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May 12, 1980


The opinion of the court was delivered by: PARKER

This case involves a suit by Central Armature, an electrical equipment contractor, against its primary insurer, American Motorists Insurance Company (AMIC), and its "excess" carrier, Employers Reinsurance Company (ERC) for compensatory and punitive damages. The plaintiff alleges that both insurers breached their obligations by failing to defend plaintiff in a suit brought by one of its customers, Joseph Smith & Sons, and by failing to indemnify plaintiff for sums expended in settling Smith's counterclaims. AMIC has now moved for summary judgment as to all issues and Central Armature has opposed and moved for summary judgment on the issue of AMIC's liability. The parties agree that there are no disputed material facts and that it is appropriate for the Court to rule on the legal issues presented by their cross motions for summary judgment. After consideration of the parties' memoranda and the oral argument of counsel, the Court determines that Central Armature is entitled to judgment.

 Factual Background

 In March 1975, plaintiff Central Armature filed in the Superior Court of the District of Columbia *fn1" a breach of contract action against Joseph Smith & Sons, Inc., claiming money due on account based upon certain electrical repair work on machinery used by Smith in its automated salvage business. The machinery in question, collectively known as a "shredder," was used to process scrap metal into small chunks. Central Armature claimed an unpaid balance of $ 48,000 for services rendered. The Smith company counterclaimed alleging, inter alia, negligent performance of the repair services by Central Armature resulting in substantial property damage, and in other instances, failure to perform the work contracted for. The damages sought on the counterclaim were between $ 1.3 to 1.8 million.

 The Smith counterclaim read in part:

As a result of the wrongful acts of the Plaintiff and its failure to perform its contractual obligations, the Defendant paid to the Plaintiff sums of money which were not owed; Defendant was required to expend large sums to correct the work performed by the Plaintiff, it suffered great loss of profits; and it was required to expend large sums of money for the replacement of electrical equipment damaged by the work which was not performed or improperly performed by the Plaintiff.

 During the course of the Superior Court litigation, settlement efforts were extended and ultimately Central Armature determined that it would be in its best interest to settle the litigation. Accordingly Central Armature settled its claim and the counterclaim by paying the sum of $ 110,000 to Smith company.

 It is the Smith counterclaim and the Central Armature settlement which gives rise to the present litigation between plaintiff Central Armature Works, Inc. and defendant American Motorists.

 At the time of the Superior Court litigation and at all relevant time prior thereto, Central Armature was covered by a special AMIC multi-peril insurance policy. That policy obligated AMIC to defend any suit against Central Armature seeking damages for bodily injury and/or property damage, and to pay up to a limit of $ 500,000, all sums which Central Armature became legally obligated to pay as damages because of bodily injury and/or property damage arising out of all operations necessary or incidental to Central Armature's business. AMIC was given proper notice of the Smith counterclaim. However, it declined coverage and informed Central Armature that it would not defend, claiming that there was "no occurrence" and "no property damage" as defined in the policy.

 Because AMIC refused to defend on the counterclaim, Central Armature bore the entire expense of the litigation and defense for approximately one year. At the end of the year, however, AMIC changed its position and agreed to defend the counterclaim, reserving, however, the right to deny coverage at a later time. *fn2" From that point on until the termination of the Superior Court litigation, AMIC retained an attorney to represent Central Armature. As that attorney gained familiarity with the factual issues and as discovery developed, he advised the carrier that, in his opinion, they were obligated to Central Armature under the policy for a substantial portion of the Smith Company counterclaim. *fn3" He also expressed concern that he had a conflict in representating Central Armature while considering the coverage question. The defendant carrier nonetheless maintained its original position as to coverage. Central Armature's own attorney, who had filed the original complaint and responded and represented them initially on the Smith counterclaim, continued to represent Central Armature during the entire course of the Superior Court litigation together with the AMIC attorney. The latter, however, was concerned principally with defense of the counterclaim.

 During the pre-trial stages it became clear to Central Armature that it faced a strong likelihood of a defendant's verdict on the Joseph Smith counterclaim, substantially larger than the unpaid balance of $ 48,000 claimed in the complaint. Estimates on a potential verdict ranged from $ 250,000 to $ 450,000. Central Armature's attorney strongly recommended that the case be settled, if it could be negotiated in the range of $ 150,000 to $ 175,000. Central Armature requested that AMIC agree to pay whatever settlement amount could be agreed upon in that range. AMIC refused and offered to pay Central Armature only $ 30,000. That offer was less than the amount of Central Armature's attorneys' fees for the period before AMIC took over defense of the case and it conditioned the payment of even that amount on Central Armature's agreeing to drop all of the claims that it had against AMIC.

 Central Armature made clear to AMIC that in light of its attorney's representations that there was a 50 percent chance of a substantial verdict well beyond the recommended range of settlement and in light of the impact of a substantial verdict on its business, it had no choice but to settle. On the eve of the Superior Court trial AMIC was also advised by its attorney that Central Armature faced the probability of a sizeable judgment on the counterclaim and that a Smith settlement offer of $ 137,000 was "clearly a "take' figure." Repeated requests to AMIC to contribute and recognize its obligation under the insurance policy were refused. The final settlement, as arranged by Central Armature's attorney, provided that Central Armature would drop its claim for $ 48,000 and would also pay Joseph Smith $ 110,000 out of its own funds.

 Central Armature then brought this suit seeking compensatory and punitive damages against AMIC and Employers Reinsurance Company, Central Armature's excess carrier, asserting that the insurers breached their duty to defend and settle the claims against Central Armature. AMIC has moved for summary judgment on all issues, and Central Armature has cross-moved for summary judgment on the issues of AMIC's duty to defend and indemnify.

 Legal Analysis

 On basis of the foregoing facts, the Court concludes that Central Armature is entitled to summary judgment on the issues of liability. AMIC's duty to defend and its duty to indemnify arise as a matter of law, for the following reasons.

 The duty of an insurer to defend a lawsuit brought against its insured is established by the allegations in the complaint. S. Freedman and Sons v. Hartford Fire Insurance Co., 396 A.2d 195, 197 (D.C.App.1978); Boyle v. National Casualty Co., 84 A.2d 614, 616 (D.C.Mun.App.1951). It is also well established that the duty to defend is broader than the duty to indemnify, S. Freedman & Sons, 396 A.2d at 197, and the parties to this suit agree that if some of the counterclaim against Central Armature fell within the terms of the policy, AMIC would have a duty to defend on all allegations. Hazard v. Aetna Casualty & Surety, 253 F. Supp. 845, 847 (D.D.C.1966).

 Exclusion (m), known in the industry as a "business risk" exclusion, is a standard feature in insurance policies issued to business enterprises. It provides that

This insurance will not apply ...
(m) to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.

 By its terms, exclusion (m) excludes coverage to the insured's own work or products caused by the insured's faulty workmanship. See e.g. Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979). It does not, however, exclude damages to other property not manufactured or provided by the insured caused by the insured's poor performance. Id. at 792. Since there is no dispute that Central Armature did not supply or manufacture the electrical equipment mentioned in the Smith counterclaim, the allegation of damage to that equipment is not within exclusion (m). This allegation alone, created AMIC's duty to defend against the counterclaim. *fn4" AMIC's initial denial of coverage therefore breached the duty to defend and made it liable to Central Armature for the cost incurred in defending against the Smith counterclaim. Whether this breach continued after AMIC undertook the defense in July 1976 cannot be determined on the basis of the undisputed facts before the Court.

 Central Armature also demands damages to compensate for AMIC's failure to indemnify it for amounts paid to Smith to settle the original action. AMIC maintains that even if it owed Central Armature a duty to defend, Central Armature's "unauthorized settlement" of the suit released the insurer from any obligation to indemnify under the policy. To support its position, the insurer relies on the standard provisions in the policy which give the insurer control over any litigation and require its written consent to any settlement. By not obtaining this consent, AMIC argues that Central Armature has failed to abide by the contractual preconditions to any claim against the insurer. AMIC's own conduct during the Superior Court litigation, however, estops it from asserting the "unauthorized" settlement as grounds for refusing to indemnify.

 An insurance carrier owes and has a duty to consider the insured's interests at least as much as its own when determining whether or not to settle. See e.g., State Farm Mutual Automobile Insurance Co. v. Smoot, 381 F.2d 331, 337-38 (5th Cir. 1967); Coppage v. Fireman's Fund Insurance Co., 379 F.2d 621, 623 (6th Cir. 1967); Potomac Insurance Co. v. Wilkins Co., 376 F.2d 425, 427-28 (10th Cir. 1967). When an insurer denies coverage, even if that denial is in good faith, a refusal to settle is viewed as an effort to further the insurer's interests. See e.g., Gibbs v. State Farm Mutual Insurance Co., 544 F.2d 423, 427 (9th Cir. 1976). The proper course for an insurer in such circumstances is to stay proceedings against the insured and seek a resolution by way of declaratory judgment or to pay the settlement and seek indemnification from the insured. See Great American Insurance Co. v. Raque, 448 F. Supp. 1355, 1358 (E.D.Pa.1978), aff'd, 591 F.2d 1335 (3d Cir. 1979).

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