                                    TO
                                     J.   33-79
                 IN T I SUPREP'IE COURT OF THE STATE OF MONTANA
                     IE
                                          1983



LINDSAY DRILLING & CONTRACTING,
a Mont. corp., WESLEY LINDSAY
and TERRY LINDSAY,
                           Plaintiffs and Appellants,


UNITED STATES FIDELITY       &   GUARANTY
CO.,
                           Defendant and Respondent.




APPEAL FROM:      District Court of the First Judicial District,
                  In and for the County of Lewis & Clark,
                  The Honorable Gordon R. Bennett, Judge presiding.

COUNSEL OF RECORD:
         For Appellants:

                  Keller, Reynolds, Drake, Sternhagen & Johnson;
                  P. Keith Keller argued, Helena, Kontana

         For Respondent:

                 Gough, Shanahan, Johnson & Waterman; Alan L.
                 Joscelyn argued, Helena, nlontana


                                    -
                                    Submitted:     December 8, 1983

                                        Decided:   January 31, 1984


Filed:     bid   ' q$+



                                                          .,.-   --
                                    Clerk
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.
      The District Court of the First Judicial District, Lewis
and Clark County, issued a declaratory judgment holding that
United States Fidelity and Guaranty Company (USF&G) has no
obligation     to     defend    Lindsay    Drilling     and     Contracting
(Lindsay) in a counterclaim action filed against Lindsay by
the Seiler Partnership and Jeannie S. Mine Company.                   Lindsay
appeals.      We reverse the judgment of the District Court.
      The    Seiler    Partnership and      Jeannie S.        Mine    Company
retained Linsday in 1979 and 1980 to drill test holes on
placer      claims    near     Boulder,    Montana.           The    economic
feasibility of mining in that area was then determined by
hand washing a core sample from each test hole to determine
the   amount     of    gold     present,   compared      to     other      soil
components.
      The claim owners failed to pay Lindsay for its drilling
services, causing Lindsay to foreclose on a mechanic's lien.
The   partnership       and    mine   company       thereafter       filed   a
counterclaim against Lindsay on June 29, 1981, alleging that:
      "[Lindsay's] employees, agents or bv-standers whom
      [Lindsay] allowed to be present during core
      drilling and testing, fraudulently and deliberately
      introduced small quantities of gold into the core
      samples, or otherwise by means unknown .                       . .
      altered the test results so as to make it appear
      that the mining properties contained more minerals
      than in fact existed .              . .
                                       As a direct and
      proximate result, Defendants Seiler and Jeannie
      suffered economic losses exceeding two million
      dollars.
      "3. That the economic losses suffered by Defendant
      Jeannie were a direct result of misrepresentations
      made by [Lindsay], and [Lindsay's] negligence in
      allowing one or more individuals to interfere with
      core drilling and testing which resulted in the
      alteration of the test results and data, to the
      economic detriment of Seiler and Jeannie."
      USF&G insured Lindsay Drilling            &   Contracting and its
full-time employees.          Therefore, Lindsay tendered defense of
the counterclaim to USF&G, which refused to accept on the
ground that the allegations of the counterclaim were not
covered by its insurance policy.
      On October 21, 1981, Lindsay filed a complaint, pursuant
to the Uniform Declaratory Judgment Act, sections 27-8-101,
et seq., MCA, to determine the rights, duties and liabilities
of    the    parties     under   the    insurance    contract.        The
declaratory judgment concluding that "the damages alleged in
the counterclaim do not fall within those risks contemplated
and insured by [USF&Gfs]policy," was then issued January 25,
1983.       We view the District Court's interpretation of the
insurance policy as too restrictive.
      The     factual     circumstances    present     essentially    two
issues:      (1) whether the insurance policy obligates USF&G to
defend Lindsay, the insured, in the counterclaim action; and
(2) whether the policy issued by USF&G provides coverage for
a    resulting judgment in        the   counterclaim action against
Lindsay.
      The second issue depends upon whether operations were
being performed by or on behalf of the insured at the time of
the   injury as        is hereafter discussed.        This must      await
determination by the jury.        Therefore, we confine our holding
to the question of "obligation to defend."
      A duty to defend exists if the counterclaim sets forth
facts which represent a risk covered by the terms of the
insurance policy.         Atcheson v. Safeco Insurance Co. (1974),
165 Mont. 239, 245-46, 527 P.2d 549, 552.                The contract's
major coverage provision and its pertinent definitions state:
      "The Company will pay on behalf of the Insured all
      sums which the Insured shall become legally
      obligated to pay as damages because of
             A. bodily injury or
             B. property damage
      to which this insurance applies, caused by an
      occurrence, and the Company shall have the right
       and duty to defend any suit against the Insured
       seeking damages on account of such bodily injury or
       property damage    . . ..

       "'occurrence'   means  an    accident,  including
       continuous or repeated exposure to conditions,
       which results in bodily injury or property damage
       neither expected nor intended from the standpoint
       of the Insured.
       "'property damage' means:
       "(1) physical injury to or destruction of tangible
       property which occurs during the policy period,
       including the loss of use thereof at any time
       resulting therefrom, or
       "(2) loss of use of tangible property which has
       not been physically injured or destroyed provided
       such loss of use is caused by an occurrence during
       the policy period."  (emphasis supplied)
       The    counterclaim     alleges       that    Lindsay,       either
intentionally or negligently, permitted             someone to tamper
with the core samples, "or otherwise by means unknown                 . . ."
altered      the   test   results,   and     that   the    claim    owners
thereafter incurred losses in their investments as a result
of relying on the altered core samples.             The policy covers
this set of alleged facts.
       A covered occurrence, as defined in the policy, is one
whose consequences were neither expected nor intended by the
insured.      In Northwestern National Casualty Co. v. Phalen
(1979), 182 Mont.         448, 597    P.2d    720, we      held    that an
insurance policy with the same definition of "occurrence"
covered an intentional act whose consequences were neither
expected nor intended.         Here, the counterclaim alleges in
part that Lindsay negligently allowed bystanders to tamper
with   the core     samples.       This scenario does not include
intended      or    expected    consequences.             Therefore     the
counterclaim sets forth a covered "occurrence" as defined in
the policy, if bodily injury or property damage resulted.
        The     policy    requires             physical     injury     to     tangible
property.         Whether           property         is tangible or         intangible
depends upon its nature and characteristics.                          State Board of
Equalization v. Fall (1948), 121 Mont. 280, 192 P.2d 532.
The core samples are tangible property because they are
perceptible and material.                     H.D.   &   J.K. Crosswell, Inc. v.
Jones (D.C.S.C.)         (1931), 52 F.2d 880, 883.
        The District Court felt that the only loss was data or
information and as such was intangible.                        However, there was
the direct loss of the core sample itself which certainly had
some     value.         The       drilling       expense     and   other      inherent
production costs establish an intrinsic value in the tangible
core sample.       Thus there was tangible loss.
        The term injury does not necessarily contemplate harm.
Restatement of Torts 2d $7, Comment a.                       Rather, it can be a
physical change or alteration which is either beneficial,
detrimental or of no consequence.                        Restatement of Torts 2d,
$7, Comment b.
        The facts set forth in the counterclaim allege that the
core     samples have             been       physically    injured.         They    were
physically and materially altered when they were salted with
gold.           That alteration resulted in a detriment to the
partnership and mining company.                      The facts set forth in the
counterclaim allege                "property damage" as defined                in    the
insurance policy and the occurrence is covered by the policy.
        USF&G   asserts that two of the policy's exclusions apply
and relieve the company from its defense obligation.                                 We
disagree.       The first exclusion states:
        "This insurance does not apply:
                    *         *          *
        "(n) to property damage to the Named Insured's
        products arising out of such products or any part
        of such products;"
The alleged damage to the core samples was clearly not caused
by the core samples themselves.             Rather, the counterclaim
alleges that the damage was caused by either intentional or
negligent acts of Lindsay.           Such acts are not covered by
exclusion (n)   .
     The second claimed exclusion is a broad form property
damage coverage provision which replaces the typical care,
custody and control coverage found in insurance policies.              It
states in relevant part:
     "This insurance does not apply:


     " (w) to property damage     ...
    "(2) (d) to that particular part of any property,
    not on premises owned by or rented to the Insured,
    "(i) upon which operations are being performed by
    or on behalf of the Insured at the time of the
    property damage arising out of such operations, or
     ...   I1



    We interpret this language to exclude from coverage,
damage caused by Lindsay or employees during operations.
However, if the samples were salted by third parties who had
access to samples only because of Lindsay's negligence, then
the exclusion would not apply.           Since the counterclaim has
alternative allegations there          is    still an obligation to
defend though there may not be coverage if the jury finds
Lindsay   or    Lindsay's    employees      contaminated   the   samples
during operations.
    Finally, we       find   USF&G    liable    to   Lindsay     for   its
attorneys fees and expenses incurred in the instant case.              It
was USF&G1s wrongful refusal to defend Lindsay which led to
this action.    Therefore, the insurer is liable for reasonable
attorney fees, expenses and court costs occasioned thereby.
Home Insurance Co. v. Pinski Brothers (1972), 160 Mont. 219,
500 P.2d 945.
      We   vacate   the   declaratory     judgment    issued      against
Lindsay and remand this case to the District Court of the
First Judicial District for entry of a declaratory judgment
ordering USF&G to defend Lindsay in the suit brought against
it by the Seiler Partnership and Jeannie S. Mine Company.
The   District Court      shall   also   determine    the    reasonable
attorney     fees, expenses     and   court   costs   of    Lindsay   in
bringing this action and order USF&G to pay the same.




We concur:

  DAA~~.&&LCLP~
Chief Justice




Justices


Mr. Justices John C Sheehy, L. C. Gulbrandson and Fred J. Weber
                   .
dissent and will file written dissents later.
