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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Great Divide Insurance Co. v. Carpenter (10/24/2003) sp-5746

Great Divide Insurance Co. v. Carpenter (10/24/2003) sp-5746

     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,
     e-mail corrections@appellate.courts.state.ak.us.


            THE SUPREME COURT OF THE STATE OF ALASKA

GREAT DIVIDE INSURANCE             )
COMPANY,                      )   Supreme Court Nos. S-9774/9843
                                   )
          Appellant/Cross-Appellee,     )
                                   )    Superior Court No.
     v.                            )    1JU-96-1125 CI
                                   )
RAYMOND CARPENTER, a minor,        )    O P I N I O N
through his natural mother, DOROTHY     )
REED,                              )
                                   )
           Appellees/Cross-Appellants.   )    [No. 5746 - October
24, 2003]
                                   )


          Appeal  from the Superior Court of the  State
          of  Alaska, First Judicial District,  Juneau,
          Larry R. Weeks, Judge.

          Appearances:   Paul  D. Stockler,  Anchorage,
          and  William  R. Hickman, Earl M. Sutherland,
          Reed   McClure,   Seattle,  Washington,   for
          Appellant/Cross-Appellee.     Mark    Clayton
          Choate,    Wailuku,   Maui,    Hawaii,    for
          Appellees/Cross-Appellants.

          Before:    Fabe,  Chief  Justice,   Matthews,
          Eastaugh, Bryner, and Carpeneti, Justices.

          PER CURIAM
          MATTHEWS, Justice, concurring.
          EASTAUGH, Justice, dissenting.

           A  jury awarded compensatory damages of $1,540,000 and

punitive  damages  of $2,600,000 against Great  Divide  Insurance

Company on claims that it had breached its duties to its insured,

Gowdy   &  Son,  while  defending  a  claim  brought  by  Raymond

Carpenter.  The five main issues presented in the appeal are:

      1.    Did the policy issued by Great Divide  to Gowdy & Son

cover the accident that resulted in injury to  Carpenter?

      2.    Was the jury determination that Great Divide did  not

fulfill  its legal obligations to Gowdy & Son in accord with  the

law?

      3.    Was the jury determination that Great Divide did  not

fulfill  its  legal obligations to Gowdy & Son supported  by  the

evidence?

      4.    Should  the  issue  of  punitive  damages  have  been

submitted to the jury?

     5.   Was the jury award of punitive damages supported by the

evidence?

           Carpenter  has  cross-appealed, raising  the  question

whether the superior court erred in refusing to rule as a  matter

of  law  that  Great  Divide was bound by  the  arbitration-based

compensatory damage judgment of more than $2,000,000  entered  in

Carpenter v. Gowdy.1

           We conclude that the policy covered the accident, that

the  finding  of a breach was legally justified, that  there  was

sufficient  evidence  that  Great  Divide  breached  its  defense

duties,  but that the claim for punitive damages should not  have

been  submitted to the jury because there was no pretrial  notice

of this claim.  Our decision on this issue moots consideration of

the  fifth issue as to whether the jury award of punitive damages

was  supported by the evidence.  We also conclude that the  court

properly ruled that Great Divide was not bound by the judgment in

Carpenter  v.  Gowdy.  We thus affirm the award  of  compensatory

damages and reverse the award of punitive damages.

I.   FACTS AND PROCEEDINGS

     A.   The Underlying Accident and Coverage

           Elmer  and  Dan Gowdy, d/b/a Gowdy & Son,  operated  a

floor-covering  business in Douglas.  The business  was  operated

out  of Elmer's house that was heated in part by woodstoves.   On

September  3, 1993, Rick Ostman, a sometime employee of  Gowdy  &

Son,  was  felling dead trees on the property of John Vavalis  in

order   to  obtain  firewood  to  heat  Elmer's  house.   Raymond

Carpenter,  age  eleven, was struck by  a  falling  tree  cut  by

Ostman.  He suffered serious, permanent injuries, including brain

damage.  On the day of the accident, a Sunday, Dan Gowdy was also

on  the  Vavalis property skidding logs that Vavalis had sawn  to

Vavalis's   new   portable  mill.   Dan   was   working   without

remuneration  to help Vavalis as "the neighborly  thing  to  do."

Elmer Gowdy was also on the Vavalis property "off and on" on  the

day  of  the  accident.  He had directed  Ostman  to  go  to  the

property  to cut three dead spruce trees for firewood.   Ostman's

trial  testimony  as to whether Elmer or Dan had  told  him  what

trees to cut is unclear.  Initially he said Elmer told him,  then

that  he could not remember if it was Dan or Elmer, and then that

Dan did so.  Ostman testified that he was being supervised by Dan

at the Vavalis property.

           At the time of the accident Gowdy & Son was insured by

Great Divide under a commercial general liability policy with  an

"each   occurrence"   limit  of  $1,000,000.    In   the   policy

declarations  sheet Gowdy & Son was described  as  a  partnership

whose  business  was  "floor-covering  installation."   Its  only

relevant  premium classification was "floor-covering installation

-   not  ceramic,  tile  or  stone."   The  policy  contained   a

classification limitation stating that "[t]his insurance does not

apply  to  `bodily  injury' . . . for operations  which  are  not

classified  or shown on the . . . Declarations, its  endorsements

or supplements."

     B.   Carpenter v. Gowdy

           Carpenter sued Dan Gowdy, but not Elmer Gowdy or Gowdy

&  Son,  on February 3, 1995, claiming that the tree that injured

him  was negligently felled.  Carpenter contended that Dan  Gowdy

was  directly  and  vicariously responsible for this  negligence;

directly  for  failing  to  exercise  adequate  supervision   and

vicariously   under  principles  of  respondeat  superior.    The

complaint  alleged that Dan Gowdy "operated a business in  Juneau

generally engaged in the operation of the felling of trees,"  and

that  at  the time of the accident Dan was cutting trees  on  the

property at the request of John Vavalis.

           When Dan was served with the complaint, he took it  to

attorney Jim Bradley, a family friend.  Bradley gave some  advice

to  Dan and attended a deposition with him, but did not enter  an

appearance.  On August 21, 1995, Bradley wrote a letter for Dan's

signature  tendering the defense to Great Divide.  Upon receiving

this  letter  Great  Divide assigned adjuster Greg  Anson,  whose

office was in Arizona, to handle the claim.  On August 25,  1995,

Anson  read  the  complaint  and  the  policy  and  identified  a

potential   coverage   question  based  on   the   classification

limitation.  He called Anchorage attorney Patrick McKay, who  had

previously represented Great Divide in numerous cases.  According

to  Anson's  contemporaneous  notes,  McKay  told  him  that  the

classification  limitation  would  be  upheld.   The  notes  also

stated that Great Divide should assign attorney Paul Stockler  to

file a declaratory judgment action on coverage.

           On August 28, 1995, Anson had a telephone conversation

with Dan Gowdy.  Anson, again according to his notes, advised Dan

that   a  coverage  question  existed  under  the  classification

exclusion and that Great Divide would conduct a defense  under  a

reservation of rights.  Anson's notes indicate that Dan  said  he

had nothing to do with cutting trees on the property, that he was

operating a skidder at the time of the accident, and that he  and

his  father  were  hired by the property owner to  remove  felled

trees.   Dan  also  told  Anson that his deposition  had  already

partly  been  taken and was slated to continue on that  day,  and

that  he was not currently represented by counsel.  Anson  called

McKay, who was able to cancel the deposition.

           On  August  31, 1995, Anson wrote both Elmer  and  Dan

Gowdy.   He  acknowledged receipt of the Carpenter complaint  and

stated  that according to the complaint "Dan Gowdy was conducting

a  tree-clearing  operation" at the time of the accident.   Anson

stated  that he had assigned Pat McKay to defend the  Gowdys  but

that  the  defense would be "under a full reservation of  rights"

and that the defense would not "constitute either an admission of

coverage   under  the  policy,  or  an  acknowledgment   of   any

responsibility  to  pay damages in any judgment  against  you  by

Raymond  Carpenter."   The letter went on  to  observe  that  the

limits   of   liability  under  the  policy  were  $300,000   per

occurrence.  Relying on the classification limitation  exclusion,

the letter stated:

                Clearly, the pleadings contained in the
          lawsuit indicate that injury sustained by the
          plaintiff  were  [sic] as a  result  of  your
          conducting a tree clearing operation  and  is
          not  in  any  way  related  to  the  business
          description of your policy.  Therefore, if it
          is   determined  that  there  would   be   no
          liability  coverage available to  your  [sic]
          under  the above policy, I encourage  you  to
          seek  and obtain counsel at your own choosing
          and  expense to defend your interests in this
          matter.
          
Anson's  letter  concluded:  "If you feel I  have  overlooked  an

allegation  in  the complaint which would be covered  under  your

policy,  or  potentially covered under your policy, please  point

out  such  language to me and I will be happy to  reconsider  our

position."

          McKay appeared in the case as counsel for Dan Gowdy and

conducted  the  defense on his behalf.  Soon after McKay  assumed

the defense, Dan was interviewed in person by Mike Trevethan,  an

independent  adjuster  hired by Great  Divide.   Trevethan  asked

questions  that  were relevant to liability and coverage  issues.

In   the  process  of  conducting  the  defense  McKay  took  and

participated in a number of depositions and forwarded reports  of

the  depositions  to  Great  Divide.  Whether  McKay's  questions

during  the depositions were designed to elicit facts showing  no

coverage  rather  than no liability is a disputed  issue  in  the

current litigation.

           In December 1995 McKay, acting on behalf of Dan, filed

a  third-party  claim  against  Rick  Ostman  and  John  Vavalis,

claiming  that their negligence had contributed to the  accident.

In early January 1996 Carpenter filed an amended complaint adding

Elmer Gowdy as a defendant.  Elmer's attorney, Loren Domke, wrote

Great Divide and asked that he be appointed as Elmer's lawyer  to

defend  the case at Great Divide's expense.  Great Divide  agreed

and  thereafter  McKay  and Domke cooperated  in  conducting  the

defense of the Carpenter action.

          The case was set for trial to begin in June 1996.  At a

mediation conference held in April 1996, Carpenter and the Gowdys

agreed  to  a  procedure  by which the  case  would  be  settled.

Contingent  on  the  outcome  of an arbitration  proceeding,  the

Gowdys  agreed  to confess judgment and assign to  Carpenter  any

rights  or claims that they had against Great Divide arising  out

of   Great  Divide's  conduct  of  their  defense.   In  exchange

Carpenter  agreed  not  to execute on the  other  assets  of  the

Gowdys.   The arbitrator would determine whether the Gowdys  were

legally  responsible for Carpenter's injuries and would determine

Carpenter's  damages.  No fault would be apportioned to  Vavalis,

Ostman,  or Raymond Carpenter.  The arbitrator would be  selected

by Carpenter's counsel.  Great Divide was aware of the settlement

procedures but did not agree to the settlement or participate  in

the  arbitration called for by the settlement.  On July 27, 1998,

the  arbitrator  found that the Gowdys were  liable  and  awarded

Carpenter  damages  of  $2,006,000.  A judgment  was  entered  in

accordance with the arbitration award.

     C.   Great Divide v. Carpenter

           Great Divide's present action against both Gowdys  and

Carpenter  was filed on May 28, 1996, seeking a declaration  that

there  was  no coverage because of the classification  limitation

exclusion.   Carpenter  answered in his  own  right  and  as  the

assignee  of  the Gowdys, generally denying that the claims  were

excluded  from  coverage.  He also asserted a  counterclaim  that

alleged  that Great Divide, upon being notified of the  Carpenter

claim  "which  on its face was possibly covered  by  the  policy,

.  .  .  reserved  the right to deny coverage, failed  to  retain

independent   counsel  for  Dan  Gowdy  and  failed   to   obtain

independent  counsel  for Elmer Gowdy until  after  he  had  been

prejudiced by the absence of counsel."  This was alleged to be  a

breach  of the policy and the implied covenant of good faith  and

fair  dealing  and  to  preclude by estoppel  Great  Divide  from

denying coverage.  Carpenter sought compensatory but not punitive

damages.

           Great  Divide answered the counterclaim  denying  that

Carpenter  was  entitled  to  any relief.   After  discovery  and

pretrial  proceedings Great Divide sought to limit the claims  at

trial, arguing that Carpenter had abandoned his claim that  there

was   coverage  based  on  comments  in  his  initial  disclosure

statement.  The court denied this motion, ruling that the central

issue  in  the  declaratory judgment case "is  whether  there  is

coverage."

           The  trial  began  on  August 16,  1999.   Carpenter's

counsel first mentioned punitive damages after the jury had  been

selected.  Great Divide's counsel objected that punitive  damages

had  not  been pled and noted that he would oppose any motion  to

amend  the  counterclaim to add punitive damages.   Counsel  also

sought  a  protective  order barring any  reference  to  punitive

damages.  The court initially ordered Carpenter's counsel not  to

refer  to punitive damages in his opening statement.  But at  the

close  of  the  evidence the court ruled that it  would  give  an

instruction on punitive damages.

           At the trial both sides agreed that Anson had erred in

advising Dan in the August 31, 1995 letter that counsel of  Dan's

own  choosing in the defense of the Carpenter suit would have  to

be  paid  for by Dan.2  Alaska decision and statutory law require

an  insurance company to provide independent counsel selected  by

the  insured at the company's expense in cases where the  company

defends under a reservation of rights.3  The significance of this

mistake was disputed.  Also at issue was the broader question  of

whether the conduct of the defense by Great Divide and McKay  was

appropriate.

            Great   Divide's  expert  witness,  attorney  Michael

Geraghty, testified that McKay's conduct was appropriate and that

"if anything, [he] bent over backwards to protect his client, who

was  Dan  Gowdy, and, really, to the prejudice of  the  insurance

company . . . ."  Geraghty also testified that Anson's failure to

advise  Dan  Gowdy that he could select his own defense  counsel,

who  would be paid by Great Divide, had no impact on the  defense

of  the case in light of the effective representation provided by

McKay.   Carpenter's expert witness, John Partlow,  an  insurance

claims  supervisor,  testified  that  Great  Divide  should  have

conducted  an investigation designed to find coverage.   Instead,

Anson  made  an initial decision that there was no coverage,  and

thereafter Great Divide showed no inclination to re-examine  that

decision.   Partlow stated that this "borders on unconscionable."

Partlow also opined that McKay had a duty to try to develop facts

that would support coverage.

           Anson,  McKay, and Dan Gowdy also testified concerning

their  respective  activities in connection  with  the  Carpenter

case.   Anson,  who no longer worked for Great Divide,  described

what  he  remembered about his conduct pertaining  to  the  case.

McKay testified that he believed that his role was to defend  Dan

Gowdy  in  the Carpenter case, not to become involved in coverage

issues.  He testified that his deposition questions were designed

to  lead  to  the  exoneration of Dan.  Dan Gowdy testified  that

despite  the letter to Great Divide that Bradley drafted  and  he

signed  claiming coverage and requesting a defense,  he  did  not

believe  the  accident  was  covered  by  the  policy.   He  also

testified  that  after the first few conversations  he  had  with

McKay, McKay told him that he could pick his own lawyer.  Bradley

later  told  him  the same thing.  But Dan did not  testify  that

either  McKay or Bradley told him that the lawyer he chose  would

be  paid  for  by  Great  Divide.  Both Gowdy  and  Bradley  were

satisfied  with  McKay throughout the defense  of  the  Carpenter

case.

           At the close of the evidence Great Divide moved for  a

directed  verdict on the question of policy coverage.  The  court

reserved  judgment until after the return of the  verdict.   When

the  verdict  was  returned,  the court  denied  the  motion  and

affirmatively ruled that there was coverage.

          The jury returned a special verdict that concluded that

Great  Divide  did  not  fulfill its duties  to  the  Gowdys  and

assessed  compensatory  damages of $1,540,000.4   The  jury  also

found that McKay did not fulfill his obligations to Dan Gowdy and

that Great Divide had been shown by clear and convincing evidence

to have been reckless and indifferent to the rights of the Gowdys

and  deserved  punishment.  In subsequent bifurcated  proceedings

the jury concluded that punitive damages of $2,600,000 should  be

awarded against Great Divide.

          Following post-judgment motions the trial court entered

judgment   against  Great  Divide  in  favor  of  Carpenter   for

$1,540,000  plus  interest from August  27,  1999,  and  punitive

damages  of  $2,600,000 plus interest from the date of  judgment.

Great Divide appeals and Carpenter cross-appeals.

II.  DISCUSSION

     A.   The Accident Was Covered by the Policy.

          Great Divide argues that the superior court should have

granted  its  motion  for a directed verdict declaring  that  its

policy  did  not  cover  the  accident.   It  contends  that  the

classification limitation excludes coverage.  Great  Divide  also

argues  that the superior court erred in acting as the  trier  of

fact  on coverage issues and that the question of coverage should

have been submitted to the jury.

           The  business description of Gowdy & Son contained  in

the   declarations  sheet  of  the  policy  was   "floor-covering

installation,"  and  the  relevant  classification  for   premium

purposes  was  the  same.  The classification exclusion  provided

that  "[t]his insurance does not apply to `bodily injury' .  .  .

for  operations which are not classified or shown on the  .  .  .

Declarations, its endorsements or supplements."

           Great Divide argues that felling the tree that injured

Carpenter   was  an  "operation"  within  the  meaning   of   the

classification exclusion, and since tree felling was  not  listed

in  the  declarations, there was no coverage.   Carpenter  argues

that  the  tree felling was an incidental activity that supported

the   floor-covering   operation.   The  trial   court   accepted

Carpenter's view, noting testimony that Elmer Gowdy burned  three

to  four cords of wood each winter as "supplemental heat for  the

business/residence."  The court ruled that the connection between

the  cutting  of the tree and the business was "not  strong"  but

sufficient, stating:

          the  fact  that there was firewood  that  was
          going  to the place where the business worked
          out of, I believe it was not prohibited under
          the  policy.  And given the benefits that the
          business got out of this, and the operations,
          that I believe there was coverage.
          
                I  looked  at  the jury verdict  as  an
          advisory  opinion as to what they thought  on
          the  issue.   But  I believe that  there  was
          coverage, and I will deny the motion and find
          coverage.
          
           We interpret insurance policies in accordance with the

following principles:

          To  the  extent  that there are  no  relevant
          unresolved   or  controversial   facts,   the
          construction  of an insurance contract  is  a
          matter for the court.  A policy's meaning  is
          determined by examining the language  of  the
          disputed  policy provisions, the language  of
          other  provisions  in  the  policy,  relevant
          extrinsic evidence, and case law interpreting
          similar provisions.  An insurance policy  may
          be  considered a contract of adhesion and  as
          such should be construed so as to provide the
          coverage which a layman would reasonably have
          expected, given his lay interpretation of the
          policy   language.   We   therefore   resolve
          ambiguities  in  the  meaning  of   insurance
          contracts against the insurer.[5]
          
           We  agree  with Carpenter and the superior court  that

activities that merely support a classified business are  covered

under  policies  like  the one presently before  us.   Businesses

necessarily  engage  in much conduct that is  incidental  to  and

supportive of revenue-earning operations.  Businesses  must,  for

example,  acquire supplies, equipment and fuel, pay bills,  bank,

repair  what  they  use,  and send their employees  on  countless

errands  in  support of operations.  Where a business  heats  its

premises  by wood, cutting dead trees for firewood can reasonably

be viewed as an incidental support activity.6

           The  result  would  be different  if,  as  alleged  in

Carpenter's initial complaint, the Gowdys were in the business of

cutting trees and the tree that injured Carpenter had been cut in

the course of that business.  In that case tree felling would  be

a  revenue-earning activity and thus an "operation," as  used  in

the classification exclusion, and coverage would be excluded.7

          Great Divide's second contention concerning coverage is

that  the  court invaded the province of the jury in  determining

coverage.   This  argument is inconsistent  with  Great  Divide's

position before the trial court.  During the course of discussing

instructions  the court asked what issues the jury should  decide

and  what  issues  the court should decide.   Counsel  for  Great

Divide stated that

          the  Court  has  to  decide  whether  or  not
          there's coverage. . . .  If the Court decides
          that  there  is no coverage . . .  the  court
          should  dismiss  the jury  and  the  case  is
          dismissed.   If  the judge -  if  Your  Honor
          decides there is coverage, then the jury  has
          these  four  questions to  decide  that  I've
          . . . laid out in my verdict form.
          
Great Divide is precluded from now taking a position inconsistent

with the position it took at trial.

           Further,  only one special verdict question was  asked

relevant  to  coverage,  namely  whether  the  accident  occurred

"during  the course and scope of business of Elmer &  Dan  Gowdy,

d/b/a  Gowdy  &  Son?"   The  jury  answered  "yes."   The  court

considered this answer to be advisory only, but reached the  same

conclusion.   Great  Divide  did  not  request  any  other   jury

instructions or special verdict questions pertaining to coverage,

nor  does  it  now  contend that any other facts  were  disputed.

Under  these circumstances the meaning of the policy was properly

a matter for the court.8

          B.    The Jury Determination that Great Divide Did  Not
          Fulfill  Its  Defense Obligations Was  Not  Legally  or
          Factually Erroneous.
          
           In the special verdict the jury was asked:  "Did Great

Divide  fulfill its obligation to Dan and Elmer Gowdy  under  the

contract of insurance in accord with the law?"  The jury answered

"no" to this question.  Great Divide challenges this finding with

a  number of legal arguments and one factual argument confusingly

grouped together under a section of its brief captioned "The Jury

Verdict Finding Bad Faith Is Not Supported by the Evidence."   In

order  to  understand these arguments, the jury  instructions  on

Great Divide's duties must be described.

          The court began by instructing on the obligations of an

attorney appointed by an insurance company to defend its  insured

when  coverage  is disputed.  The court explained the  duties  of

appointed  counsel and particularized them to the  facts  of  the

case as follows:

                Meanwhile,  the attorney hired  by  the
          insurance company to defend the insured  must
          zealously  represent  the  interests  of  the
          insured, not the insurance company.  He  may,
          indeed  must  send progress  reports  to  the
          insurance company telling it how the case  is
          going.   But he must not use his relationship
          with  the  insured, his client, to improperly
          give  advantage to the insurance  company  in
          its coverage dispute with the insured.
          
                In this case you must determine whether
          it is more likely than not that Patrick McKay
          failed  in  his  obligation to represent  his
          client   by  improperly  providing   coverage
          information to Great Divide, or taking  other
          actions.
          
The  court  then  addressed in particular and  general  form  the

defense obligations of an insurance company:

                In every insurance policy, there is  an
          implied  obligation of good  faith  and  fair
          dealing on the part of both parties.  Raymond
          Carpenter  also  alleges  that  Great  Divide
          Insurance  Company breached the  covenant  of
          good  faith  and fair dealing in other  ways,
          including that it did not properly and  fully
          investigate the claim before deciding to file
          a  declaratory  judgment action;  that  Great
          Divide   did  not   affirmatively  look   for
          coverage  to  protect the insured;  and  that
          Great  Divide did not inform the  insured  of
          the  correct  amounts of  liability  coverage
          provided by the policy; and that Great Divide
          incorrectly told the insureds that they would
          have  to pay for their own counsel to protect
          their interests.  If you find that any of the
          above  occurred, you must determine if it  is
          more  probable  than not  that  Great  Divide
          breached the covenant of good faith and  fair
          dealing.
          
               An insurance company which fails to deal
          fairly and in good faith with its insured  by
          refusing unreasonably to pay the insured  for
          a valid claim covered by the policy is liable
          for  all damages resulting from such conduct.
          The  duty  to defend arises if the complaint,
          on  its  face, alleges facts which,  standing
          alone,  give  rise to a possible  finding  of
          liability covered by the policy; or,  if  the
          complaint  does not contain such allegations,
          where   the   true  facts   are   within   or
          potentially  within the policy coverage,  and
          are  known or reasonably ascertainable to the
          insured [sic].
          
               When investigating a claim, an insurance
          company  has a duty to diligently search  for
          evidence which supports its insured's  claim.
          If  it  seeks  to discover the evidence  that
          defeats  the  claim, it holds  its  interests
          above that of its insured.
          
           Great  Divide  does not argue that these  instructions

misstate  the law, nor does it contend that it is not vicariously

liable,  as the instructions assume, for any dereliction  of  its

appointed  counsel, McKay.  Thus, for purposes of this  case  the

legal validity of the instructions is assumed.

           We  turn now to the various legal arguments that Great

Divide  presents in its challenge to the jury's verdict  that  it

did not fulfill its defense obligations.  Great Divide begins  by

quoting  a treatise to the effect that an insurance company  does

not  breach its policy by unjustifiably reserving its  rights  to

deny coverage.9  Great Divide does not develop this point further

or  explain how it relates to the court's instructions.  But  the

point  appears to be an oblique attack on the court's instruction

that  an  insurance company has an obligation to diligently  seek

out  evidence  that will support coverage.  Great Divide  may  be

saying that if an insurance company can with impunity reserve its

rights  regardless  of  what a proper  investigation  might  show

concerning  coverage, then it is inconsistent to  require  it  to

make  an investigation seeking out coverage.  We doubt that  such

an argument, if actually made, would have merit.  The covenant of

good  faith and fair dealing governs all aspects of the  insurer-

insured relationship, and we see no reason to exempt reservation-

of-rights  decisions.   But  we need not  do  more  than  express

skepticism,  for  the point is not properly  before  us.   It  is

inadequately briefed; it is also waived because it was not raised

below.10

          Great Divide's second argument is that since the Gowdys

suffered no damages because of the covenant not to execute aspect

of  their settlement agreement, Great Divide cannot be liable for

breach  of  its defense obligations.  This argument lacks  merit.

Our  case  law permits an insured whose insurer has  committed  a

material breach of one of its defense obligations to enter into a

settlement agreement with the injured claimant.11  Ordinarily the

insured  is  barred by the cooperation clause of the policy  from

settling without the insurer's consent.  But the prior breach  by

the  insurer precludes it from relying on the cooperation  clause

as a defense to liability for the settlement.12  And the insured's

settlement  may  involve  an assignment of  the  insured's  right

against the insurer to the claimant together with a covenant  not

to execute against the other assets of the insured.13

           The covenant not to execute ordinarily means that  the

insured   has  not  suffered  a  personal  loss.   But   covenant

settlement agreements are given effect because it is thought that

an insured that has been placed at economic risk by its insurer's

breach  should be allowed to protect itself by shifting the  risk

to  the  breaching  insurer without first  subjecting  itself  to

potential  financial  ruin.  As the Supreme  Court  of  Minnesota

stated in approving a covenant settlement agreement:

                If as here, the insureds are offered  a
          settlement that effectively relieves them  of
          any  personal liability, at a time when their
          insurance  coverage is in  doubt,  surely  it
          cannot  be said that it is not in their  best
          interest  to accept the offer.   Nor,  do  we
          think,  can  the  insurer  who  is  disputing
          coverage  compel  the  insureds  to  forgo  a
          settlement    which   is   in   their    best
          interest.[14]
          
           Covenant settlement agreements are enforceable against

an  insurance company if the agreements are reasonable.  If  such

agreements  were not enforceable, claimants would not  make  them

and  insureds would often suffer financial ruin before they could

vindicate   their  rights  against  their  insurers.    Affording

insurers  the  right to relitigate liability and  damages  issues

resolved  by  agreement  "would destroy  the  purpose  served  by

allowing  insureds to enter into [covenant settlement] agreements

because claimants would never settle with insureds if they  never

could receive any benefit."15  But insurers are not precluded from

litigating  the defenses they relied on in denying  coverage,  or

reserving  their  rights to disclaim coverage,  or  other  issues

pertaining to whether they have breached their obligations.16

           Covenant  settlement agreements can  be  abused.   The

insured  who  is  fortunate enough to be able  to  make  such  an

agreement  has  no  incentive not to agree to  very  high  damage

awards.   In  recognition of this, we have been careful  to  hold

that  an  insurance  company  that has  materially  breached  its

defense  obligations whose insured has made such an agreement  is

not automatically bound by the agreement.  Instead, the agreement

must be reviewed for reasonableness by the trier of fact.17

           Great  Divide's  third  legal challenge  to  the  jury

determination that it violated its defense duties is  to  suggest

that  we adopt a recent California case limiting covenant  settle

ment agreements to cases in which the insurer has failed entirely

to  provide  a  defense,18 or a Texas case that ruled  that  such

agreements are void as against public policy.19

           In Washington Insurance Guaranty Ass'n v. Ramsey,20 we

rejected  the  argument that the only defense  obligation  breach

that   would   justify  enforcement  of  a  covenant   settlement

agreement  is an outright refusal to defend.  In that  case,  the

insurer  defended the action but unreasonably refused  to  settle

within  policy limits.  The insured then entered into a  covenant

settlement agreement with the plaintiff.  We declined to hold the

agreement  invalid  despite  the  specific  argument  that   such

agreements  were  only enforceable where there is  a  refusal  to

defend.  We adhere to our decision in Ramsey.21  The focus of our

case law has been on whether the insurer "has materially breached

its  contractual obligation to the insured."22   Where  such  has

occurred  the insurer cannot escape liability merely because  the

insured has taken control of the defense and settled the case  in

a  manner  that, except for the insurer's material breach,  would

violate  the  cooperation clause or other terms of the  insurance

contract.23

           With respect to Great Divide's argument that we should

adopt  the Texas rule holding that covenant settlement agreements

are void as against public policy, we disagree.  That approach is

contrary to our case law and contrary to the decisions of most of

the  other  states  whose courts have ruled on  the  validity  of

covenant settlement agreements.24

           In  summary,  we  conclude that the  legal  challenges

presented by Great Divide to the jury's determination that it  is

liable  for  failing  to fulfill its defense obligations  do  not

require reversal of the judgment.

            Great   Divide  raises  only  one  factual   argument

challenging the sufficiency of the evidence to support the jury's

verdict.   The argument is that Great Divide's failure to  advise

Dan  Gowdy that it would pay for independent counsel selected  by

Dan  was  a  mere technical violation of its defense duties.   We

discuss and reject this argument in the following paragraphs.

           Great  Divide  argues that its failure to  advise  Dan

Gowdy  that it would pay for independent counsel selected by  Dan

was  an inconsequential failure because at some fairly early time

McKay  and Bradley advised Gowdy of his CHI rights.25  But  while

there is uncontradicted testimony that Dan Gowdy was told that he

could  select his own counsel, it is not clear that he  was  ever

told that counsel of his selection would be paid by Great Divide.

Even at trial he seemed not to understand this point.

           We  reject  Great Divide's contention that failure  to

advise   Dan   Gowdy   of   his  CHI   rights   was   necessarily

inconsequential.  Independent counsel of Gowdy's  choosing  might

have developed the theory of coverage which the trial court,  and

this court, accepted:  that felling the tree for firewood to heat

the business was incidental to the classified business and not  a

separate  operation.  If this had been done, Anson,  who  invited

the presentation of overlooked theories of coverage in his August

31,  1995  letter,  might  have  reconsidered  his  position   on

coverage.   This  could  have greatly  changed  prospects  for  a

settlement   between   Carpenter  and  Great   Divide.    Another

possibility  is  that Great Divide might have  chosen  to  defend

without  a reservation of rights in order to maintain control  of

the  defense.  Of course these are merely possibilities.  But  we

held in Lloyds v. Fulton that an insurer's breach of its duty  to

provide  a  conflict free defense "must be considered a  material

breach  . . . unless the breach clearly has no adverse impact  on

the  relationship between the insurer and the insured."26  In the

present  case  Anson's failure to advise Dan  Gowdy  of  his  CHI

rights  was not clearly without adverse impact, and thus properly

can be considered a material breach.

           Finally,  we also observe that the jury was instructed

on  other  theories under which it could find that  Great  Divide

breached  its  defense  obligations.   The  sufficiency  of   the

evidence  to  support  a compensatory damage  award  under  these

theories has not been challenged.  Thus Great Divide's claim that

the  verdict concerning its breach of its defense obligations  is

factually unsupported fails.

          C.   The Issue of Punitive Damages Should Not Have Been
          Submitted To the Jury.
          
           We turn now to Great Divide's contention that punitive

damages  should not have been submitted to the jury  because  the

claim  for punitive damages was not pled and no notice of such  a

claim was given prior to trial.

           Carpenter's  counterclaim alleged  that  Great  Divide

reserved the right to deny coverage, failed to retain independent

counsel  for Dan Gowdy, failed to obtain independent counsel  for

Elmer Gowdy until after he had been prejudiced by the absence  of

counsel,  and failed to obtain a written waiver of the  right  to

independent  counsel  from Dan Gowdy.  The  counterclaim  alleged

that   this  conduct  "constituted  a  breach  of  the  insurance

contract,  a violation of the implied covenant of good faith  and

fair  dealing and a violation of Alaska law in effect at the time

of plaintiff's conduct."  The counterclaim went on to allege that

the  Gowdys  were  prejudiced  by this  conduct  and  that  as  a

consequence  of  this  conduct Great  Divide  "is  estopped  from

denying coverage under the contract of insurance and is liable to

Raymond Carpenter, Gowdy's assignee, for the full amount  of  any

liability  the Gowdys incur as a result of the injuries  suffered

by  Raymond  Carpenter on September 3, 1993."  In  the  wherefore

clause  of  the  counterclaim, judgment was sought  by  Carpenter

"[a]s  and for his special and general damages, an amount  to  be

determined  at trial;" plus interest, costs and fees and  "[s]uch

other and further relief as the court may grant in equity."

           A  scheduling order of December 30, 1998, required the

parties  to file proposed jury instructions in advance of  trial.

Carpenter filed proposed instructions on July 14, 1999,  a  month

before the trial began.  No jury instructions on punitive damages

were included.

           The  first  indication  by Carpenter  that  he  sought

punitive  damages occurred in comments his counsel  made  to  the

trial  court on the first day of trial.  Great Divide immediately

objected  on the ground that punitive damages had not  been  pled

and  asked  for  a protective order preventing any  reference  to

punitive  damages  during the course of  the  trial.   The  court

initially  barred reference to punitive damages.  On  the  second

day of trial the court ruled that it would not bar Carpenter from

"exploring those avenues that you believe will sustain a punitive

damages  claim,"  while  indicating that it  would  decide  later

whether  punitive  damages  would  be  submitted  to  the   jury.

Ultimately the court instructed the jury on punitive damages.

           Pleadings provide an opposing party with notice of the

nature  of  claims being asserted.27  The Alaska Rules  of  Civil

Procedure   require  a  party  who  seeks  special   damages   to

specifically  state this in a pleading.28  But the rules  do  not

require that punitive damages be specifically pled.

          Some jurisdictions have ruled on the question whether a

litigant  must  include  a  reference  to  punitive  damages   in

pleadings.   The  North Carolina Supreme Court has  held  that  a

plaintiff need not explicitly plead punitive damages in order  to

recover them, though the pleading must "fairly apprise[] opposing

parties  of facts which will support an award of punitive damages

. . . ."29  The Oregon Supreme Court has similarly commented that

"exemplary  damages  are  so intimately  connected  with  general

damages  that if the general allegations are sufficient  to  show

the  wrong  complained of was inflicted with malice or oppression

or  other like circumstances, the complaint will be sufficient to

authorize the infliction of punitive or exemplary damages."30

           We agree with the approach taken by these authorities.

We  believe that although punitive damages need not be pled in  a

complaint,  the  complaint should, at a minimum,  allege  conduct

that  meets the legal standard for the award of punitive damages.

Alternatively, a sufficiently early notification in the course of

pretrial proceedings that punitive damages are being sought could

also serve to give fair notice to the opposing party.

           Since  the  advent  of tort reform in  1986,  punitive

damages have been governed by statute.  They may be awarded  only

on  proof  by  clear and convincing evidence that  a  defendant's

conduct was either outrageous, including acts done with malice or

bad  motives, or evidenced reckless indifference to the interests

of another.31

           In  the  present case we have little doubt  that  fair

notice that punitive damages would be sought was not given.   The

conduct   alleged   in  the  counterclaim  was  not   necessarily

outrageous   or   recklessly   indifferent,   nor   was   it   so

characterized.   The  allegation that Great Divide  violated  the

implied covenant of good faith and fair dealing is not sufficient

to  support a claim for punitive damages.32  Further, the body of

the  complaint seeks only a judgment for the full amount  of  the

liability   the  Gowdys  incurred  as  a  result  of  Carpenter's

injuries,  with  no claim for personal wrongs to the  Gowdys  for

their treatment by Great Divide.  Consistent with the body of the

counterclaim,  the  wherefore clause of the  counterclaim  simply

requested  special  and  general  damages,  both  of  which   are

categories  of  compensatory rather than  punitive  damages.   No

pleadings  subsequent  to  the  counterclaim  gave  notice   that

punitive damages would be sought.  One occasion for the assertion

of punitive damages would have been in proposed jury instructions

as  required  by  the  scheduling  order.   Carpenter's  proposed

instructions did not include punitive damages instructions.   For

these reasons we conclude that appropriate standards relating  to

notice  of  punitive damages claims were not  satisfied  in  this

case.

           The  trial  court  did not rule  on  whether  punitive

damages  would be submitted to the jury until after the close  of

the evidence in the process of deciding on jury instructions.  At

that point, following Great Divide's renewal of its objection  to

punitive damages instructions, the court stated:

                Well,  I  believe that it places  Great
          Divide  in  a  difficult  situation.   I   do
          believe  that  we've  litigated  the   issues
          during  the course of the trial.   I'll  give
          the  instruction.  I guess I do that  because
          Mr. Choate moved for a continuance, and Great
          Divide  wanted to go ahead with the trial  at
          the trial date that it was set.  And, to some
          extent,   you're  in  a  difficult   position
          because  of that decision.  And I acknowledge
          that  it  wasn't your desire to  be  in  that
          place  where  you had to make that  decision.
          I'll give the instruction . . . .
          
           We  agree  that Great Divide was placed in a difficult

situation  given the lack of fair notice of the punitive  damages

claim.  It was prejudiced because it had done no legal or factual

preparation  or  discovery related to  punitive  damages.   Great

Divide's  counsel  made a persuasive showing  of  prejudice.   He

argued that depositions of supervisors of Great Divide would have

been  taken  inquiring  about  Great Divide's  training  methods,

claims handling practices, and company policy with respect to the

CHI  decision.  He contended that the purpose of these  inquiries

would  be  to  establish that at worst a  mistake  was  made,  as

opposed  to deliberate or malicious acts deserving of punishment.

He  noted that the pre-trial phase of the case was over, and with

these  witnesses being thousands of miles away, "I can't go  redo

all those depositions . . . ."

           But  we  do  not agree with the continuance  rationale

employed by the trial court.  The continuance motion was filed on

August  10,  the week before trial was to begin.  The motion  did

not  mention punitive damages.  It was based on two reasons.  The

first was so that the deposition of Anson could be taken, and the

second was so that additional motion practice could take place in

order   to  decide  unresolved  questions  of  law.   The   Anson

deposition  was  taken without the need for a  continuance.   The

time  for  motions on questions of law had expired  on  June  15,

1999.   Further,  the  objective underlying this  reason  was  to

narrow issues, rather than broaden them.  Thus it is hard to  see

how it could later be related to punitive damages.

           Carpenter  argues  though that "the  punitive  damages

claim arose primarily as a result" of the deposition testimony of

Anson.  Carpenter does not further explain this rationale, and we

do  not find it to be persuasive.  What Anson did and did not  do

was  evident  from  Great  Divide's claims  file  that  had  been

furnished  to  Carpenter much earlier in the  case.   Carpenter's

expert,  Partlow, concluded before Anson's deposition  was  taken

that Great Divide's conduct was not merely a mistake but rather a

willful attempt to avoid its obligations.33  Further, much of the

focus  of  Carpenter's  claim for punitive  damages  was  on  the

conduct   of   McKay,  and  Anson's  deposition  contributed   no

significant new knowledge about McKay's conduct.

           In summary, we conclude that Great Divide did not have

fair notice that punitive damages were being sought, that it  was

prejudiced  when  the court instructed on punitive  damages,  and

that  the  court abused its discretion when it so instructed  the

jury.

          D.    Great Divide Was Not Automatically Bound  by  the
          Judgment in Carpenter v. Gowdy.
          
           On cross-appeal, Carpenter argues that the trial court

erred  in  failing  to rule that the amount of  the  judgment  in

Carpenter v. Gowdy was binding on Great Divide.  Carpenter sought

such a ruling after the jury was selected but before evidence was

presented.  Great Divide contended that not only was the judgment

not  binding but should be inadmissible.  As a back-up  position,

Great  Divide  contended  that if the judgment  was  admitted  in

evidence  then  the details of Carpenter's injury should  not  be

included.

           The  court  declined  to rule that  the  judgment  was

binding, allowed the fact of the judgment to go to the jury,  but

ruled that the details of Carpenter's injuries and his course  of

recovery would not be admitted.  During oral argument leading  up

to this ruling, Great Divide's counsel stated that if Carpenter's

counsel believed that the Carpenter v. Gowdy judgment "is binding

on  this court, it could be argued and be in a jury instruction."

But no jury instruction concerning the effect of the judgment was

given, nor was one requested.

           Carpenter's argument that Great Divide is bound  as  a

matter of law by the judgment entered in Carpenter v. Gowdy is in

conflict   with  our  case  law.   We  have  held  that  covenant

settlement agreements can only be binding on an insurance company

that does not consent to them if they are found to be reasonable.34

In  Ramsey and in Grace we indicated that a number of factors are

relevant to the question of reasonableness:

          The releasing person's damages; the merits of
          the  releasing person's liability theory; the
          merits   of  the  released  person's  defense
          theory; the released person's relative faults
          [sic];  the  risks and expenses of  continued
          litigation; the released person's ability  to
          pay; any evidence of bad faith, collusion  or
          fraud;  the extent of the releasing  person's
          investigation and preparation  of  the  case;
          and  the  interest of the parties  not  being
          released.[35]
          
Grace  makes it clear that these factors should be considered  by

the jury in a jury-tried case.36

           Although the settlement agreement in the present  case

was  combined  with  an  arbitration  proceeding  that  at  least

superficially  resembled a contested trial,  the  fact  that  the

judgment in Carpenter v. Gowdy was entered by arbitration  rather

than  by  agreement does not eliminate the applicability  of  the

requirement that covenant settlement agreements must be found  to

be  reasonable before they may be given effect.  The  arbitration

proceeding was not truly adversarial  since Carpenter had already

agreed  not  to execute against the Gowdys at the time  that  the

proceeding took place.  Further, the arbitrator was chosen solely

by  Carpenter's  counsel,  and  the  parties  agreed  to  exclude

considerations of comparative fault.  These factors  prevent  the

Carpenter  v.  Gowdy  judgment from being  accorded  unquestioned

acceptance.37

           Carpenter's argument that the court erred in  refusing

to  hold  that Great Divide was bound by the underlying  judgment

must be rejected for the above reasons.  Carpenter does not claim

that  the  court  erred  in failing to submit  to  the  jury  the

question  whether  the  settlement and  resulting  judgment  were

reasonable,  or  that  the  court erred  in  refusing  to  permit

detailed  evidence of Carpenter's injury and course of  recovery.

If these points had been raised and argued, they might have merit

and  could  warrant setting aside the judgment  for  compensatory

damages  and  remanding  for a new trial  on  the  issue  of  the

reasonableness of the settlement.38  But as these points have not

been  raised  and  this  remedy  is  not  sought,  the  award  of

compensatory damages must stand.

III. CONCLUSION

           For  the above reasons the judgment is AFFIRMED as  to
compensatory  damages and REVERSED as to punitive damages.   This
case is REMANDED for modification of the judgment consistent with
the             views             expressed             herein.39
MATTHEWS, Justice, concurring.
           I  concur fully in the reasoning and the result of the
per curiam opinion.  I write separately merely to express my view
on  an  issue  that  the  opinion does not  reach:   whether  the
evidence  was  sufficient to warrant submission of the  issue  of
punitive damages to the jury.  For the reasons set forth below, I
conclude that it was not.
           In  State  Farm  Mutual Automobile  Insurance  Co.  v.
Weiford40 we summarized our approach in reviewing punitive damage
awards:
                 Punitive   damages  have  a   two_fold
          purpose:   "to  punish the wrongdoer  and  to
          deter the wrongdoer and others like him  from
          repeating  the  offensive  act."   Providence
          Washington  Ins.  Co. of Alaska  v.  City  of
          Valdez,  684  P.2d  861, 863  (Alaska  1984).
          Since  these objectives go beyond the primary
          purpose   of   tort  law,  to  provide   just
          compensation  for the wrong  done,  "punitive
          damages are not favored in law.  They are  to
          be  allowed  only  with  caution  and  within
          narrow  limits."  Alaska Placer Co.  v.  Lee,
          553  P.2d  54, 61 (Alaska 1976).   Consistent
          with  this approach, we have limited punitive
          damages   to   cases  where  the  wrongdoer's
          conduct   could  fairly  be  categorized   as
          "outrageous, such as acts done with malice or
          bad  motives or reckless indifference to  the
          interests  of another."  State  Farm  Fire  &
          Casualty  Co.  v. Nicholson, 777  P.2d  1152,
          1158  (Alaska  1989); Alyeska Pipeline  Serv.
          Co.  v.  Beadles, 731 P.2d 572,  574  (Alaska
          1987);  Ross  Lab., Div. of  Abbott  Lab.  v.
          Thies,  725  P.2d 1076, 1081  (Alaska  1986).
          Malice may be inferred if the acts exhibit "a
          callous  disregard for the rights of others."
          Alyeska  Pipeline Serv. Co. v. O'Kelley,  645
          P.2d 767, 774 (Alaska 1982).  However, "where
          there  is no evidence that gives rise  to  an
          inference   of  actual  malice   or   conduct
          sufficiently   outrageous   to   be    deemed
          equivalent to actual malice," the trial court
          need  not, and indeed should not, submit  the
          issue of punitive damages to the jury.   Id.;
          Beadles, 731 P.2d at 574.
          
                 Despite  the  narrow  range  in  which
          punitive damages may be awarded, the role  of
          the  appellate  court in  reviewing  punitive
          damages awards is limited.  We will reverse a
          punitive  damages award "only if  we  have  a
          firm  conviction  based on the  record  as  a
          whole that the trial court erred and we  must
          intervene   to   prevent  a  miscarriage   of
          justice."   Alaska Village, Inc. v.  Smalley,
          720 P.2d 945, 948 (Alaska 1986).[41]
          
Great  Divide  argues that the evidence of  fault  in  this  case

simply  shows that Great Divide's employee Anson mistakenly  sent

letters  "that  wrongly  stated the Gowdys'  policy  limits,  and

wrongly  stated that the Gowdys could obtain independent  counsel

at  their  own  expense.   There was no  evidence  of  malice  or

reckless indifference, just mistakes."

           Carpenter responds with a one-sentence summary of  the

facts that he contends justify the award:  "Systemic ignorance of

basic law in conjunction with the taking advantage of the insured

to  obtain coverage information warranted punishment."  I  assume

that  Carpenter means to include within this statement the  three

main shortcomings identified by his expert witness Partlow:

          (1)  The  failure of Anson to advise Dan Gowdy  of  his
          right  to  select his own defense counsel who would  be
          paid for by Great Divide (CHI counsel);
          
          (2)  The failure of Great Divide, and McKay, to conduct
          an investigation designed to establish coverage; and
          
          (3)  McKay's conduct that favored Great Divide  to  the
          prejudice  of  Dan  Gowdy  by asking  questions  during
          depositions that were designed to elicit facts  showing
          no  coverage and by submitting reports to Great  Divide
          containing  information  regarding  coverage  that  was
          unfavorable to Dan Gowdy.
          
          I proceed to discuss each of these three points.

1.   Failure To Advise of CHI Rights

           The  only  clear misconduct in this case  was  Anson's

failure  to  advise  Dan Gowdy of his right  to  select  his  own

counsel  whose  fees  would  be paid by  Great  Divide.   Today's

opinion explains that this was not a mere technical violation  of

Great Divide's defense duties.42

          But it is one thing to conclude (as we do) that Anson's

failure  to  advise Dan Gowdy of his CHI rights  was  a  material

breach, and another to conclude (and today's opinion does not  so

conclude)  that  the  breach  was  outrageous  and  deserving  of

punishment.  Anson testified that he was adjusting claims in  all

fifty  states.  He stated that as of August 1995 he was aware  of

the  CHI  decision  in  Alaska, but he also  testified  that  his

understanding  was  that  if insureds "requested  an  independent

counsel  of their choosing, then yes, we would provide  that  for

them."   While Anson's testimony concerning his understanding  of

CHI  was  confused  and inconsistent with  his  August  31,  1995

letter,  there  is little to suggest that his failure  to  comply

with  the requirements of CHI was other than a negligent mistake.

In  February 1996 Elmer Gowdy's attorney, Loren Domke,  requested

that  he be allowed to defend Elmer as CHI counsel.  Great Divide

complied  with this request, and thereafter at least one  partner

to  the Gowdy & Son partnership was afforded CHI rights by  Great

Divide.   Thus, although Anson's mistake concerning CHI  coverage

was  a  material  breach of Great Divide's  defense  obligations,

"there  is no evidence that gives rise to an inference of  actual

malice or conduct sufficiently outrageous to be deemed equivalent

to actual malice."43

2.   Failure To Seek Out Coverage

     a.   Great Divide

          There is evidence that would justify finding that after

reviewing  the  complaint  Anson  concluded  that  there  was  no

coverage,   and   thereafter,  in  the  words  of   the   court's

instruction,  he  did not fulfill his "duty to diligently  search

for  evidence  which supports" coverage.  But  this  was  more  a

matter  of attitude than a failure of conduct.  Anson did send  a

field  adjuster  to investigate facts relating to both  liability

and   coverage,  and  his  investigation  appears  to  have  been

reasonably thorough, if not particularly imaginative.

           The  allegations of the complaint provide the  initial

guide to whether an insurance company has a duty to defend.   The

duty to defend arises "if the complaint on its face alleges facts

which,  standing  alone,  give rise  to  a  possible  finding  of

liability covered by the policy . . . ."44  If the complaint does

not contain allegations indicating coverage, there is nonetheless

a  duty  to defend "if facts underlying the complaint are within,

or  potentially  within, the policy coverage  and  are  known  or

reasonably ascertainable by the insurer."45

            The  allegations  of  Carpenter's  initial  complaint

affirmatively excluded coverage.  The complaint alleged that  the

falling tree that injured Carpenter was cut in the course of  Dan

Gowdy's  tree-felling  business.  If  this  had  been  true,  the

classification  exclusion  would have  excluded  coverage.   Even

though  the  allegations of the complaint negated coverage,  this

did  not  discharge Great Divide from its duty to take reasonable

steps  to  ascertain whether the facts underlying  the  complaint

were  potentially  within  policy coverage.   Complaints  may  be

amended,  and  in  any case the allegation in  question  was  not

binding on Dan Gowdy.  Nonetheless, the fact that the allegations

of  the  complaint explicitly negate coverage serves  to  explain

Anson's  quick  judgment and negative mind-set  on  the  coverage

issue.   I believe that his conduct concerning the duty  to  seek

out  coverage, at worst, can only reasonably be characterized  as

negligent.

     b.   McKay

           McKay conceived of his role in defending Dan Gowdy  as

limited  to  providing a defense to the Carpenter complaint.   He

testified "I was there to do the liability.  I wasn't there to do

the coverage."

           The  trial  court did not instruct the  jury  that  an

attorney  appointed by an insurance company to defend an  insured

must  seek out coverage for the insured, although Partlow, a non-

lawyer,  testified that he thought attorneys had this  duty.   In

CHI  we  discussed the role of counsel appointed by  an  insurer,

noting  a  split  of  authority as to whether  appointed  counsel

should  report  information that might  give  rise  to  a  policy

defense  to  the  insurer.  Both sides of this debate  seemed  to

agree  that it would be appropriate for appointed counsel "to  be

involved  only  in  the defense of the liability  claim,  not  in

coverage  issues,"  if this is made clear at the  outset  of  the

engagement.46  Although it is unclear whether McKay told Dan Gowdy

that he would not be involved in coverage issues, his failure  to

become involved in coverage issues seems to have been within  the

expectations of Dan Gowdy and Bradley.  I do not believe that  it

can reasonably be regarded as outrageous.

3.   McKay's Deposition Questions and Reports to Great Divide
     
           At  trial  Carpenter claimed that deposition questions

asked  by  McKay were intended to negate coverage.  The questions

generally sought information that might show that Rick Ostman was

neither employed nor being supervised by Dan Gowdy at the time of

the  accident.  McKay explained that if he could establish  those

facts  Dan  Gowdy would be exonerated.  The deposition was  taken

before  Elmer  Gowdy  or Gowdy & Son were added  as   defendants.

Both  McKay  and  Carpenter are right as to  the  impact  of  the

questions.   If  it  could be established  that  Ostman  was  not

working  for  or  being  supervised by Dan,  Dan  would  have  no

liability.   He  would also have no coverage, but that  would  be

irrelevant  if  he was not liable.  I believe that the  questions

are   reasonably  viewed  as  embodying  a  plausible  litigation

strategy, and that the evidence is lacking that McKay asked  them

because of a misplaced loyalty to Great Divide.47

           McKay  also wrote two reports to the insurance company

that  were cited as examples of improper communication  to  Great

Divide.   The  court  instructed the jury that  an  attorney  who

represents  an  insured cannot supply information detrimental  to

the  insured to the insurance company.  As we noted in  CHI  with

respect  to  insurer  appointed counsel,  there  is  a  split  of

authority as to the nature of the obligation of appointed counsel

to  report  information that may give rise to a policy defense.48

But assuming the correctness of the instruction, the duty not  to

supply  detrimental information cannot be met simply by  refusing

to  report at all to the insurance company.  The statute that was

enacted to flesh out CHI obligations, AS 21.89.100, requires that

even  CHI  counsel  consult  with the  insurer  "on  all  matters

relating to the civil action" and to "disclose to the insurer  in

a  timely  manner all information relevant to the  civil  action,

except  information that is privileged and relevant  to  disputed

coverage."49

           The  reports that McKay submitted to Great Divide  are

mainly summaries of non-privileged deposition testimony.  Some of

the  testimony that is reported is relevant to both liability and

coverage  as described above.  But the reports never mention  the

topic   of   coverage.   They  only  discuss  various  strategies

concerning the defense of Dan Gowdy in the Carpenter case.  In my

view  the  reports are consistent with the reporting requirements

expressed in AS 21.89.100 and I do not believe that they  can  be

reasonably read as showing that McKay in writing them was  intent

on bolstering Great Divide's coverage defense.

           In  summary, Great Divide did not correctly advise Dan

Gowdy of his CHI rights and did not investigate coverage with  an

open-minded  attitude.  But Great Divide did appoint counsel  who

provided an acceptable and ultimately successful defense  of  Dan

Gowdy in cooperation with CHI counsel for Elmer Gowdy.  And Great

Divide's    early   negative   attitude   toward   coverage    is

understandable, though not excusable, because the allegations  of

Carpenter's  complaint themselves negated coverage.  Under  these

circumstances  while  Great  Divide's  failures  may  have   been

material  breaches of its defense duties, they cannot  reasonably

be  characterized as outrageous.  I thus have a definite and firm

conviction  "based on the record as a whole that the trial  court

erred and we must intervene to prevent a miscarriage of justice."50

On  this  ground  as  well as on lack of fair notice  grounds,  I

conclude that the award of punitive damages must be vacated.

EASTAUGH, Justice, dissenting.

A.   Introduction

           I  disagree  with  this court's  conclusion  that  the

insurance policy covered Raymond Carpenter's claims.  I therefore

respectfully   dissent.  The  activity   that   injured   Raymond

Carpenter, cutting down a tree, was not one of the two classified

operations - floor covering and sheet-metal work - covered by the

policy.   Nor  is  it  reasonable to view  this  activity  as  an

"incidental  support  activity"  to  the  operations  the  policy

actually did cover.  Finally, I think it important not to confuse

the  operation that harmed Carpenter - cutting down trees -  with

its purpose - gathering fuel.

B.   Facts

           Great  Divide's  insurance policy provided  commercial

general liability coverage to the Gowdys' business, a partnership

doing  business as Gowdy & Son.  It covered liability for  bodily

injury  "to  which  this insurance applies."  This  coverage  was

subject  to this exclusion for bodily injury claims arising  from

non-classified business operations:

              EXCLUSION - CLASSIFICATION LIMITATION
          The following exclusion is added to COVERAGES
          A,  B  and C (Section I): This insurance does
          not  apply  to "bodily injury,"  .  .  .  for
          operations which are not classified or  shown
          on  the Commercial General Liability Coverage
          Declarations,     its     endorsements     or
          supplements.
          
           The  policy's declarations pages described the Gowdys'

business  as "Floor Covering Installation" and specified premiums

for  the  two  categories  of  work  listed  under  the  policy's

"Classification"  declaration.  The  two  listed  classifications

were  "Floor Covering Installation - not ceramic, tile or  stone"

and   "Sheet   Metal  Work  -  outside."   Each  of   these   two

classifications specified code numbers, the bases for calculating

the  premium, the applicable premium rate, and the total premium.

The  premium  charged for each classification  was  dependent  on

various  bases, including payroll.  These were the only  premiums

paid by the Gowdys for this policy.

           The  policy did not list tree-felling as a  classified

operation.

           On  September 3, 1993, Rick Ostman cut down  the  tree

that struck Raymond Carpenter; it was to be used for firewood  to

help   heat   Elmer   Gowdy's   home,   where   Elmer   performed

administrative  tasks  for the partnership.   Elmer  also  stored

business equipment in the attached garage.

           Findings  of the superior court and the advisory  jury

establish that Ostman was working for Gowdy & Son at the time  of

the  accident and that the accident occurred "during  the  course

and  scope"  of the Gowdys' business.  In denying Great  Divide's

motion  for  a  directed verdict on coverage, the superior  court

commented  that, although "the connection to the business  itself

was not strong," gathering firewood to heat the business premises

was  sufficiently  business-related that it "was  not  prohibited

under  the policy."51      Although the issue was hotly contested

at  trial,  Great  Divide does not appeal  the  superior  court's

finding that Ostman was working for Gowdy & Son when he cut  down

the  tree.  The superior court, in finding coverage, referred  to

opinions  of Carpenter's insurance expert to the effect that  the

classified  operations  exclusion did not  exclude  coverage  for

business activities that are "necessarily ancillary" to the  main

business activities.

C.   The Policy Did Not Cover Carpenter's Claims.

           Great  Divide  argues that, as a matter  of  law,  the

policy excludes claims arising from this accident, even if Ostman

was  working  for  the business when he cut down  the  tree.   It

contends  that  the  accident did not occur during  a  classified

operation,  and  that  the  policy consequently  does  not  cover

Carpenter's injuries.

           Carpenter responds that the superior court's  findings

of  fact  and  the  advisory jury's special verdict  support  the

superior court's conclusion.  But as Great Divide points out,  it

is not determinative that Ostman was working for Gowdy & Son when

he  cut the tree down: that the tree was felled in the course  of

Gowdy  &  Son's  business  is  a  necessary  but  not  sufficient

condition for coverage.

           Carpenter also argues that the firewood-gathering  job

was  "reasonably incidental" to the Gowdys' classified operations

and  should  therefore be covered by the policy, even though  the

policy  does  not  explicitly cover incidental operations.   This

court  accepts that argument.52  It affirms because it  concludes

that  the  tree-cutting activity that injured  Raymond  Carpenter

"can reasonably be viewed as an incidental support activity" to a

business that heats its premises by wood.53  It reasons that this

activity  differed from a "revenue-earning activity"  that  would

have been an "operation" subject to the classification limitation

exclusion in the policy.54  I disagree with these conclusions.

           The question of coverage under the Great Divide policy

presents a question of contract interpretation and does not  turn

on disputed fact issues.55

            Great  Divide  supports  its  interpretation  of  the

classification limitation by noting that the Gowdys' premium  was

computed  solely with reference to the two classified operations.

This  circumstance,  in  itself,  would  not  preclude  coverage.

Courts have rejected attempts to deny coverage on the sole ground

that the injury occurred outside listed classifications used  for

premium-setting purposes.56  Rather, courts have stated  that  an

insurer wishing to limit coverage to classified activities should

include an express exclusion to this effect.57

           Great Divide included such an express exclusion in the

Gowdy  &  Son policy.  That exclusion provides:  "This  insurance

does not apply to `bodily injury' . . . for operations which  are

not classified or shown on the . . . Coverage Declarations."  The

question   is   therefore  whether  this  express  exclusion   is

sufficient.  I think that it is.  The language is plain enough on

its  face.   Nothing implies that tree-felling,  even  if  it  is

conducted  for  business as opposed to private  purposes,  is  an

operation  that is within either of the two operations classified

in the policy's coverage declarations.

           My  reading of the exclusion is confirmed by two cases

applying  New  York  law  and  upholding  similar  exclusions  in

commercial  liability  policies like Great  Divide's.   In  Mount

Vernon  Fire Insurance Co. v. Chios Construction Corp., a  United

States district court applied New York law to a policy structured

exactly  like the Gowdy & Son policy: a declarations page  listed

classified operations and a classification limitation endorsement

excluded  coverage for claims arising from anything else.58   The

only  classified  operation was "Carpentry  -  Interior."59   The

claimant  sought coverage for injuries sustained  while  cleaning

steel  beams.60   Relying on the classification  limitation,  the

court  held  that the insurance company had no duty to  defend  -

much  less indemnify - its insured, reasoning that "there is  not

even  a  metaphysical  possibility that  the  .  .  .  injury  is

covered."61

          The Appellate Division of the Supreme Court of New York

relied upon a similar classification limitation in Ruiz v.  State

Wide  Insulation & Construction Corp.62  The classified operation

in  Ruiz  was "painting."63  Plaintiffs alleged personal injuries

and  property damage stemming from a fire that started while  the

third-party defendant was repairing their roof.64  Relying on the

classification limitation, the appellate court reversed the trial

court's  denial  of  the insurer's motion for  summary  judgment,

reasoning  that  "[t]he  terms  of  the  policy  are  clear   and

unambiguous and their construction may be determined as a  matter

of law."65

           The  parties have not directed us to any  other  cases

interpreting similar language, and I am not aware of any.  I find

these cases persuasive.

           Contrary to what this court thinks, it does not matter

whether  Gowdy & Son was to be paid for cutting down this tree.66

Whether  the  tree-felling  activity was  a  separate  source  of

revenue  for  the  business  is inconsistent  with  this  court's

justification for finding coverage; it is also irrelevant.  It is

inconsistent because the court's decision turns on its conclusion

that  Ostman's activity supported the floor-covering operation.67

That  conclusion necessarily assumes that there  was  a  business

nexus, and thus that heating the business premises (and therefore

by  extension gathering fuel, and, by further extension,  cutting

the tree) advanced the business's profit-making purposes.  If the

applicability  of  the exclusion did turn on a business  purpose,

i.e.,  profit-making, it would have been satisfied by the court's

inherent  assumption that Ostman's activity advanced  the  floor-

covering business.  (The fact that the tree-felling activity  was

not  revenue-generating  nonetheless helps  illustrate  why  this

activity was so remote from any covered operations.)

          And whether the business was to be paid for cutting the

tree is also irrelevant to the words of the policy.  No words  in

the  exclusion  imply that it turns on whether  the  unclassified

activity  is revenue-generating.  It is hard to imagine  all  the

"incidental" non-income generating business operations that might

be  covered  on  this  theory.  Cutting trees  for  use  as  fuel

sometime  in  the future would seem no different than demolishing

the  old  business  premises, excavating  for  and  building  new

premises,  driving  a well to serve the business,  or  installing

electrical  power and gas lines.  Some or all of these activities

would  seem  to  be unclassified operations.  Just because  these

activities  might  not  generate  revenue  should  not  determine

whether they are unclassified operations.

           In  my  view,  timber felling, even  for  purposes  of

heating  the business premises, is in the category of "operations

which are not classified or shown" on the insuring declarations.

           The  next  question is whether, as  Carpenter  argues,

gathering  firewood was "reasonably incidental" to the  insureds'

classified  operations and is therefore covered even  though  the

policy  does  not  explicitly cover incidental operations.   This

court  concludes  that  the tree-cutting  activity  that  injured

Raymond  Carpenter  "can reasonably be viewed  as  an  incidental

support activity" to a business that heats its premises by wood.68

It  reasons  that  this activity differed from a "revenue-earning

activity"  that  would have been an "operation"  subject  to  the

classification limitation exclusion in the policy.69

           The  first  problem  with this interpretation  of  the

insurance  contract  is that the words of  the  contract  do  not

support it.  Likewise, this interpretation is hard to square with

the  results  in  Mount Vernon Fire Insurance Co.70  and  Ruiz,71

discussed  above.   One would expect those cases  to  have  ended

differently if there were any legitimate basis for thinking  such

a policy covers incidental activities.

           A  second  problem  is  that any  incidental  activity

coverage  must  be  somehow anchored in the policy  language.   I

assume  that  some liability policies in Alaska can  properly  be

read  to  provide  some undefined coverage for some  "incidental"

activities.  But any such "incidental activity" coverage must  be

consistent  with  the words of the policy.   The  only  pertinent

Alaska cases brought to our attention involved policies that  did

not   contain  an  exclusion  equivalent  to  the  classification

limitation exclusion in the Great Divide policy.  In  a  case  in

which  policy  language  did  not  explicitly  provide  for  such

coverage  or  attempt  to  exclude  it,  this  court  held   that

incidental  activities were covered.  Thus, we held  in  Hale  v.

Fireman's  Fund  Insurance  Co.  that  a  produce-stand   owner's

"premises-operations" policy provided coverage for "necessary and

incidental"  operations.72  Hale is distinguishable  because  the

policy  did  not contain an exclusion like the one that  controls

here.  Moreover, there we relied on extrinsic evidence in finding

coverage: the policy in Hale had replaced an earlier policy which

explicitly   provided  coverage  for  "necessary  or  incidental"

operations.73  I am not aware of any extrinsic evidence here that

permits an inference that the Gowdys thought they were purchasing

specific coverage for tree-felling operations or general coverage

for  activities  "incidental" to the two  classified  operations.

There is instead evidence that Dan Gowdy had good reason to think

he  would  not  be covered for tree-felling, and  indeed  thought

after  the  accident  that the policy did not  cover  Carpenter's

claims.

           This  court  has approvingly cited a federal  district

court  decision  which,  applying Minnesota  law,  reasoned  that

parties  to an insurance contract language containing a "loading-

unloading"  clause  "most likely intended to  cover  .  .  .  all

hazards  from  the initial loading until the goods were  unloaded

including  all  incidental and necessary parts of  the  unloading

process."74  Again, there was no exclusion like the one at  issue

here.   Furthermore, there the incidental activity was  at  least

closely  related  in  time and place to  the  unloading  process.

Nonetheless,  the  Eighth  Circuit reversed  on  the  ground  the

unloading   process  had  been  completed  before  the   accident

occurred.75   There is no such close connection here between  the

two  classified  operations and the activity that harmed  Raymond

Carpenter.

           A third problem is that the court's conclusion that it

is  "reasonable" to find incidental activity coverage here  seems

at  odds  with  the usual approach in interpreting  an  insurance

policy.   The court's conclusion seems to ignore the  absence  of

policy  language  or extrinsic evidence implying  coverage.   But

assuming  we can look to post-formation circumstances, I  am  not

willing to say as a matter of law that it is "reasonable" to find

coverage  for  this  activity.   Cutting  down  trees  in   early

September  for  future  use  in heating  a  home  also  used  for

administrative  purposes seems too remote in purpose,  time,  and

place  to  be  "incidental" to Gowdy & Son's classified  business

operations.76   The  activity was not conducted  to  fulfill  any

particular contract; it did not occur at the business premises or

at  a job site; it did not occur on a day when job work was being

performed;  and it seems to have taken place well in  advance  of

the time the wood would be needed.

          Carpenter's position might be more plausible had Ostman

cut  down the tree to obtain wood to be used for flooring  for  a

specific  floor-covering  job.   But  virtually  every  business-

related  activity  could be deemed "incidental"  to  the  covered

operations under the expansive view of the policy the court takes

here.   Accepting  Carpenter's  position  vitiates  the  policy's

classification  scheme  and transforms a limited  policy  into  a

comprehensive  one.   Conducting  business  activities  at  Elmer

Gowdy's  home  is  justifiably regarded as  "incidental"  to  the

classified  operations.   Perhaps the  step-removed  activity  of

stoking the wood stove is also.  And perhaps stock-piling fuel on

the premises should be also, although it is another step removed.

But  going  onto someone else's land and cutting down  trees  for

future use as fuel is far too attenuated to be "reasonably"  held

to be "incidental."

           Inherent  in the court's opinion is a conclusion  that

cutting  down the tree was close enough to the revenue-generating

activity  of  floor-covering to be incidental or supportive,  and

thus  covered,  but  not so close that it can  be  deemed  to  be

revenue-generating, and thus not covered.  Both aspects  of  this

conclusion  are alien to the actual policy language.  The  policy

said  nothing about covering incidental or supporting activities,

and  the  exclusion  did  not  depend  on  whether  a  particular

operation did (or would) generate revenue.

           Finally,  Ostman's  activity was  the  sort  that  was

subject   to   a  separate  classification,  for  a   substantial

additional  premium.77  There are marked differences between  the

accident  activity and the classified activity of floor-covering.

Tree-felling poses altogether different personal injury  hazards;

the  causes,  frequency,  and consequences  of  accidents  differ

greatly.    Tree-felling  requires  different  skills  that   are

exclusive  to  that profession; it requires specialized  training

and  equipment, and greater physical strength. Tree-felling is  a

separate  profession.  The activities are not related;  they  are

not  commonly performed by the same business.  Ostman was cutting

down  trees.  He was not simply using his hands to pick  up  wood

that  was  already  downed.  Surely the  policy  would  not  have

covered  mechanized extraction of other fuels, such  as  coal  or

oil,  to  be  used  for  heat.  Common sense  distinguishes  this

activity from activities that might be genuinely incidental.

           Assuming that some activities which merely support the

two   classified  activities  are  nonetheless  within  coverage,

cutting  down trees cannot be considered within the  penumbra  of

either classification.

          The court may assume that the coverage of such a policy

is  inherently broad.  Certainly the result reached here has  the

effect  of  broadly  providing  coverage  the  policy  does   not

expressly   provide.   A  commercial  general  liability   policy

"affords  specific  coverage for specific  losses."78   That  the

"incidental"  coverage found here is not reasonable is  confirmed

by the annual premium.  It was less than $2,000, little more than

what  many  motorists pay for routine automobile  coverage,  even

though  this  policy had facial liability limits  of  $1,000,000.

Based on his own experience with the cost of a timber policy, Dan

Gowdy did not think the policy covered this accident.

D.   Conclusion

           Having  concluded that the insurance  policy  did  not

cover Raymond Carpenter's claims, I would reverse and remand  for

entry of judgment for Great Divide.79

_______________________________
1No. 1JU-95-245 Civil (Alaska Super, 1st Dist.).
2The  parties also agreed that Anson erroneously stated that  the
policy  limits  were  $300,000  rather  than  $1,000,000.   Great
Divide's  current adjuster on the case testified that the  policy
was  initially written with $300,000 limits, but they were  later
raised  to  $1,000,000.  She stated that this was the  source  of
Anson's  mistake  and that she corrected it in a  letter  to  the
Gowdys that she sent in June 1996 after she took over the case.
3CHI  of  Alaska, Inc. v. Employers Reinsurance Group,  844  P.2d
1113  (Alaska  1993); AS 21.89.100 (originally enacted  effective
July 1, 1995), ch. 62,  107, SLA 1995.
4In  answer  to  a later interrogatory from the  court  the  jury
explained that the award consisted of $1,000,000 as the amount of
the  policy's  coverage, prejudgment interest  of  $538,014,  and
$1,086 representing premiums paid by the Gowdys.
5Fejes  v.  Alaska  Ins.  Co., 984 P.2d 519,  522  (Alaska  1999)
(citations omitted).
6Carpenter's counsel offered an apt hypothetical illustration  of
a  business  that heated its premises with fuel oil,  positing  a
case where an employee bought a barrel of oil and handled it in a
manner that injured a third party.  In such a case, he argued, it
would be unreasonable to contend that buying and handling the oil
was  a  separate  "operation," as distinct from  an  activity  in
support of the classified operation.
7In  the  two  cases that Great Divide has cited in which  courts
upheld  classification limitations exclusions,  the  "operations"
that  were  excluded were not merely incidental to the classified
business;  rather  they were separate sources  of  revenue.   The
cases  are  distinguishable on this basis.   The  cases  are  Mt.
Vernon  Fire  Ins.  Co.  v. Chios Constr. Corp.,  1996  WL  15668
(S.D.N.Y.  1996)  (iron  work  a  separate  classification   from
"carpentry-interior"); Ruiz v. State Wide  Insulation  &  Constr.
Corp.,  703 N.Y. Supp. 2d 257 (N.Y. App. Div. 2000) (roof  repair
an operation separate from "painting").
8See Fejes, 984 P.2d at 522.
9Great  Divide quotes Allan D. Windt, Insurance Claims & Disputes
 2.15, at 63 (3d ed. 1995), as follows:

          Whether   or   not   the  coverage   defenses
          specified  by  the insurance company  in  its
          reservations  of rights letter are  justified
          should, in most instances, be irrelevant.  By
          reserving  its rights, the company is  merely
          putting  the  insured  on  notice  of   those
          defenses  that  it believes might  ultimately
          serve  to  reduce or eliminate  its  duty  to
          indemnify.  That duty, however, has  not  yet
          come  into  existence, since the insured  has
          not  yet  become  legally  obligated  to  pay
          damages.     An    unjustified   reservation,
          therefore,  cannot  constitute  a  breach  of
          contract.
          
10Points  that  are  inadequately briefed are considered  waived.
State  v. O'Neill Investigations, Inc., 609 P.2d 520, 528 (Alaska
1980).   Instructions may not be challenged on appeal on  grounds
not  raised  in  the trial court in the absence of  plain  error.
Alaska  Marine  Pilots v. Hendsch, 950 P.2d 98,  109-110  (Alaska
1997);  Conam Alaska v. Bell Lavalin, Inc., 842 P.2d 148,  152-53
(Alaska 1992); see also Alaska R. Civ. P. 51(a).
11See Grace v. Ins. Co. of N. America, 944 P.2d 460 (Alaska 1997);
Washington Ins. Guar. Ass'n v. Ramsey, 922 P.2d 237, 239,  246-48
(Alaska 1996);  Continental Ins. Co. v. Bayless & Roberts,  Inc.,
608 P.2d 281, 286 (Alaska 1980).
12Grace, 944 P.2d at 464, 465 & authorities there cited.
13See authorities cited in note 11, supra.
14Miller v. Shugart, 316 N.W.2d 729, 733-34 (Minn. 1982).
15United  Servs. Auto Ass'n v. Morris, 741 P.2d  246, 253  (Ariz.
1987).
16Grace,  944  P.2d at 467; Bayless & Roberts, 608  P.2d  at  288
(accepting  argument  that insurer "must either  (1)  affirm  the
policy,  defend the suit, and pay any resulting adverse judgment,
thus  waiving  both  the alleged breach by the  insured  and  any
possible  coverage  defenses, or (2)  repudiate  the  policy  and
withdraw from the defense, taking its chances that its claim of a
breach by the insured would stand up in a subsequent suit on  the
policy.").
17Grace, 944 P.2d at 467-68; Ramsey, 922 P.2d at 247-48; Bayless &
Roberts,  608 P.2d at 293 n.20.  We revisit this subject  in  our
discussion of Carpenter's cross-appeal, infra.
18Safeco  Ins. Co. v. Superior Court, 84 Cal. Rptr. 2d  43  (Cal.
App. 1999).
19State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996).
20922 P.2d 237, 246 (Alaska 1996).
21In Bayless & Roberts, 608 P.2d at 281, the insurer also did not
refuse  to  defend;  instead  it  attempted  to  defend  under  a
reservation of rights to later disclaim coverage.  We held that a
covenant  settlement agreement was valid where  the  insured  had
rejected  the  conditional tender of defense:  "[I]f  an  insured
refuses  to  accede to the insurer's reservation of  rights,  the
carrier must either accept liability under the policy and  defend
unconditionally or surrender control of the defense and  be  held
liable  if it guessed wrong on the coverage issue."  Id. at  288.
Although Bayless & Roberts was a policy defense case rather  than
a  coverage  defense case, in CHI of Alaska,  Inc.  v.  Employers
Reinsurance  Group, 844 P.2d 1113 (Alaska 1993), we  adopted  the
rule  of  decision  of  Bayless & Roberts in  the  context  of  a
coverage defense.  We note also that cases in other jurisdictions
have  given  effect to covenant settlement agreements  where  the
insurer  offered  a defense but did not accept responsibility  to
pay  the  insured's  liability exposure.  See,  e.g.,  Miller  v.
Shugart,  316 N.W.2d 729 (Minn. 1982); United Servs. Auto.  Ass'n
v. Morris, 741 P.2d 246 (Ariz. 1987).
22Grace, 944 P.2d at 464-65 & cases there cited.
23Id.
24See,  Justin  A.  Harris,  Judicial  Approaches  to  Stipulated
Judgments, Assignments of Rights, and Covenants Not To Execute in
Insurance  Litigation, 47 Drake L. Rev. 853 n.31  &  accompanying
text.
25See supra note 2 and accompanying text.
262 P.3d 1199, 1209 (Alaska 2000).
27Martin v. Mears, 602 P.2d 421, 427 (Alaska 1979).
28Alaska R. Civ. P. 9(h).
29Holloway v. Wachovia Bank & Trust Co., NA, 452 S.E.2d 233,  238
(NC 1994).
30Stark v. Epler, 117 P. 276, 278 (Or. 1911).
31AS 09.17.020(b).
32State  Farm Fire & Cas. Co. v. Nicholson, 777 P.2d  1152,  1158
(Alaska  1989)  (upholding compensatory  damages  for  bad  faith
conduct  while finding insufficient evidence to support award  of
punitive damages); State Farm Mut. Auto. Ins. Co. v. Weiford, 831
P.2d  1264,  1269 (Alaska 1992) (concluding there was  sufficient
evidence  to  support  a jury finding of bad  faith  on  which  a
compensatory  damage  award  was  based  but  not  a  finding  of
outrageousness supporting punitive damages).
33This  testimony  was  the centerpiece of Carpenter's  counsel's
closing   argument  to  the  jury  that  Great  Divide's  conduct
warranted punitive damages.
34Grace  v. Ins. Co. of N. America, 944 P.2d 460, 467-68  (Alaska
1997);  Washington Ins. Guar. Ass'n v. Ramsey, 922 P.2d 237,  247
(Alaska  1996);  Continental Ins. Co. v. Bayless &  Roberts,  608
P.2d 281, 293 n.20 (Alaska 1980).
35Ramsey, 922 P.2d at 247-48.  These factors are taken from Glover
v. Tacoma Gen. Hosp., 658 P.2d 1230, 1236 (Wash. 1983), overruled
on other grounds by Crown Controls, Inc. v. Smiley, 756 P.2d 717,
719 (Wash. 1988).
36944 P.2d 467-68.
37According to section 57 of the Restatement (Second) of Judgments
even  where  an indemnitee fully litigates a claim the indemnitor
is  not bound except upon a showing that "the indemnitee defended
the   action   with  due  diligence  and  reasonable   prudence."
Restatement (Second) of Judgments  57(1)(b)(ii) (1982).
38We  do  not imply that counsel's failure in this regard  was  a
mistake.   Giving  up  the current award of compensatory  damages
carries both the possibility of increasing the award and the risk
of reducing it if a future jury were to find the settlement to be
unreasonable.
39Great  Divide has raised a number of other arguments.  We  have
considered each of them and find them to be either without  merit
or mooted by this decision.
40831 P.2d 1264, 1266 (Alaska 1992).
41Id. at 1266 (footnote omitted).
42Slip Op. at 20-21.
43Weiford, 831 P.2d at 1266.
44Afcan  v. Mutual Fire, Marine & Inland Ins. Co., 595 P.2d  638,
645 (Alaska 1979).
45Fejes v. Alaska Ins. Co., 984 P.2d 519, 522 (Alaska 1999).
46CHI  of  Alaska, Inc. v. Employers Reinsurance Corp., 844  P.2d
1113, 1116 (Alaska 1993).
47McKay  clearly was not seeking to protect Great Divide when  he
recommended  to Dan Gowdy that he accept the covenant  settlement
agreement.   His  role at that point was correctly  described  by
Great  Divide's expert Geraghty as protective of  Gowdy  "to  the
prejudice of the insurance company."
48844 P.2d at 1116.
49AS 21.89.100(e).
50Alaskan  Village, Inc. v. Smalley, 720 P.2d  945,  948  (Alaska
1986).
51The  advisory  jury  answered "yes"  to  this  special  verdict
question:  "Did  the  accident resulting  in  injury  to  Raymond
Carpenter occur during the course and scope of business of  Elmer
and Dan Gowdy d/b/a Gowdy and Son?"

52Slip Op. at 11.
53Slip Op. at 12.
54Id.
55We review findings of fact under the clearly erroneous standard.
Alaska Foods, Inc. v. Am. Mfrs. Mut. Ins. Co., 482 P.2d 842,  848
(Alaska 1971).  We use our independent judgment to determine  the
legal  significance  of those facts.  Alaska Travel  Specialists,
Inc.  v. First Nat'l Bank of Anchorage, 919 P.2d 759, 762 (Alaska
1996).   "The construction of an insurance contract is  a  matter
for  the  court, unless its interpretation is dependent upon  the
resolution  of controverted facts."  State v. State Farm  Fire  &
Cas.  Co., 939 P.2d 788, 790 (Alaska 1997).  Even when facts  are
disputed,  we review the words of any contract de novo.   Tsakres
v.  Owens, 561 P.2d 1218, 1222 (Alaska 1977).  We treat insurance
contracts as contracts of adhesion, resolving ambiguities against
the  insurer.   Makarka v. Great Am. Ins. Co., 14 P.3d  964,  966
(Alaska  2000).   We  construe  insurance  contracts  to  provide
coverage  that  a layperson would have reasonably expected.   Id.
To  determine reasonable coverage expectations, we  look  to  the
language  of  the disputed provision, the language of  the  other
provisions of the policy, relevant extrinsic evidence,  and  case
law interpreting similar provisions.  Hale v. Fireman's Fund Ins.
Co., 731 P.2d 577, 580 (Alaska 1987).
56See,  e.g., Mount Vernon Fire Ins. Co. v. Belize NY, Inc.,  277
F.3d  232,  239 (2d Cir. 2002) (holding that insurer cannot  rely
upon  classification scheme to deny coverage because policy fails
to  provide that classifications define covered risks);  Feurzeig
v. Ins. Co. of the West, 69 Cal. Rptr. 2d 629, 634 n.5 (Cal. App.
1997)  (collecting  cases and holding that rating  classification
could  not  be  construed  as additional limitation  on  coverage
absent  express  language indicating that such  construction  was
intended by parties).
57E.g., Mount Vernon Fire Ins. Co., 277 F.3d at 239 (noting  that
"[i]f   [insurer]   wished  to  limit  the  coverage   based   on
classifications, it should have done so specifically");  Thompson
v.  Harold Thompson Trucking, 748 P.2d 430, 435 (Kan. App.  1987)
(collecting cases and stating that "an insurance company  wishing
to  limit  the  scope  of  coverage  to  that  classification  of
operations  listed  in  the declarations can  do  so  by  express
exclusion") (citations omitted).
581996 WL 15668, *1 (S.D.N.Y. Jan. 17, 1996).
59Id.
60Id. at *2.
61Id.  at  *3.  The court noted the "heavy burden"  borne  by  an
insurer  seeking  to  avoid its obligation to defend,  concluding
that  the  insurer  met that burden by showing  that  the  policy
exclusion was "stated in clear and unmistakable language, .  .  .
subject  to no other reasonable interpretation, and applie[d]  in
the particular case."  Id. at *1, *3 (citation omitted).
62703 N.Y.S.2d 257, 258 (N.Y. App. Div. 2000).
63Id.
64Id.
65Id. at 259.
66Cf.  Slip Op. at  12.
67Slip Op. at  11.
68Slip Op. at 12.
69Id.
701996 WL 15668 at *3.
71703 N.Y.S.2d at 259.
72731 P.2d 577, 580 (Alaska 1987).
73Id. at 580.
74See  Marwell Constr., Inc. v. Underwriters at Lloyd's,  London,
465  P.2d  298,  304  (Alaska 1970), quoting  from  the  district
court's  decision,  Johnson, Drake & Piper v. Liberty  Mut.  Ins.
Co.,  258 F. Supp. 603, 610 (D. Minn. 1966), rev'd, 390 F.2d 410,
413  (8th  Cir.  1968).   The  ground for  the  Eighth  Circuit's
reversal,  that  the unloading process had been completed  before
the accident, is irrelevant to the case before us.
75Johnson, Drake & Piper, 390 F.2d at 413.
76Rick Ostman testified that Elmer Gowdy performed administrative
tasks  for  the business at his home. Ostman also testified  that
Elmer  stored  floor  covering equipment  and  materials  in  the
garage,  but  that none of the wood-burning stoves used  to  burn
firewood were located in the garage.  But even if the garage were
heated  by  wood-burning  stoves,  and  assuming  that  equipment
storage is sufficiently connected to the classified operations to
be deemed "reasonably incidental" thereto, the firewood-gathering
operation  -  which is itself at most incidental to  an  activity
that  is  already incidental to the classified operation -  would
still be too attenuated.
77Dan  Gowdy testified that he previously had a timber  liability
policy  for  a  firewood  operation that  he  used  to  run.   He
testified that the policy's insurance premiums were "exorbitant."
78Friar  v.  Statutory Trs. of Kirkwood Sports Ass'n,  Inc.,  959
S.W.2d 808, 811 (Mo. App. 1997).
79Given my conclusion that the policy does not cover these claims,
it  is  necessary to reach Carpenter's alternative argument  that
Great  Divide's conduct estops it from denying coverage.  I would
hold  as to that issue that Great Divide's conduct does not estop
it   from  denying  coverage.   See  Lloyds  &  Inst.  of  London
Underwriting  Cos. v. Fulton, 2 P.3d 1199, 1212-15 (Alaska  2000)
(Eastaugh, J., dissenting).  Because I conclude that there was no
coverage,  it  is not necessary for me to reach the other  issues
addressed in the court's opinion.