Utah Supreme Court
When does a commercial liability exclusion apply to contractual obligations? Gibbs M. Smith, Inc. v. United States Fidelity & Guaranty Co. Explained
Summary
Publisher Gibbs contracted with author Heinz to publish a book containing photographs, agreeing to be responsible for any loss of photographs valued at $1,500 each. When nineteen photographic transparencies were lost during shipping to a Malaysian color separation house via Federal Express, insurer USF&G denied coverage under exclusion clauses. The trial court granted partial summary judgment for Gibbs, ruling that coverage applied under the commercial general liability policy.
Practice Areas & Topics
Analysis
In Gibbs M. Smith, Inc. v. United States Fidelity & Guaranty Co., the Utah Supreme Court clarified when commercial general liability insurance exclusions for contractually assumed liability apply to an insured’s obligations under contract.
Background and Facts
Publisher Gibbs M. Smith contracted with author Tom Heinz to publish a book on Frank Lloyd Wright houses. The licensing agreement provided that Gibbs would be responsible for any loss of original photographs, with each valued at $1,500. Gibbs subcontracted printing to a Hong Kong company, which sent nineteen photographic transparencies to Malaysia for color separation. The photographs were lost during Federal Express shipping from Malaysia back to Hong Kong and never recovered. When Heinz demanded $27,000 compensation per the contract, Gibbs sought coverage under its commercial general liability policy with USF&G, which denied the claim based on contractual liability exclusions.
Key Legal Issues
The court addressed whether USF&G’s exclusion clause for liability “assumed in a contract or agreement” applied to Gibbs’ contractual obligation to compensate Heinz for lost photographs. USF&G argued the exclusion barred coverage because Gibbs had “assumed” liability under its contract with Heinz.
Court’s Analysis and Holding
The Utah Supreme Court held that contractual liability exclusions apply only to indemnification and hold-harmless agreements where the insured assumes another party’s tort liability. The court explained that “liability assumed by the insured under any contract” refers specifically to situations where one party promises to indemnify or hold harmless another, not to liability resulting from breach of the insured’s own contractual obligations. The court noted that if exclusions applied to all contractual liability, commercial liability insurance would be severely limited since “all business transactions are entered into according to some sort of agreement.”
Practice Implications
This decision provides important guidance for interpreting commercial general liability exclusions. Practitioners should distinguish between assumed liability (where an insured takes on someone else’s legal obligations) and direct contractual liability (arising from the insured’s own performance duties). The ruling also addresses coverage territory issues for worldwide operations and establishes that attorney fees in first-party coverage actions require proof of breach of the implied covenant of good faith and fair dealing.
Case Details
Case Name
Gibbs M. Smith, Inc. v. United States Fidelity & Guaranty Co.
Citation
1997 UT
Court
Utah Supreme Court
Case Number
Nos. 960007, 960045
Date Decided
December 2, 1997
Outcome
Affirmed in part on different grounds, and reversed in part
Holding
A commercial general liability insurance contract’s exclusion for contractually assumed liability applies only to indemnification and hold-harmless agreements where the insured assumes another’s tort liability, not to liability arising from the insured’s own breach of contract.
Standard of Review
No deference to questions of contract interpretation not requiring resort to extrinsic evidence as matters of law
Practice Tip
When analyzing commercial general liability exclusions, distinguish between contractual liability assumed from third parties (excluded) and liability arising from the insured’s own contractual performance (covered).
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