Fire Insurance conducted an in-house review of Mr. Oltmanns's claim and then submitted his claim to outside counsel for a coverage opinion. Whether the accident was deemed covered was uncertain because of the policy's "jet ski" exclusion.

Fire Insurance asked Mr. Oltmanns's attorney to continue to represent him, indicating that Fire Insurance might reimburse him for his fees and expenses should the accident be deemed a covered occurrence.

Fire Insurance's outside counsel advised Fire Insurance that he believed there was a high probability that the incident would not be covered, but that Fire Insurance should authorize him to file a declaratory judgment action seeking a determination of its responsibility to Mr. Oltmanns under the policy. He advised this course of action because "[u]nder Utah law, a liability insurance carrier's duty to defend is broader than its duty to indemnify," and "[i]t would be dangerous to simply deny coverage because Mr. Blackner and Mr. Oltmanns may enter into an agreement to stipulate to a large judgment and Mr. Oltmanns could then assign his claims against Fire Insurance Exchange to Mr. Blackner."

Fire Insurance filed the action and then moved for summary judgment. The trial court ruled in favor of Fire Insurance, finding that the exclusion precluded coverage. Mr. Oltmanns appealed and the court of appeals reversed, holding that the term jet ski as used in the jet ski policy exclusion was ambiguous and construed the contract against the insurer in favor of the insured.

Fire Insurance settled with Mr. Blackner for the policy limit of $300,000 and paid Mr. Oltmanns's attorney's fees and expenses for his defense of that claim.

Fire Insurance did not pay for Mr. Oltmanns' costs of defending the declaratory judgment action. Mr. Oltmanns then filed a counterclaim against Fire Insurance in the still open declaratory judgment action, seeking "damages for breach of the implied covenant [of good faith and fair dealing], which include his attorney['s] fees for prosecuting this coverage action and the successful appeal" as well as "damages for the severe emotional distress that was caused by the coverage denial and his self-defense of a significant personal injury claim."

Fire Insurance once again moved for summary judgment and for a motion to dismiss. The trial court granted summary judgment, finding that Fire Insurance's actions were reasonable because the coverage issue was "fairly debatable."

Mr. Oltmanns appealed and the court of appeals affirmed the trial court, holding that "when an insurance company proceeds in a reasonable way to resolve a difficult coverage question, its eventual loss at the appellate level does not foreclose a determination that an issue of interpretation was fairly debatable, as was the case here."

The dispute reached the Utah Supreme Court.

Mr. Oltmanns framed his claim as a first-party claim. According to him, Fire Insurance was liable because it could not fairly argue, that is, it was not "fairly debatable," whether the term jet ski encompassed a Honda F-12 Aquatrax (in Mr. Oltmanns view, it obviously did not). Therefore, Fire Insurance had breached its duty to Mr. Oltmanns by seeking a declaratory judgment that the jet ski exclusion in Mr. Oltmanns's insurance policy encompassed bodily injuries resulting from the use of that jet-ski-like watercraft. As Mr. Oltmanns put it:

[Fire Insurance] relied on the advice of counsel [that an Aquatrax would be encompassed by the jet ski policy exclusion] in refusing the tender of defense. However, the advice was patently flawed. Therefore, the claim was not "fairly debatable," and [Fire Insurance] breached the insurance contract and the implied duty of good faith [and] fair dealing.

According to Mr. Oltmanns, whether Fire Insurance had breached its duties to him turned entirely on whether the jet ski exclusion's applicability to an Aquatrax was fairly debatable: If it was fair for Fire Insurance to argue that the jet ski exclusion encompassed an Aquatrax, then there was no breach; otherwise, according to Mr. Oltmanns, there was.

The Fire Insurance Exchange Policy

The Fire Insurance Exchange policy provided:

We pay those damages which an insured becomes legally obligated to pay because of bodily injury, property damage or personal injury resulting from an occurrence to which this coverage applies. . . . At our expense and with attorneys of our choice, we will defend an insured against any covered claim or suit. We are not obligated to pay defense costs, including attorneys' fees of any claim or suit where you select an attorney not chosen by us because there is a dispute between you and us over coverage. We may investigate and settle any claim or suit that we consider proper. Our obligation to defend any claim or suit ends once we have paid our limit of liability. 

The policy also provided that Fire Insurance agreed to pay:

[i]n addition to the limits of liability . . . all costs we incur in the settlement of a claim or defense of a suit with attorneys of our choice. 

In addition, the policy stated:

We do not cover bodily injury [that] . . . .

7. results from the ownership, maintenance, use, loading or unloading of:

a. aircraft

b. motor vehicles

c. jet skis and jet sleds or

d. any other watercraft owned or rented to an insured and which:

(1) has more than 50 horsepower inboard or inboard-outdrive motor power; or

(2) is powered by one or more outboard motors with more than 25 total horsepower; or

(3) is a sailing vessel 26 feet or more in length. Exclusions 7c and d do not apply while jet skis, jet sleds or watercraft are stored. 

The court affirmed the court of appeals' decision to uphold the summary judgment of the trial court.

In its decision, the court rejected Mr. Oltmanns' argument, finding that it was "more than fair" for Fire Insurance to argue that its policy's jet ski exclusion applied to bodily injuries resulting from the use of an Aquatrax. According to the court, in litigating whether the jet ski exclusion encompassed Aquatrax accidents, Fire Insurance put forward "substantial usage evidence" suggesting that the term jet ski was, in Fire Insurance's words, a "genericized term for any type of personal watercraft." Fire Insurance's argument was bolstered by the fact that jet ski was frequently treated as a generic term in cases, ordinances, and dictionaries, the court added. That suggested, according to the court, that the scope of the term "may be fairly debatable."

At least in this context – where Mr. Oltmanns framed his claim as a first-party claim – the court rejected his argument.

Significantly, however, the court also made it clear that its decision was a "narrow" one, explaining that it had "never held that an insurer must defend against all third-party liability claims that could 'conceivably' fall within insurance coverage" and that it had never "squarely repudiated any role for the 'fairly debatable' standard in the third-party insurance context."

The court, therefore, affirmed the court of appeals on the basis that Mr. Oltmanns' argument was not persuasive on its own terms – the coverage question was fairly debatable. The court also "expressly" flagged, for future litigants, the following two questions:

(1) Whether claims like those asserted by Mr. Oltmanns should be analyzed under third-party insurance principles, and

(2) If so, what those principles are.

The case is Fire Ins. Exchange v. Oltmanns, No. 20160304 (Utah Feb. 28, 2018). Attorneys involved include: Stewart B. Harman, Joel D. Taylor, Salt Lake City, for appellee; Donald L. Dalton, Salt Lake City, for appellant.