The issue presented on appeal is whether an exclusionary clause of a comprehensive business liability policy which provides coverage for contractual liability is properly construed to exclude coverage for an indemnity agreement between the insured and a third party whose direct liability is based on injuries caused to employees of the insured. The district court, the Honorable Andrew W. Bogue presiding, granted a declaratory judgment in favor of the insurer finding that the coverage was excluded. We must respectfully disagree. We reverse and remand for further proceedings.

CM, Inc. is a Montana corporation with its principal place of business in Montana, and is a wholly owned subsidiary of a Canadian corporation, Canadian Mine Services, Ltd. Canadian Indemnity Company, a Canadian corporation, sold the policy in question to Canadian Mine Services through an insurance agency located in Vancouver, British Columbia. The policy was delivered in Vancouver and the premiums were paid there. The policy designated the parent and CM as named insureds.

On March 26, 1974, CM contracted with Homestake Mining Company, a South Dakota corporation, to perform underground mine development work. The contract had a hold harmless provision that provided:

Contractor shall at all times and hereby does indemnify and hold harmless Homestake on account of any and all claims, damages, losses, litigation, expenses, counsel fees and compensation arising out of injury (including death) sustained by or alleged to have been sustained by the Contractor, its subcontractors and materialmen, officers, agents, servants and employees of Homestake or the Contractor, its subcontractors and materialmen, and from injury (including death) sustained by or alleged to have been sustained by the public, servants, employees, or agents of the public, any or all persons on or near the work, or by any other person or property, real or personal, caused in whole or in part by the acts or omissions of the Contractor, its subcontractors or materialmen, or anyone directly or indirectly employed by them or any of them while engaged in the performance of the work herein.

During the work performed at the Homestake mine, two CM employees, Breneman and Bauer, were killed when a crosshead1 malfunctioned and caused the men to fall to the bottom of the mine shaft.

Robert LaFleur, the special administrator of the employees' estates, brought suit against Homestake Mining for the wrongful deaths of the two employees. Homestake filed a third party complaint against CM, Inc. under the indemnity clause. CM tendered its defense to Canadian Indemnity which denied coverage and refused to defend.

CM assumed the defense of the actions and, after advising Canadian Indemnity of the proposed settlement, settled the cases. Pursuant to the settlement agreement, judgments were entered against Homestake in the primary suit and against CM in the third party action. Homestake's judgment against CM on the indemnity agreement was assigned to the administrator of the estates with the stipulation that the judgment could only be satisfied out of the general liability insurance policy between CM and Canadian Indemnity.2 Thereafter CM instituted this declaratory judgment action which resulted in a judgment finding that the coverage was excluded.

The Policy Agreements.

The issue in this case involves the construction of the insurance policy between CM and Canadian Indemnity. The policy's insuring agreement provides:

1. Bodily Injury or Illness-All sums resulting from the liability imposed by law upon the Insured for loss or damage because of bodily injury to or the illness or death of any person or persons.

3. Contractual Bodily Injury or Illness-All sums resulting from the liability imposed by law upon any third party for loss or damage because of bodily injury to, or the illness or death of any person or persons where the Insured has incurred liability therefor under the terms of an agreement wholly in writing.

Canadian Indemnity argues that exclusion 2, as amended by endorsement 3, clearly excludes coverage. Endorsement 3 provides:

IT IS HEREBY UNDERSTOOD AND AGREED that Exclusion # 2 of this Policy is amended to read as follows:

[The coverage given by this policy does not apply to:]

2. The liability imposed upon the Insured by any Workmen's Compensation Plan or Agreement or for bodily injury to or the illness or death of any employee of the Named Insured while engaged in the business operations of the Insured, other than where an Insured has made contributions to the Workmen's Compensation Plan on behalf of an employee and where protection of the Act is denied....

Conflict of Laws.

The parties concede there exists no controlling case in either Canada or South Dakota interpreting similar insurance clauses. The district court applied British Columbian law as governing the rules of construction. This is challenged on appeal and CM urges that South Dakota law should govern. Resolution of conflict rules are necessary only when the laws of the various jurisdictions differ. Both the Supreme Court of Canada and the Supreme Court of South Dakota have adopted rules of construction that require exclusionary provisions of insurance contracts to be narrowly interpreted. The Supreme Court of Canada, in Cooperative Fire & Casualty Co. v. Twa, (1974) 1 W.W.R. 467 (Ritchie, J.), stated the general rule is:

The basis for (construing contract language in favor of the insured is) that the insurer, by such clauses, seeks to impose exceptions and limitations to the coverage he has already described and, therefore, should use language that clearly expresses the extent and scope of these exceptions and limitations and, in so far as he fails to do so, the language of the coverage should obtain.

Id. at 469 (quoting Indemnity Insurance Co. v. Excel Cleaning Service, (1954) S.C.R. 169, 179).

The South Dakota Supreme Court has said, "We are dealing here with a term of exclusion, and thus we apply a strict construction to the term." Novak v. State Farm Mutual Automobile Insurance Co., 293 N.W.2d 452, 455 (S.D.1980). Similarly, this court in Roach v. Churchman, 431 F.2d 849, 851 (8th Cir. 1970), a diversity case applying Iowa law, observed these principles and stated, "(T) he well-settled general rule that exceptions, limitations and exclusions to insuring agreements require a narrow construction on the theory that the insurer, having affirmatively expressed coverage through broad promises, assumes a duty to define any limitations upon that coverage in clear and explicit terms." Since we find no difference in the case law governing construction of the policy in the present case, we see no purpose in an exacting analysis as to which law applies.

Policy Interpretation.

There is no dispute that paragraph 3 of the insuring agreement provides coverage for CM's contractual bodily injury liability. Without exclusion 2 the insurer must provide coverage as to the indemnity agreement between its insured, CM, and Homestake. In excluding coverage, Canadian Indemnity relies solely on the language which excludes coverage for the "liability imposed upon the Insured ... for bodily injury to ... or death of any employee of the Insured while engaged in the business operations of the Insured."3

It is fundamental that the language of an insurance policy must be construed according to its plain and ordinary meaning and must not be given a forced construction. Grandpre v. Northwestern National Life Insurance Co., 261 N.W.2d 804, 807 (S.D.1977). Concomitant to this rule, we observe if the language of the exclusion clearly and unambiguously excludes coverage for CM's contractual liability to third parties for injuries to its employees, this court must enforce the exclusion. See Johnson v. United States Fire Insurance Co., 586 F.2d 1291, 1295 (8th Cir. 1978); Novak v. State Farm Mutual Automobile Insurance Co., 293 N.W.2d 452, 454 (S.D.1980).

The district court found this language of the exclusionary clause to be unambiguous. It observed that the only reasonable interpretation of this language is that it excludes coverage of any claims against CM by its employees whether the claims are brought directly or indirectly. We also find the insuring agreement and exclusion to be unambiguous; however, we disagree with the district court that the coverage was intended to exclude CM's contractual liability.4

Applying the rule of construction that exclusionary clauses are read narrowly, we find the exclusion was intended to apply only to direct actions brought by employees against CM and not to any obligation assumed under contract. We think this is clear for several reasons. First, the insuring agreement provides coverage under paragraph 1 for "bodily injury to ... any person." Exclusion 2 specifically relates to "liability imposed ... for bodily injury ... of any employee." It is clear that the coverage under paragraph 1 is limited by the exclusionary agreement. Coverage under paragraph 3 of the insuring agreement, however, relates specifically to "contractual bodily injury." The exclusionary agreement does not speak in these explicit terms.

Second, we observe the wording of exclusion 2 is nearly identical to that of paragraph 1 of the insuring agreement but significantly different from that of paragraph 3. Paragraph 1 covers "liability imposed by law upon the Insured " and exclusion 2 excludes coverage of "liability imposed upon the Insured." Paragraph 3, on the other hand, covers liability incurred by the Insured that results from "liability imposed by law upon any third party." Considering the difference in language between exclusion 2 and paragraph 3 we conclude that exclusion 2 was not intended to exclude CM's contractual liability to third parties for job-related injuries suffered by CM's employees which is included in the coverage of paragraph 3.

Third, other language in exclusion 2 and paragraph 3 also supports this conclusion. Exclusion 2 speaks of liability "imposed" upon the Insured, language identical to that in paragraph 1. The language of paragraph 3, however, relates to liability "incurred" by the Insured for breach of a contractual duty to indemnify third parties for their liability for injury to any person. Webster defines "impose" to mean, "to make, frame, or apply as compulsory," Webster's New Third International Dictionary (unabridged) 1136 (1966), while defining "incur" to mean to "become liable or subject to: bring down upon oneself." Id. at 1146. Exception 2 defeats coverage of liabilities which CM is forced to assume while paragraph 3 covers liabilities which CM voluntarily assumes by contract. This difference in language also indicates that exclusion 2 was not intended to exclude coverage provided by paragraph 3.

Canadian Indemnity argues that exclusion 2 should be construed so as to exclude coverage of any liability CM may have for injury to its employees, whether it be direct or indirect liability. Assuming this is a reasonable interpretation, it is obvious that it is not the only interpretation. Under Canadian as well as South Dakota law, the rule is uniformly applied that if a contract is ambiguous, the ambiguity is construed against the insurer. See Dakota Block Co. v. Western Casualty & Surety Co., 132 N.W.2d 826, 830 (S.D.1965); Pentagon Construction Co. v. United States Fidelity & Guarantee Co., (1977) I.L.R. 3124 (B.C.C.A.).

We conclude that judgment should be entered in favor of the insured finding coverage of the indemnity agreement.

The cause is reversed and remanded for further proceedings.5

I concur in the result on the ground that the policy language of the exclusion is ambiguous and should be construed against the insurer as discussed at 708.