is self-serving and
decidedly at odds with the darker view taken by the superior court,
which found that PacMar "continued to investigate the coverage
issue, covertly building its case against the Clarks[,] . . . until
after it had gained full access to the Clarks without the presence
of counsel."  Lloyds fails to establish that the trial court's view
of the facts is clearly erroneous.  And while it points to factual
distinctions between the present case and the cases the trial court
relied on to find presumptive prejudice, Lloyds offers no
persuasive reason for any legal distinction. [Fn. 26]  
          In arguing that presumptive prejudice is not legally
appropriate, Lloyds relies chiefly on the Washington Court of
Appeals' decision in Coventry Associates, L.P. v. American States
Insurance Co. [Fn. 27]  But in an opinion issued after Lloyds filed
its brief, the Washington Supreme Court reversed the court of
appeals' ruling. [Fn. 28]  The more recent opinion in Coventry
undermines Lloyds's position, strongly suggesting that Washington's
supreme court would apply presumptive prejudice and coverage by
estoppel to a claim like the Clarks', regardless of the existence
of coverage. [Fn. 29]
          Moreover, Lloyds has not shown that the superior court
was clearly erroneous in finding actual prejudice -- a finding that
effectively establishes Lloyds's failure to rebut the presumption
of prejudice.  Lloyds asserts that PacMar's coverage investigation
could not have harmed the Clarks because the evidence conclusively
demonstrates that the JAMIE LYNN was outside the area of the
policy's coverage.  Lloyds insists that "no 'dream team' of lawyers
could have altered the outcome on that fatal point."  But this
outcome-based view of the prejudice requirement is unduly rigid. 
We have previously recognized that "[a]n insurer's obligation to
defend and the obligation to indemnify are separate and distinct
elements" [Fn. 30] and that an "insurer may have an obligation to
defend although it has no ultimate liability under the policy."
[Fn. 31]  Thus, coverage is not the ultimate measure of prejudice;
in order to establish prejudice, Fulton was required to show only
that PacMar's conduct caused some actual harm to the Clarks, not
that it changed the outcome of the case.
          Impropriety of the kind that PacMar committed is
intolerable if it has any adverse effect on an insured party.  The
need to discourage such overreaching is particularly compelling in
insurance cases because of the special fiduciary relationship that
exists between an insurer and its insureds, the insurer's peculiar
ability to take advantage of its insured's trust, and the typical
insured's vulnerability to overreaching conduct. [Fn. 32]  Given
the unique nature of this relationship, a bright-line, easily
established test of prejudice also promotes efficiency and
fairness.  A stricter, outcome-based definition of prejudice would
require case-by-case litigation to determine actual coverage -- a
requirement that would pit the insurer against its own insured on
a playing field where the insurer almost always enjoys tremendous
financial and institutional advantages. 
          Moreover, by punishing misconduct only if the insured can
show that the misconduct defeated otherwise available coverage, an
outcome-based prejudice test would effectively reward successful
misconduct.  It would encourage insurers to dispute coverage -- and
to overreach in the process to ensure that their efforts succeed. 
The strict prejudice requirement thus would functionally convert
the remedy of coverage by estoppel into a remedy of coverage by
proof of coverage; by requiring the insured to prove that the
insurer's misconduct actually changed the outcome, it would
effectively force the insured to shoulder the affirmative burden of
proving coverage. 
          The dissent suggests that when an insurer's breach makes
no difference in the ultimate outcome, or when it is not a
fundamental breach, the remedy of coverage by estoppel should be
abandoned in favor of some lesser punishment -- one more suitable
to the crime. [Fn. 33]  But applied to insurance contracts, a
"punishment-fits-the-crime" approach would retain all of the
drawbacks of an outcome-based prejudice rule without offering any
offsetting advantages.  It would continue to encourage case-by-case
litigation of coverage, to reward successful misconduct (albeit
partially rather than fully), and to saddle the insured with the
duty of proving either loss of coverage or some unspecified
alternative form of actual damage.  Moreover, the dissent proposes
no specific sanction to replace estoppel.  And we can think of none
that would be workable -- that is, easy to apply yet still capable
of effectively deterring misconduct. 
          Furthermore, by contending that "[a]t most, Fulton is
invoking technical, procedural deficiencies in [PacMar's] handling
of the coverage investigation," Lloyds posits a distinction between
serious and non-serious breaches that, in our view, is somewhat
artificial.  Lloyds repeatedly points to the trial court's finding
that PacMar did not breach its duty of providing the Clarks with an
independent defense.  But as we have already pointed out, the trial
court did not acquit PacMar of breaching its duty to defend the
Clarks.  Instead, the court confined its ruling on breach to the
period after the covert investigation, finding that PacMar
fulfilled its duty to defend "while maintaining the declaratory
judgment action" and "while [it] pursued the policy coverage
dispute."  The careful wording of this finding implicitly
determined that PacMar had impaired the Clarks' right to a
conflict-free defense at an earlier stage of the process by
precluding their attorney from participating during Barnum's
interview about coverage. 
          Indeed, the superior court based its finding of actual
prejudice precisely on this impairment of the Clarks' right to a
conflict-free defense:
          As the record indicates, there was in fact
dispute over the exact location of the JAMIE LYNN . . . .  It is
difficult to ascertain with precision the extent to which the
intervention of competent legal counsel could have helped the
Clarks develop a more favorable factual record.  The Clarks were
prejudiced by [PacMar's] access to them without full disclosure of
their rights or the presence of counsel. 

          This finding is not clearly erroneous.  Having received
no notice of PacMar's coverage investigation, the Clarks submitted
to Barnum's interviews without the benefit of legal representation.
In the course of these interviews, they gave Barnum damaging
information concerning their claim -- information that potentially
could have helped PacMar build a case against them on coverage.
This in itself is substantial evidence of harm, establishing that
the trial court did not clearly err in finding that PacMar's
conduct actually prejudiced the Clarks.
          Lloyds nonetheless contends that the court erred in
finding prejudice because the information Barnum obtained from the
Clarks was not actually used against them.  Rather, according to
Lloyds, evidence from independent sources was sufficient to prove
the Clarks were not covered.  Lloyds maintains that in these
circumstances we should apply an "independent source" rule
comparable to the exception that criminal courts apply to avoid
suppression of evidence under the exclusionary rule. [Fn. 34]
          To support its position, Lloyds cites an Indiana
appellate decision, Snodgrass v. Baize. [Fn. 35]  Analogizing
insurance cases to criminal cases, Snodgrass found exclusion, not
estoppel, to be the correct remedy when an insurer improperly
obtains evidence against its clients. [Fn. 36]  But we find the
analogy to criminal cases unwarranted.  In our view, rules
governing suppression of evidence in criminal cases are inapposite
in the context of insurance disputes because suppression of
evidence in the criminal-law context implicates public-welfare
concerns that have little relevance in the unique contractual
setting of insurance law.  Moreover, police deal with criminals at
arm's length, whereas insurers have a special fiduciary
relationship with their clients -- a relationship in which the
"adhesionary aspects of insurance contracts make the insured
particularly reliant on the insurer's good conduct." [Fn. 37]  In
this setting, public policy strongly favors rules providing "needed
incentive to insurers to honor their implied covenant [of good
faith] to their insureds." [Fn. 38]
          While some form of sanction more lenient than estoppel
might be desirable for breaches involving equally situated parties
engaged in arms-length business transactions, given the size and
pervasiveness of the insurance industry, its economic strength, and
the fiduciary duty of loyalty it owes to its clients, we conclude
that an insurer's breach of the duty to defend must be considered
a material breach that estops denial of coverage unless the breach
clearly has no adverse impact on the relationship between the
insurer and the insured.  Here, although the consequences of
PacMar's breach were not outcome-determinative, they did adversely
affect the Clarks and were therefore prejudicial. 
          In sum, the superior court did not err in concluding that
PacMar's conduct estopped it from denying coverage.  Under our
prior decision in Fulton, the court correctly determined that
PacMar's estoppel runs against Lloyds. [Fn. 39]  Accordingly, we
affirm the superior court's entry of judgment against Lloyds. [Fn.
40]  
     B.   Fulton's Cross-Appeal
          1.   Standard of review
          Fulton argues in his cross-appeal that the superior court
erred in calculating prejudgment interest on his award against
Lloyds. [Fn. 41]  He advances a twofold argument.  The first part
is based on AS 09.30.070(b), which governs accrual of prejudgment
interest in personal injury cases; the second is based on Alaska
Civil Rule 68(b)(2), which governs offers of judgment.  These
issues present questions of law, which we review de novo. [Fn. 42]
          2.   Prejudgment interest should have begun to accrue
upon Lloyds's receipt of PacMar's May 10, 1990 letter, rather than
beginning April 22, 1992.

          Fulton argues that the superior court erred in
determining that prejudgment interest should accrue from April 22,
1992, the day that the defendants received formal notice of
Fulton's suit.  In fixing the starting date for its award of
prejudgment interest, the court cited AS 09.30.070, which governs
accrual in cases involving personal injury, death, or property
damage.  This statute provides, in relevant part: 
               Except when the court finds that the
parties have agreed otherwise, prejudgment interest accrues from
the day process is served on the defendant or the day the defendant
received written notification that an injury has occurred and that
a claim may be brought against the defendant for that injury,
whichever is earlier.[ [Fn. 43]]
          Fulton claims that under this provision, prejudgment
interest should begin to accrue from September 22, 1986, when
Walter Clark sent a letter imploring the Clarks' attorney,
Richmond, to "tell us immediately and in writing as to whether or
not the insurance companies have agreed to cover this incident."  
Richmond forwarded this letter to PacMar; it is not clear exactly
when.  
          But in any event, Clark also sent a copy of his
September 22 letter to Lloyds's agent in San Francisco, Property
Marine, Inc.; Property Marine received the letter and forwarded it
to Lloyds's agent in London by fax on September 26.  Property
Marine's cover memo, prominently stamped "CLAIM," notified Lloyds
that "this is your first notice of a back injury to crewman
Christopher Fulton.  The injury occurred on March 9, 1986, but
primary underwriters were not placed on notice until August, 1986."
The memo named all of the attorneys participating in the matter,
specifically indicating that PacMar's attorney "will be seeking a
declaratory relief judgement from the court based on the numerous
warranties that were breached."  It further advised, "I feel London
underwriters must respond to the letter from assured," and "IT
WOULD NOT BE A BAD IDEA FOR EXCESS UNDERWRITERS TO JOIN PRIMARY
UNDERWRITER IN THE DECLARATORY RELIEF ACTION."
          In our view, receipt of a copy of this letter by Lloyds's
agent on September 26, 1986, satisfied the notice requirement of
AS 09.30.070(b).  In choosing the date of actual notice of Fulton's
complaint as the starting point for prejudgment interest, the trial
court evidently construed this statute's reference to
"notification" of "a claim" as a requirement that Lloyds receive
notice of Fulton's suit against the insurers.  But Fulton simply
asserted the Clarks' assigned cause of action, and stood in their
shoes.  The relevant "claim" for purposes of the prejudgment 
interest provision, then, is the Clarks' claim under their policy. 
Moreover, AS 09.30.070(b) does not require direct notice from the
prospective claimant.  Rather, the statute establishes an objective
test providing that interest begins to accrue upon written notice
"that would lead a prudent person to believe that a claim will be
made against the person receiving the notification." [Fn. 44]    
          Thus, the only relevant question is whether a reasonable
person in Lloyds's position would believe, upon receiving Walter
Clark's September 22 letter and Property Marine's accompanying
memo, that the Clarks would claim policy coverage for Fulton's
injuries. [Fn. 45]  Our review of the letter and the cover memo
leads us to answer this question in the affirmative.  Accordingly,
we hold that AS 09.30.070(b) entitles Fulton to prejudgment
interest as of September 26, 1986 -- the earliest date that the
record establishes for receipt of Clark's letter by either PacMar
or Lloyds.  We therefore vacate the portion of the judgment setting
April 22, 1992, as the accrual date and remand for recalculation
based on Lloyds's receipt of the 1986 correspondence. 
          3.   The changed date of accrual for prejudgment
interest requires recomputation of the value of Fulton's award in
comparison to his second offer of judgment. 

          Fulton argues next that the superior court erred in
failing to award him an enhanced rate of prejudgment interest based
upon his 1993 and 1997 offers of judgment.  Alaska Civil
Rule 68(b)(2) provides that if the final judgment is less favorable
to the defendant than a pretrial offer of judgment by the
plaintiff, the plaintiff is entitled to an increased rate of
prejudgment interest. [Fn. 46] 
          We conclude that the superior court correctly found that
Fulton's 1993 offer of judgment was invalid because it was a joint
offer to Lloyds and Property Marine. [Fn. 47]  We also conclude
that in comparing the values of Fulton's 1997 offer and his final
judgment, the superior court properly applied the formula that we
adopted in Farnsworth v. Steiner. [Fn. 48]  Contrary to Fulton's
argument, the Farnsworth formula is not limited to offers made by
defendants. [Fn. 49] 
          Fulton may nonetheless be entitled to enhanced interest
on remand.  Our holding that Fulton's prejudgment interest should
accrue from September 1986 will increase the value of his final
judgment under Farnsworth.  Because this change may alter the Civil
Rule 68 comparison, the trial court should reconsider this issue
after recalculating Fulton's prejudgment interest based on the
September 1986 accrual date.
IV.  CONCLUSION
          For the foregoing reasons, we AFFIRM the superior court's
findings and conclusions on remand and its final judgment except
insofar as the judgment establishes prejudgment interest.  We
VACATE the portion of the final judgment establishing prejudgment
interest and REMAND for recalculation as directed in this opinion.
EASTAUGH, Justice, dissenting. 
          Although I agree that the insurers breached duties they
owed their insureds, the Clarks, I disagree with this court's
analysis of the effects of those breaches.
          The superior court originally found that the insureds
breached the navigational warranty.  It based this conclusion on
its findings that the JAMIE LYNN was in the Bering Sea near the
Pribilof Islands, not Bristol Bay or the waters surrounding the
Alaska Peninsula, and was therefore outside the geographical area
covered by the policy.  The superior court recited substantial,
indeed overwhelming, evidence in support. [Fn. 1]  The only dispute
about the vessel's location concerned its exact position in the
Bering Sea, not whether it was within the area covered by the
insurance policy.  The superior court also found this breach by the
Clarks to be material because it significantly increased the risk
plaintiff Fulton would be injured.  
          But the superior court later equitably estopped the
insurers from raising the breach of the navigational warranty.  It
did so because it found that the insurers had breached duties they
owed the insureds, the Clarks, by interviewing them without first
informing them of potential coverage issues (particularly the
question of whether the vessel had been outside covered waters)
when they did not have counsel present. 
          Prejudice is an essential element of equitable estoppel.
[Fn. 2]  To satisfy that element, the superior court first presumed
that the breach prejudiced the Clarks; it cited three decisions as
authority for adopting that presumption. [Fn. 3]  The superior
court also found that the interviews "actually prejudiced" the
Clarks.  In that regard, it stated that 
          As the record indicates, there was in fact
dispute over the exact location of the JAMIE LYNN . . . It is
difficult to ascertain with precision the extent to which the
intervention of competent legal counsel could have helped the
Clarks develop a more favorable factual record.  The Clarks were
prejudiced by [the insurers'] access to them without full
disclosure of their rights or the presence of counsel. 

It did not discuss any other circumstances supporting its finding
of actual prejudice.
          Affirming, this court first holds that the superior court
did not err in finding that the insurers breached duties to the
insureds.  I agree with that holding.
          This court next holds that it was not error to equitably
estop the insurers from relying on the Clarks' alleged breach of
the navigational warranty. [Fn. 4]  I disagree with that holding.
          In discussing estoppel's essential element of prejudice,
this court first concludes that prejudice is to be presumed. [Fn.
5]  It alternatively holds that the superior court did not clearly
err in finding that the insurers' breach actually prejudiced the
Clarks. [Fn. 6]  Although the court does not expressly say so, it
necessarily must reason that actual prejudice was established
conclusively by the fact the insurers interviewed the Clarks when
they had no attorney present and before notifying them that the
insurers were looking into coverage. [Fn. 7]  This latter
conclusion effectively rejects as irrelevant any evidence that the
prejudice the Clarks suffered at the interviews was purely
transitory and did not actually affect the outcome of the critical
factual dispute: whether the vessel was in covered waters.
          Applying the clear error standard of review [Fn. 8]
compounds the problem by ignoring the question, reviewed under an
abuse of discretion or independent judgment standard, whether post-
interview evidence is irrelevant to the issue of prejudice.
          I would follow this analysis:  (1) the insurers are
equitably estopped from relying on a breach of the navigational
warranty only if the insureds establish all essential elements of
equitable estoppel; (2) prejudice is an essential element of
equitable estoppel; (3) prejudice may not be conclusively presumed;
(4) any possible presumption of prejudice [Fn. 9] disappeared in
this case when the insurers produced evidence, independent of any
derived from the interviews, that the insureds breached the
navigational warranty; and (5) even assuming all elements of
equitable estoppel are present, the remedy should be commensurate
with the prejudice suffered.
          This approach is based on this assumption: in determining
whether the insureds were prejudiced, and in selecting an
appropriate remedy for the breach, the court must determine
whether, and the extent to which, the insurers' breach actually
hampered the insureds' ability to fairly dispute the vessel's
location.  The real coverage question is whether the vessel was in
covered waters.  The real estoppel question is whether the
insurers' breach affected the outcome of the coverage issue.  If
the insurers' wrongful acts did not affect the outcome of the
dispute about the vessel's location, there is no justification in
law or fact for completely foreclosing the insurers from trying the
navigational warranty issue by providing evidence of the vessel's
location.
          The superior court's equitable estoppel findings relied
in part upon a presumption of prejudice.  This court also presumes
prejudice. [Fn. 10]  Most cases discussing a presumption of
prejudice concern breach of one of an insurer's primary duties,
typically the duty to defend. [Fn. 11]  Not all duties and breaches
are created equal. [Fn. 12]  But it is not necessary to decide
whether the breaches here should give rise to a presumption of
prejudice, because there was ample evidence that the vessel was not
within covered waters.  This evidence rebutted any presumption by
establishing that the two interviews did not actually affect
resolution of the factual dispute about where the vessel was.
          And I also see no justification for adopting a conclusive
and irrebuttable presumption of prejudice here.  Nothing about the
nature of the breaches here was so gravely inappropriate that we
should prevent the insurers from attempting to rebut a presumption
of prejudice.
          I would therefore next have the court consider the
alternative finding of "actual prejudice."  In doing so, this court
should apply its independent judgment because it is reviewing the
superior court's implicit relevancy ruling when the superior court
looked only to the interview events in deciding whether the Clarks
were prejudiced.  The superior court effectively ruled that the
overwhelming evidence showing that the vessel was outside covered
waters was irrelevant to the issue of prejudice, even though that
evidence was not derived from the flawed interviews.  
          I think it was necessary to consider that evidence. It
was relevant because it tended to show that the flawed interviews
caused the Clarks no lasting prejudice or, indeed, any prejudice at
all.  The existence of that evidence and its subsequent
preservation through depositions rebuts any notion that the flawed
interviews materially prejudiced the Clarks.  Independent sources
establishing the vessel's location rendered immaterial any
prejudice resulting from any admissions the Clarks made during the
interviews.
          Nor can I imagine how this independent evidence of the
vessel's true location might have remained unknown to the insurers
had the interviews not been flawed.  Assume the insurers had
notified the Clarks of the coverage issue and interviewed the
Clarks while they had counsel present.  What could the Clarks or
their counsel have done that would have favorably affected
resolution of the location issue?
          Refusing to attend the interviews or to answer questions
about location would have been unavailing.  The Clarks' contractual
duty to cooperate would have foreclosed that course. [Fn. 13]  And
if the Clarks had followed that approach, the insurers could have
investigated further and learned that the vessel was not in covered
waters.  Because refusing to be interviewed would have gained them
nothing, the Clarks were not prejudiced by the loss of any
opportunity to follow such a course.
           They alternatively might have professed ignorance, or
claimed faulty memories.  But that would have gained them nothing,
because it would not have prevented the insurers from investigating
and discovering the relevant facts from other sources.  Loss of the
opportunity to follow this course did not prejudice the Clarks.
          They might alternatively have asserted that the vessel
was in covered waters.  This alternative was open to them only if
they told what they believed to be the truth. [Fn. 14]  Because
there is no indication that the insurers kept them from telling the
truth at the interviews, it is hard to see how the breaches harmed
them. Moreover, when counsel represented them in later proceedings,
both Clarks gave deposition testimony indicating that the vessel
was outside covered waters. [Fn. 15]  This testimony would have
negated any self-serving statements they might have made at the
interviews.  And the other evidence would have overwhelmingly
rebutted such statements. 
          Perhaps counsel could have prompted the Clarks to
truthfully recount additional details favorable to coverage. But
nothing kept them from recounting those details later.  And again,
the evidence of the actual location was overwhelmingly contrary to
coverage.
          We can assume that the Clarks were prejudiced if they did
things during the interviews that later hampered them in litigating
the vessel's true location.  I would not find that they were
hampered if they inevitably would have lost because there was no
genuine dispute about the vessel's location.  But if they made
harmful admissions that, for valid reasons, they could have avoided
but for the insurers' breaches, [Fn. 16] lasting prejudice could
have been avoided by preventing the insurers from relying on the
admissions and their fruits. [Fn. 17]  The remedy for that
prejudice was not to completely estop the insurers from relying on
the navigational warranty and to prevent them from proving its
breach by independent evidence, but to restore the insureds to the
position they would have occupied absent the insurers' breaches.
          The court concludes that it is unfair to make these
insureds prove the essential estoppel element of prejudice. [Fn.
18]  Assuming the court's fairness concerns are not remedied by
adopting a presumption of prejudice, it should be sufficient to
shift the burden to the insurers to prove lack of prejudice. 
Instead, the court creates a conclusive presumption of prejudice,
and renders that presumption irrebuttable by preventing the
insurers from disputing this essential element of estoppel.  I see
no justification for making this presumption irrebuttable.
          Thus, I think it is legally incorrect to assume that the
only evidence relevant to prejudice concerns the interview events. 
Alternatively, I think it was clear error to find prejudice in the
face of overwhelming independent location evidence, absent evidence
of how the interview breaches actually harmed the Clarks.  And if
the interview breaches did prejudice the Clarks, it was error to
altogether foreclose litigation on the navigational warranty when
a lesser equitable remedy would have restored them to the positions
they occupied absent these relatively minor and immaterial
breaches.  Finally, it was error to estop the insurers from raising
an issue that was not dependent on information learned at the
interviews. 
          We should therefore reverse and remand for further
proceedings.



                            FOOTNOTES


Footnote 1:

     See Fulton v. Lloyds & Inst. of London Underwriting Cos., 903
P.2d 1062, 1063-65 (Alaska 1995) (quoting extensively from the
superior court's initial findings).


Footnote 2:

     By 1992 PacMar had been declared insolvent and had ceased
doing business.  Fulton's suit also named Property Marine -- the
company that had arranged the co-coverage by PacMar and Lloyds --
as a defendant.  Property Marine apparently had ceased doing
business, and it never filed an appearance in the action.   


Footnote 3:

     See Fulton, 903 P.2d at 1062.


Footnote 4:

     See id. at 1066 n.3.


Footnote 5:

     See id. at 1067-70.


Footnote 6:

     Id. at 1069.


Footnote 7:

     Id. at 1070.


Footnote 8:

     See CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844
P.2d 1113, 1117-19 (Alaska 1993).


Footnote 9:

     Quoting Robert Keeton & Alan Widiss, Insurance Law sec.
7.6(b),
at 823 (1988) (internal quotations omitted).


Footnote 10:

     See Sauer v. Home Indem. Co., 841 P.2d 176, 182 (Alaska 1992)
(citing 7C John A. Appleman, Insurance Law and Practice sec. 4686
(1979)).


Footnote 11:

     In support of its presumptive prejudice finding, the court
cited CHI of Alaska, Inc., 844 P.2d at 1119; Sauer, 841 P.2d at
182, 183; and Continental Insurance Co. v. Bayless & Roberts, Inc.,
608 P.2d 281, 291 (Alaska 1980).


Footnote 12:

     See State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152
(Alaska 1989); William Shernoff, Insurance Bad Faith Litigation 
sec. 1.07[2] at 1-23 (1993 ed.).


Footnote 13:

     See Nicholson, 777 P.2d at 1156.


Footnote 14:

     See Tenala, Ltd. v. Fowler, 921 P.2d 1114, 1118 (Alaska 1996).


Footnote 15:

     See State v. United Cook Inlet Drift Ass'n, 895 P.2d 947, 950
(Alaska 1995).


Footnote 16:

     841 P.2d 176, 182 (Alaska 1992) (quoting 7C John A. Appleman,
Insurance Law and Practice sec. 4686 (1979), and AS 21.36.125).


Footnote 17:

     Id. at 183.


Footnote 18:

     Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281,
291 (Alaska 1980); see also CHI of Alaska, Inc. v. Employers
Reinsurance Corp., 844 P.2d 1113, 1116 (Alaska 1993).


Footnote 19:

     Quoting Robert Keeton & Alan Widiss, Insurance Lawsec. 7.6(b),
at 823 (1988).


Footnote 20:

     See, e.g., Sauer, 841 P.2d at 182 ("[The insurer] not only
breached its duty to defend, but it failed to promptly communicate
its denial of a defense and coverage or any basis for such
denial."); Continental, 608 P.2d at 292 (Alaska 1980) (holding that
insurer's failure to inform insured promptly of its intention to
deny liability after discovering facts evidencing a breach of the
insurance policy amounts to a waiver of its right to deny coverage
based on that breach).


Footnote 21:

     The superior court stated in paragraph 4 of its conclusions of
law on remand: 

               [PacMar] did not breach a duty of care to
the Clarks by conducting a conditional defense while maintaining
the declaratory judgment action. [PacMar] supplied the Clarks with
independent counsel, while [PacMar] pursued the policy coverage
dispute.  The defense provided was thus not "conditional."

(Emphases added; citation omitted.)


Footnote 22:

     1 Allan D. Windt, Insurance Claims and Disputes, sec. 2.06, at
39
(3d ed. 1995).


Footnote 23:

     844 P.2d 1113 (Alaska 1993).


Footnote 24:

     841 P.2d 176 (Alaska 1992). 


Footnote 25:

     608 P.2d 281, 291 (Alaska 1980).


Footnote 26:

     The most particularly applicable case is Sauer, where we held
that a substantial breach by an insurer of its obligations under
the policy precluded it from later arguing that coverage did not
exist.  See 841 P.2d at 183-84.


Footnote 27:

     939 P.2d 1245 (Wash. App. 1997), rev'd, 961 P.2d 933 (Wash.
1998).


Footnote 28:

     See Coventry Assocs. v. American States Ins. Co., 961 P.2d 933
(Wash. 1998). 


Footnote 29:

     In Coventry, a contractor sued its insurer for bad faith
failure to investigate the contractor's claim for construction
damages caused by a mudslide.  See Coventry, 961 P.2d at 934.  By
the time the case reached appeal, it was undisputed that the policy
did not cover the damage.  See id. at 935.  The Washington Supreme
Court had previously held in third-party cases -- cases where the
insured party asserts a third party's claim for damages -- that a
bad-faith action could be maintained under a theory of presumptive
prejudice even when coverage was ultimately found non-existent. 
See id. at 936-37.  But the court of appeals in Coventry granted
summary judgment to the insurer, declining to apply the same rule
to a first-party case -- a case like Coventry's where the insured
directly asserts its own damages claim.  See id. at 935-36.  In
reversing the court of appeals, the supreme court held that a bad-
faith action is permissible against an insurer in a first-party
case, as it is in a third-party case, "regardless of whether the
insurer was ultimately correct in determining coverage did not
exist."  Id. at 937.  But the court declined to apply presumptive
prejudice to first-party cases, restricting its use to third-party
cases.  See id. at 938-39.  In the absence of presumptive
prejudice, the court also declined to apply the doctrine of
coverage by estoppel, holding that if Coventry established bad
faith at trial, its recovery should be limited to the actual
expenses it incurred as a result of its insurer's conduct.  See id.
at 940.  In contrast to Coventry, the present case involves a
third-party claim. 



Footnote 30:

     Sauer v. Home Indem. Co., 841 P.2d 176, 180 (Alaska 1992).


Footnote 31:

     Afcan v. Mutual Fire, Marine & Inland Ins. Co., 595 P.2d 638,
645 (Alaska 1979); see also Sauer, 841 P.2d at 180-81. 


Footnote 32:

     See, e.g., State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d
1152, 1157 (Alaska 1989).


Footnote 33:

     Dissent at 40.


Footnote 34:

     See, e.g., Smith v. State, 948 P.2d 473 (Alaska 1997).


Footnote 35:

     405 N.E.2d 48, 54 (Ind. App. 1980).


Footnote 36:

     See id.


Footnote 37:

     State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152, 1157
(Alaska 1989).


Footnote 38:

     Id.


Footnote 39:

     See Fulton v. Lloyds & Inst. of London, 903 P.2d 1062, 1069
(Alaska 1995).


Footnote 40:

     Lloyds does not specifically dispute the superior court's
conclusion that PacMar's conduct amounted to a breach of the
covenant of good faith and fair dealing and that this breach
entitled Fulton to damages in tort, as well as to contract damages.
Lloyds also does not dispute the court's ruling concerning the
proper measure of damages that applies under this tort theory.  We
therefore need not address these issues. 


Footnote 41:

     Given our decision affirming the superior court's entry of
judgment against Lloyds, we need not address Fulton's contingent
cross-appeal arguments concerning the independence of Richmond's
legal representation.


Footnote 42:

     See McConkey v. Hart, 930 P.2d 402, 404 (Alaska 1996), as
modified on denial of rehearing (February 2, 1997).


Footnote 43:

     AS 09.30.070(b).  Although the superior court initially
questioned whether AS 09.30.070(b) applied to Fulton's action
against Lloyds, neither party claims on appeal that the court erred
in ultimately concluding that it did.  Because the issue is not
raised, we need not decide it.


Footnote 44:

     See Himschoot v. Shanley, 908 P.2d 1035, 1042-43 (Alaska
1996).  Nor is it significant that Clark addressed his letter to
his primary insurer, PacMar; for as we recognized in our original
opinion, the terms of the policy require PacMar and Lloyds to be
treated as a single party and allow "only one defense . . . , since
there was only one policy."  Fulton v. Lloyds & Inst. of London
Underwriting Cos., 903 P.2d 1062, 1069 (Alaska 1995).


Footnote 45:

     See Himschoot, 908 P.2d at 1042-43.


Footnote 46:

     Alaska Civil Rule 68(b)(2) provides:

               (b) If the judgment finally rendered by
the court is not more favorable to the offeree than the offer, the
prejudgment interest accrued up to the date of judgment is entered
shall be adjusted as follows:

               . . . .

               (2) if the offeree is the party defending
against the claim, the interest rate will be increased by the
amount specified in AS 09.30.065.

          AS 09.30.065 was amended substantially in 1997; however,
the amended section only applies to causes of action "accruing on
or after August 7, 1997."   Ch. 26, sec. 55, SLA 1997.  Under the
version of AS 09.30.065 applicable in this case, Fulton's annual
rate of interest would increase from 10.5% to 15.5%.  See Alaska
Housing Finance Corp. v. Salvucci, 950 P.2d 1116, 1126 (Alaska
1997).


Footnote 47:

     Cf. Hayes v. Xerox Corp., 718 P.2d 929, 936-37 (Alaska 1986);
Brinkerhoff v. Swearingen Aviation Corp., 663 P.2d 937, 943 (Alaska
1983).


Footnote 48:

     601 P.2d 266, 269 n.4 (Alaska 1979).  Farnsworth holds that in
computing the value of a judgment under Civil Rule 68, the jury's
damage award must be added to prejudgment interest accruing prior
to the offer, pre-offer attorney's fees, and costs.  See id. 
Farnsworth also holds that in determining attorney's fees for
purposes of the Civil Rule 68 calculation, the trial court should
refer to the partially contested fee schedule set forth in Civil
Rule 82.  See id.


Footnote 49:

     See Power Constructors, Inc. v. Taylor & Hintze, 960 P.2d 20,
34-36 (Alaska 1998) (applying the Farnsworth formula to both
parties in considering competing offers of judgment).



                            FOOTNOTES


Footnote 1:

     United States District Court Judge James M. Fitzgerald also
made findings of fact in the federal declaratory judgment
proceeding that found that the JAMIE LYNN was outside covered
waters.


Footnote 2:

     See Miscovich v. Tryck, 875 P.2d 1293, 1302 (Alaska 1994);
Dressel v. Weeks, 779 P.2d 324, 329 (Alaska 1989). 


Footnote 3:

     The superior court cited CHI of Alaska, Inc. v. Employers
Reinsurance Corp., 844 P.2d 1113, 1119 (Alaska 1993); Sauer v. Home
Indemnity Co., 841 P.2d 176, 182-83 (Alaska 1992); and Continental
Insurance Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 291 (Alaska
1980).  


Footnote 4:

     See Slip Op. at 25.  


Footnote 5:

     See Slip Op. at 17-19.  


Footnote 6:

     See Slip Op. at 23.  


Footnote 7:

     See Slip Op. at 23.  


Footnote 8:

     See Slip Op. at 10.


Footnote 9:

     For cases which presume prejudice to the insured where an
insurer materially breaches the contract or acts in bad faith, see 
Kirk v. Mount Airy Insurance Co., 951 P.2d 1124, 1126-27 (Wash.
1998); and Safeco Insurance Co. v. Butler, 823 P.2d 499, 504 (Wash.
1992).  Both of these cases, however, recognized a rebuttable
rather than a conclusive presumption.  I do not read the three
cases noted above in footnote 3 to discuss, much less endorse, a
presumption of prejudice.


Footnote 10:

     See Slip Op. at 17-23.


Footnote 11:

     See, e.g., Safeco, 823 P.2d at 504 (listing cases presuming
prejudice where insurer had assumed defense of action and later
attempted to withdraw).


Footnote 12:

     See, e.g., Luke v. American Family Mut. Ins. Co., 476 F.2d
1015, 1020 (8th Cir. 1972) (noting difference between liability of
insurer which meets its duty to defend insured but fails to
exercise good faith in settling within policy limits, and insurer
which breaches its contract by failing to defend and then rejects
reasonable settlement offer); Montrose Chem. Corp. v. Superior
Court, 861 P.2d 1153, 1157 (Cal. 1993) (discussing differences
between insurer's duties to defend and to indemnify).


Footnote 13:

     The cooperation clause reads in pertinent part:
     
          The Insured shall render every assistance to
Underwriters hereof to facilitate investigation or adjustment of
claims . . . and to co-operate [sic] fully in the securing of
evidence . . . .


Footnote 14:

     We must presume that they would not have knowingly falsified
their answers on this issue, because doing so would have both
precluded granting them equitable relief, and would have violated
their contractual duty to cooperate.  We must also conclusively
presume that counsel would not have encouraged them or knowingly
permitted them to falsify their answers.


Footnote 15:

     In his deposition in the federal civil personal injury action,
Chris Fulton again indicated that the JAMIE LYNN was sixteen hours
outside the Pribilof Islands at the time of Fulton's injury.
Likewise, Walter Clark, in his November 18, 1986, deposition in the
federal declaratory judgment action, testified that the JAMIE LYNN
was fifty miles off the Pribilof Islands at the time of Fulton's
injury.


Footnote 16:

     Falsification or refusal to answer relevant questions would
not have been a valid form of avoidance.


Footnote 17:

     Cf. Snodgrass v. Baize, 405 N.E.2d 48, 54 (Ind. App. 1980)
(applying exclusionary remedy instead of estopping insurer from
relying on policy defense).


Footnote 18:

     See Slip Op. at 21.