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Cases

C.H. Robinson v. Zurich

United States District Court,

D. Minnesota.

C.H. ROBINSON COMPANY, a Delaware corporation, Plaintiff,

v.

ZURICH AMERICAN INSURANCE COMPANY, a New York corporation; and United States

Fire Insurance Company, a New York corporation, Defendants.

Nov. 5, 2004.

 

MEMORANDUM AND ORDER

 

MAGNUSON, J.

This matter is before the Court on several Motions for Summary Judgment. Plaintiff C.H. Robinson Company (“C.H.Robinson”) seeks partial summary judgment against both Defendants regarding the insurers’ obligation to pay defense costs. Defendant United States Fire Insurance Company (“U.S.Fire”) seeks summary judgment that it is not responsible for reimbursing C.H. Robinson for a $4.25 million settlement payment. Defendant Zurich American Insurance Company (“Zurich”) seeks summary judgment that it is not responsible for costs incurred by C.H. Robinson’s independent defense counsel. For the reasons that follow, the Court grants in part and denies in part C.H. Robinson’s Motion, denies U.S. Fire’s Motion, and grants Zurich’s Motion.

BACKGROUND

The primary dispute at issue is who is responsible for the payment of $4.25 million used to settle Hylla v. T-J Transport, Inc., a personal injury action venued in an Illinois state court. Hylla arose from an automobile accident on September 13, 1999, which occurred when Isaac Stewart collided with a vehicle, ultimately causing a sixteen-car pile-up. Stewart was transporting a load for International Paper in a semi-tractor trailer owned by T-J Transport. C.H. Robinson brokered the load between International Paper and T-J Transport. The brokerage agreement required C.H. Robinson to indemnify and defend International Paper for all liability, including reasonable attorneys’ fees, arising from the brokerage agreement.

At the time of the accident, Zurich insured C.H. Robinson under a commercial automobile policy with a limit of $1 million per occurrence. U.S. Fire provided the next layer of insurance under a commercial umbrella policy, which had a limit of $25 million per occurrence. Both policies were duty to defend policies, and both included punitive damages exclusions. The U.S. Fire policy required C.H. Robinson to cooperate with U.S. Fire in the settlement and defense of litigation arising from an occurrence.

As a result of the collision, three wrongful death actions were filed in Illinois state court against C.H. Robinson, International Paper, and others: Hylla, Trout v. C.H. Robinson et al., and Ficke v. C.H. Robinson et al. International Paper looked to C.H. Robinson to defend the cases. In turn, C.H. Robinson tendered the defense to its insurance carriers. Zurich accepted the tender and appointed attorney Mark Cero to defend C.H. Robinson. Zurich also acknowledged the obligation to provide International Paper with separate defense counsel, and therefore retained the law firm of Pugh, Jones, Johnson & Quandt to represent International Paper.

The cases did not proceed well for the defendants. The plaintiffs in all three actions prevailed on the theory that C.H. Robinson was vicariously liable for damages caused by Stewart. Because Stewart had pled guilty to manslaughter charges, C.H. Robinson believed that a finding of liability was inevitable. U.S. Fire believed that these liabilities would exhaust the Zurich policy, and that Zurich would bear the majority of the potential verdict. As a result, U.S. Fire appointed attorneys Patterson Gloor and Michael Mullen to join the defense.

The plaintiffs in all three actions later amended the complaints to assert additional allegations against C.H. Robinson to obtain punitive damages. In response, U.S. Fire sent C.H. Robinson a letter on August 29, 2002, in which U.S. Fire purported to reserve its rights to deny coverage for punitive damages, as well as coverage for compensatory damages if C.H. Robinson knew there “was a substantial probability that the conduct would cause injury.” (Preus Aff. Ex. L.) Zurich also reserved its right to deny coverage for punitive damages, but tendered its $1 million policy toward settlement on September 9, 2002.

On September 16, 2002, C.H. Robinson inquired as to the breadth of U.S. Fire’s reservation of rights. In addition, C.H. Robinson claimed that the insurers’ reservations of rights created a conflict of interest, and therefore requested that C.H. Robinson appoint its own attorney to control the defense. U.S. Fire agreed to the substitution and withdrew Gloor as counsel. However, Zurich denied that a conflict of interest existed and refused to accede. C.H. Robinson nevertheless appointed its own defense counsel, Thomas Marrinson and Thomas Mulroy of the law firm of Scandaglia, Marrinson & Ryan.

The parties unsuccessfully attempted to settle the underlying suits several times, and disagree about the conduct of settlement negotiations. C.H. Robinson describes the insurers’ conduct as dilatory and dubious, contending that the insurers repeatedly promised to make final offers but continually reneged on those promises. U.S. Fire asserts that C.H. Robinson engaged in secret negotiations with the plaintiffs’ counsel in Hylla without informing U.S. Fire.

On November 7, 2002, U.S. Fire informed C.H. Robinson that U.S. Fire had the right to control the settlement negotiations in Hylla and demanded that C.H. Robinson cease any further unilateral settlement negotiations in the matter. Four days later, while Mullen was attempting to convince the plaintiffs’ counsel in Hylla that a $1 million settlement offer previously made was reasonable, he learned that the plaintiffs’ counsel had already rejected the offer in a letter to Marrinson. C.H. Robinson had not informed U.S. Fire of the rejection. Soon thereafter, Marrinson proposed a hypothetical settlement offer of $2.75 million. [FN1]

FN1. The parties dispute whether U.S. Fire sanctioned this offer. C.H. Robinson contends that U.S. Fire suggested making the offer, while U.S. Fire claims that it neither knew of nor authorized the offer.

On November 12, 2002, Mullen informed Marrinson that U.S. Fire was negotiating with other defendants’ insurers to provide a global settlement fund for the purpose of resolving the underlying suits on behalf of C.H. Robinson and other defendants. Mullen also advised Marrinson that if a global settlement proved unattainable, U.S. Fire would explore an individual settlement solely on behalf of C.H. Robinson. On November 14, 2002, the defendants’ insurance carriers discussed the creation of a $20 million global settlement fund. The next day, C.H. Robinson informed U.S. Fire that it would not agree to U.S. Fire’s control over the settlement process unless U.S. Fire rescinded its reservation of rights and acknowledged coverage for punitive damages.

Nevertheless, Mullen continued settlement efforts. On November 26, 2002, he offered $2.5 million to settle Hylla. The plaintiffs’ counsel scoffed at the offer, as Marrinson had previously offered $2.75 million. Mullen then continued to negotiate a settlement, offering $4 million on November 27, 2002, and $4.5 million on November 29, 2002.

Trial in Hylla began with no resolution and a demand of $12 million. Mullen countered with an offer of $5 million. On December 3, 2002, C.H. Robinson informed Mullen that it was willing to offer $2.5 million of its own funds, in excess of the pending $5 million carrier offer, to push the settlement offer to $7.5 million. Mullen offered the $7.5 million, but was rejected.

During a break in the trial proceedings, Marrinson and the plaintiffs’ counsel discussed settlement in the absence of Mullen. On December 3, 2003, the Hylla plaintiffs accepted a $9.25 million settlement offer. The settlement was consummated without the knowledge or authority of U.S. Fire. C.H. Robinson acknowledges that the $9.25 million offer was contingent on the insurers’ paying $5 million. [FN2] U.S. Fire refused to pay more than $5 million, leaving C.H. Robinson to pay the remaining $4.25 million. U.S. Fire contends that C.H. Robinson’s counsel secretly negotiated with the Hylla plaintiffs and unilaterally settled the case. It therefore argues that it is not responsible for reimbursing C.H. Robinson the $4.25 million as a matter of law.

FN2. The other two wrongful death lawsuits against C.H. Robinson also settled. Trout settled for $8.25 million and Ficke settled for $9.5 million. It is notable that U.S. Fire settled both of these matters without any contribution from C.H. Robinson.

DISCUSSION

A. Standard of Review

Summary judgment is proper if no reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Thus, only disputes of facts that might affect the outcome of the suit under the governing substantive law will preclude summary judgment. Id. The moving party bears the burden of showing that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The nonmoving party is entitled to all inferences that may be reasonably drawn from the underlying facts in the record. Kiemele v. Soo Line R.R. Co., 93 F.3d 472, 474 (8th Cir.1996). However, the nonmoving party may not merely rest upon allegations or denials in its pleadings–it must set forth specific facts showing that there is a genuine issue for trial. Anderson, 477 U.S. at 256.

B. Hylla Settlement Payment

C.H. Robinson commenced this action, seeking a declaration that U.S. Fire and Zurich must reimburse C.H. Robinson the $4.25 million C.H. Robinson paid to the Hylla plaintiffs. U.S. Fire counterclaimed, alleging that C.H. Robinson breached three provisions of its insurance policy by unilaterally settling Hylla. U.S. Fire now seeks summary judgment, arguing C.H. Robinson breached its duty to cooperate, thereby vitiating U.S. Fire’s obligation to reimburse C.H. Robinson the $4.25 million.

In determining whether the settlement agreement is binding on U.S. Fire, the Court must determine whether C.H. Robinson violated its duty to cooperate with U.S. Fire. [FN3] An insured does not violate its duty to cooperate when it settles a claim while insurance coverage is in doubt. Miller v. Schugart, 316 N.W.2d 729, 732-34 (Minn.1982); see also S.G. v. St. Paul Fire & Marine Ins. Co., 460 N.W.2d 639, 643 (Minn.Ct.App.1990) (an insurer’s denial of coverage nullifies the duty to cooperate).

FN3. Whether the settlement agreement is binding also turns on whether the settlement agreement is reasonable and prudent, and not the product of fraud or collusion. Miller v. Schugart, 316 N.W.2d 729, 732- 35 (Minn.1982). Because a genuine issue of material fact exists as to whether C.H. Robinson breached its duty to cooperate, the Court need not address those issues.

However, once the insurer acknowledges coverage, the insured may not settle the claim without authority from the insurer. S.G., 460 N.W.2d at 643. Thus, an insured violates its duty to cooperate by settling a claim when a dispute exists only about the applicable limits of liability–and not whether part of the claim is covered. Buysse v. Baumann-Furrie & Co., 448 N.W.2d 865, 872- 74 (Minn.1989); see also Sargent v. Johnson, 551 F.2d 221, 231 (8th Cir.1977). Likewise, it violates its duty to cooperate when the insurer does not contest coverage entirely, but merely reserves its rights to defend against some claims. Steen v. Lloyds of London, 442 N.W.2d 158, 161-62 (Minn.Ct.App.1989).

A genuine issue of material fact remains as to whether U.S. Fire denied coverage for some or all claims against C.H. Robinson when C.H. Robinson unilaterally settled Hylla. The August 29, 2002, reservation of rights letter clearly begins with a partial reservation of rights by advising C.H. Robinson that U.S. Fire will not cover a punitive damages award. However, the letter also invokes an intentional acts exclusion, stating that U.S. Fire would not cover any damages that arose from C.H. Robinson’s conduct that “occurred with the knowledge that there was a substantial probability that the conduct would cause injury.” (Preus Aff. Ex. L .)

Thereafter, C.H. Robinson requested clarification from U.S. Fire as to whether the letter was a complete reservation of rights. U.S. Fire never responded, even though C.H. Robinson and U.S. Fire disagreed throughout the settlement process about who should control settlement negotiations in light of the letter. In addition, U.S. Fire’s conduct conveyed a message that it was gambling to see if a jury would return a verdict that would afford an excuse for invoking the intentional acts exclusion. For example, U.S. Fire indicated that any punitive damages award would be tantamount to a finding of intentional conduct, thereby excluding the entire verdict from coverage. [FN4] In this way, this case is similar to S.G., where the insured entered into a settlement without the insurer’s consent because the insurer continually avoided acknowledgment of full coverage. 460 N.W.2d at 641-44.

FN4. Insurers often seek to exclude coverage under intentional act exclusions, regardless of whether the insured’s actual liability is couched in terms of negligence. See, e.g., Haarstad v. Graff, 517 N.W.2d 582 (Minn.1994) (denying coverage under intentional acts exclusion for negligence and careless conduct claims).

On the other hand, U.S. Fire was present with authority to settle Hylla during most negotiations sessions, offered millions of dollars in settlement, and helped to pool a global settlement fund. Most importantly, C.H. Robinson used $5 million of insurance carrier money in the ultimate settlement offer. These actions indicate that U.S. Fire merely reserved its right to deny some claims– but not coverage entirely. See Steen, 442 N.W.2d at 160-62.

Viewing these facts in a light most favorable to C.H. Robinson, the Court finds that U.S. Fire gave mixed signals that create a genuine issue as to whether U.S. Fire reserved its rights to deny all coverage in Hylla. Thus, U.S. Fire’s Motion for Summary Judgment is denied.

C. Independent Defense Costs

1. Zurich

C.H. Robinson has brought a partial Motion for Summary Judgment, contending that it was entitled to select its own defense counsel and require the insurers to pay its defense costs after the insurers reserved their rights to deny coverage for punitive damages. It seeks $364,936.22 from Zurich for the cost of independent defense counsel incurred before Zurich paid its policy limit on January 22, 2003. Zurich has cross-filed a Motion for Summary Judgment, arguing that it is not required to reimburse C.H. Robinson for the costs of the independent defense counsel.

a. Choice of Law

The parties dispute whether Illinois or Minnesota law should apply to this issue. “In a diversity case, a federal court applies the choice of law rules of the forum state.” Northwest Airlines, Inc. v. Astraea Aviation Servs., Inc., 111 F.3d 1386, 1393 (8th Cir.1997). Under Minnesota law, the Court must first address whether an actual dispute exists between the laws of the different states and whether constitutional problems arise with application of either law. Jepson v. General Cas. Co. of Wis., 513 N.W.2d 467, 469 (Minn.1994). If an actual conflict exists and both laws can be constitutionally applied, then the Court must examine five factors to determine which state’s law should be applied: predictability of result, maintenance of interstate order, simplification of the judicial task, advancement of the forum’s governmental interests, and the better rule of law. Id. at 470.

Under the laws of both Minnesota and Illinois, an insured is entitled to choose counsel and obtain reimbursement from the insurer when an “actual conflict” exists between the insured and the insurer. Cf. Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 391 (Minn.1979) with Ill. Mun. League Risk Mgmt. Ass’n v. Seibert, 585 N.E.2d 1130, 1135 (Ill.App.Ct.1992). However, Illinois defines “actual conflict” more broadly than Minnesota.

Under Minnesota law, an actual conflict exists when the insurer denies coverage, but is still required to defend the suit. See Prahm, 277 N.W.2d at 391. [FN5] The conflict of interest does not relieve the insurer of its duty to defend, but requires the insurer to reimburse the insured for reasonable attorneys’ fees. Id. Minnesota courts have not addressed whether a reservation of rights relating to punitive damages creates an actual conflict. However, in Mutual Service Casualty Insurance Co. v. Luetmer, 474 N.W.2d 365, 368-69 (Minn.Ct.App.1991), the Minnesota Court of Appeals declined to adopt a rule that assumes a conflict of interest arises when an insurer defends under a general reservation of rights. Rather, Luetmer requires substantial evidence that an actual conflict exists, such as actions that demonstrate a greater concern for the insurer’s interest than the insured’s interests. Id. Accordingly, the mere reservation of rights by itself does not create a sufficient conflict under Minnesota law.

FN5. In Prahm, the insurer both denied coverage and refused to defend the insured, arguing that an exclusion in the insurance policy applied. The Minnesota Supreme Court recognized that requiring the insurer to defend the insured in an underlying suit created a conflict of interest because the insurer would be required to take opposing positions at trial to defend the insured while at the same time defending itself on the coverage question. 277 N.W.2d at 391.

Conversely, Illinois courts have expressly recognized that a punitive damages reservation of rights is an actual conflict vesting the insured with the right to select independent counsel at the cost of the insurer. Nandorf, Inc. v. CNA Ins. Co., 479 N.E.2d 988, 992 (Ill.App.Ct.1985); see also Seibert, 585 N.E.2d at 1135 (general rule is that an insurer has the right to control the insured’s defense, but an exception exists when the proof of certain facts would shift liability from the insurer to the insured). Because Illinois explicitly provides that a punitive damages reservation of rights creates an actual conflict, whereas Minnesota does not, the Court must assume a conflict of law exists and engage in a choice of law analysis. Med. Graphics Corp. v. Hartford Fire Ins. Co., 171 F.R.D. 254, 260 (D.Minn.1997) (Erickson, Mag. J.).

Whether the laws of a state can be applied constitutionally depends on whether sufficient contacts create state interests so that application of the state’s law is neither arbitrary nor fundamentally unfair. Jepson, 513 N.W.2d at 469. The parties do not dispute that Minnesota has sufficient contacts with the case. Illinois also has sufficient contacts, as the alleged conflict of interest arose in Illinois state court between Illinois defense counsel.

The question then is which state law should be applied under the Minnesota choice of law factors. Most relevant to this case are three factors: predictability of results, maintenance of interstate order, and advancement of the forum’s interests. [FN6] “The first factor, predictability of results, is most relevant when parties have expectations about the applicable law, such as in consensual transactions where people should know in advance what law will govern their act, but has less relevance in cases such as accidents when the parties could not reasonably have such expectations.” Northwest Airlines, Inc., 111 F.3d at 1394 (internal quotations and citations omitted). C.H. Robinson argues that the parties expected to apply Minnesota law, as this case involves the interpretation of an insurance policy brokered and executed by Minnesota companies in Minnesota. Although the present action is based on an insurance contract, it was foreseeable that C.H. Robinson might incur liability outside Minnesota. Thus, the fact that the insurance contract arose in Minnesota is not determinative, and predictability of result is not advanced by applying Minnesota law. See Am. States Ins. Co. v. Mankato Iron & Metal, Inc., 848 F.Supp. 1436, 1443 (D.Minn.1993) (Kyle, J.).

FN6. The simplification of the judicial task factor is usually inconsequential, as the Court has no difficulty applying the laws of either state. Northwest Airlines, Inc., 111 F.3d at 1394. Likewise, the better rule of law factor only applies when the first four factors do not clearly resolve the choice of law question. Id . at 1395. Because the Court finds that the application of Minnesota law is most appropriate, it need not address the last factor.

Maintenance of interstate order is satisfied if applying Minnesota law would not show disrespect for the sovereignty of Illinois or impede interstate commerce. Northwest Airlines, Inc., 111 F.3d at 1394. When examining this factor, the Court must determine whether Minnesota has sufficient contacts with the litigation to meet the requirements of due process, and whether the application of Minnesota law encourages forum shopping. Id. Minnesota clearly has sufficient contacts to justify application of its law. C.H. Robinson is a Minnesota corporation, and the contract at issue was executed in Minnesota through a Minnesota broker. Moreover, C.H. Robinson has commenced this action based on that contract in the District of Minnesota, and has requested that the Court apply Minnesota law to its claim. Thus, this factor weighs in favor of applying Minnesota law. [FN7]

FN7. Notably, the court in the underlying suits applied Missouri law, not Illinois law, to the claims.

Advancement of the forum’s interest considers both Minnesota’s governmental interests and the relative interests of Illinois. Northwest Airlines, Inc., 111 F.3d at 1394. According to C.H. Robinson, Illinois has a greater interest in this case because only Illinois is interested in enforcing its rules of professional responsibility. However, the underlying concern is not the enforcement of ethical rules, but rather the protection of the insured when its interests conflict with those of its insurer. See N. Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353, 1359 (9th Cir.1992); see also Golotrade Shipping & Chartering v. Travelers Indem. Co., 706 F.Supp. 214, 218 (S.D.N.Y.1989) (when determining whether the insured was entitled to independent defense counsel, the main legal issues concern the rights and obligations of the parties to an insurance contract–and not where the underlying action was litigated). Minnesota has a strong interest in seeing its law applied to protect a Minnesota insured and to a contract negotiated and executed in Minnesota. See American States Ins. Co., 848 F.Supp. at 1444 (“Application of contrary or uncertain law from other states would be inconsistent with Minnesota’s interest in policing the issuance and terms of insurance contracts in the state.”). Moreover, applying Minnesota law does not harm Illinois’s interest, as attorneys practicing in Illinois still must abide by local ethics rules and may be sanctioned for failing to do so. Accordingly, the Court finds that this factor weighs in favor of applying Minnesota law.

b. Application of Minnesota Law

Under Minnesota law, a potential conflict of interest arises when an insurer reserves its right to deny coverage. As the Luetmer court explained:

Problems can arise when an insurer defends under a reservation of rights. While the insured seeks to avoid liability on all claims and the insurer shares that desire, the insurer has an additional interest that if liability is found, that it be found on claims for which there is no coverage…. A further concern is that counsel selected by the insurer will have a compelling interest in protecting the rights of the insurer rather than the rights of the insured because of counsel’s closer ties with the insurer.

474 N.W.2d at 368; see also United States Fidelity & Guaranty Co. v. Louis A. Roser Co., Inc., 585 F.2d 932, 938 (8th Cir.1978) (when insurer denies coverage of one count in the complaint, “[c]ommon logic dictates that … [the insurer] would be inclined, albeit acting in good faith, to bend his efforts, however unconsciously, to establishing that any recovery by” the plaintiff would be grounded in the uncovered theory). When an insurer reserves its right to deny coverage for punitive damages, a risk exists that the insurer will be less motivated to achieve the best possible result if it believes that the loss will result from punitive damages. Furthermore, it may be tempted to devote more effort into the non-coverage issue than into defending the insured.

The Court therefore recognizes that Zurich’s reservation of rights regarding punitive damages may have entitled C.H. Robinson to independent counsel albeit one fact: Zurich offered its $1 million policy limit immediately after reserving its rights. When Zurich offered to exhaust its limits under the policy, its reservation of rights relating to punitive damages became moot. Thus, when C.H. Robinson identified the potential conflict of interest and requested independent defense counsel, no possibility existed to shift liability from Zurich to C.H. Robinson. Merely because C.H. Robinson faced substantial exposure beyond Zurich’s limits does not create an actual conflict of interest between C.H. Robinson and Zurich.

C.H. Robinson contends that the tendering of the policy limit in and of itself created a conflict of interest, as Zurich thereafter had no economic incentive to defend aggressively. However, C.H. Robinson presents no evidence that Zurich afforded a less vigorous defense after it tendered its policy limits. Luetmer requires substantial evidence of an actual conflict, such as actions demonstrating that Zurich was more concerned with its interests than with C.H. Robinson’s interest. C.H. Robinson has not presented any evidence of such dereliction on the part of Zurich.

Under the facts of this case, the Court finds that no actual conflict of interest existed between C.H. Robinson and Zurich because Zurich had already tendered its policy limit when the potential conflict of interest arose. Accordingly, Zurich is not required to reimburse C.H. Robinson for independent defense counsel costs. Zurich’s Motion for Summary Judgment is therefore granted, and C.H. Robinson’s partial Motion for Summary Judgment on this point is denied.

2. U.S. Fire

U.S. Fire acknowledges that its broad reservation of rights requires it to pay C.H. Robinson’s independent defense costs incurred once all primary insurance limits were exhausted. C.H. Robinson seeks summary judgment that U.S. Fire must pay $148,418.06 for the independent defense counsel costs. U.S. Fire argues that summary judgment is inappropriate because genuine issues of material fact exist as to the amount due.

U.S. Fire first claims that C.H. Robinson has not presented evidence establishing exhaustion of all primary insurance policies covering the underlying litigation or evidence that C.H. Robinson incurred any defense costs after such exhaustion. [FN8] C.H. Robinson counters that U.S. Fire knew that all primary policies were exhausted as of January 31, 2003. The Zurich policy was exhausted on January 22, 2003, with the $1 million payment toward the Hylla settlement. On January 31, 2003, Continental Western Insurance Company, the other primary insurer, informed U.S. Fire that it had $206,557 remaining on its policy limits toward satisfaction of the underlying suits. (McKinney Aff. Ex. C.) On that day, the $8.25 million settlement in Trout was reached, thereby exhausting the primary insurance policy limits. Indeed, in May 2004, U.S. Fire explicitly promised to reimburse C.H. Robinson for reasonable attorneys’ fees incurred by C.H. Robinson since the Trout settlement. (Id.; see also Campbell Aff. Ex. 1.) U.S. Fire fails to dispute this acknowledgment and merely asserts that it is unaware of when the primary policies were exhausted. Because U.S. Fire fails to set forth specific facts showing there is a genuine issue for trial, the Court finds as a matter of law that U.S. Fire was required to pay for C.H. Robinson’s independent defense counsel fees as of January 31, 2003.

FN8. The U.S. Fire umbrella policy provides that U.S. Fire has a duty to defend when damages sought were not covered by the terms and conditions of underlying or other insurance. Accordingly, U.S. Fire was not required to pay defense costs until all available primary insurance was exhausted.

U.S. Fire also contests the reasonableness of the independent defense counsel fees. U.S. Fire asserts that C.H. Robinson failed to disclose several documents on which it now bases its calculation of fees, and that the defense counsel invoices provided during discovery contain several billing entries that do not relate to C.H. Robinson’s defense in the underlying litigation. [FN9] In May 2004, C.H. Robinson provided U.S. Fire with invoices from its independent defense counsel totaling $166,078.12. After reviewing the invoices, U.S. Fire objected to some of the charges, and now claims that other entries relate to billings unconnected to the underlying litigation. As the moving party, C.H. Robinson must demonstrate that no genuine issue of material fact remains. Because the record reflects a dispute in the amount of fees incurred since January 31, 2003, the Court denies C.H. Robinson’s Motion on this point.

FN9. U.S. Fire identifies several invoices upon which C.H. Robinson bases its Motion, but did not produce during discovery. U.S. Fire asks the Court to bar C.H. Robinson from further using the previously undisclosed documents in this litigation. Because the Court denies C.H. Robinson’s Motion for partial Summary Judgment, and because U.S. Fire now possesses all documents on which C.H. Robinson bases its claim, the Court finds that U.S. Fire is not prejudiced by the untimely disclosure. Thus, the Court denies U.S. Fire’s request.

D. Defense Costs for International Paper

In its Motion for partial Summary Judgment, C.H. Robinson seeks an order that Zurich pay International Paper’s defense costs for the underlying suits that were incurred before Zurich paid its policy limit on January 22, 2003, and that U.S. Fire pay for International Paper’s defense costs incurred since January 31, 2003. On June 16, 2004, International Paper issued a formal demand for payment of its legal fees, claiming that over $550,000 remains unpaid for defense costs relating to the underlying suits. While this Motion was pending, C.H. Robinson informed the Court that C.H. Robinson and International Paper have agreed to mediate disputes regarding the reimbursement of attorneys’ fees, and requested that the Court order Zurich to participate in the mediation session.

Neither insurer disputes its responsibility for International Paper’s defense costs. Indeed, Zurich expressly recognized its obligation to provide International Paper with a separate defense on April 23, 2002, and claims that it has already paid over $403,000 to International Paper’s defense counsel. U.S. Fire argues that C.H. Robinson has not disclosed the costs International Paper incurred after all of its primary insurance was exhausted.

Because C.H. Robinson seeks declaratory relief, a dispute as to the exact amount due will not preclude summary judgment. See, e.g., Employers Mutual Casualty Co. v. Wendland & Utz. Ltd., 351 F.3d 890 (8th Cir.2003) (summary judgment granted to insurer who sought declaration as to coverage of insurance policy). No genuine issue of material fact exists, as Defendants do not dispute their obligation to pay for International Paper’s defense costs. [FN10] The Court therefore grants C.H. Robinson’s Motion as it relates to its request for declaratory relief. It similarly grants C.H. Robinson’s request that Zurich be ordered to participate in mediation sessions involving International Paper with full settlement authority to resolve the outstanding defense cost dispute. Finally, if parties cannot resolve the disputes as to the reasonableness of independent defense costs incurred by C.H. Robinson and International Paper, the Court strongly encourages the parties to consent to the appointment of a Special Master to decide the outstanding amounts due.

FN10. Zurich’s argument that C.H. Robinson is ambushing Zurich with its request for declaratory relief is unfounded. In its Complaint, C.H. Robinson requests a declaration that it is entitled to all defense fees and costs incurred as a result of the underlying suits. (Compl. at 8.) The parties do not dispute that C.H. Robinson was required to pay for International Paper’s defense costs. Moreover, Zurich has acknowledged responsibility for payment of International Paper defense costs since April 2002.

CONCLUSION

For the foregoing reasons, and upon all of the files, records, and proceedings herein, IT IS HEREBY ORDERED that:

1. Defendant Zurich American Insurance Company’s Motion for Summary Judgment (Clerk Docket No. 84) is GRANTED;

2. Defendant U.S. Fire’s Motion for Summary Judgment (Clerk Doc. No. 107) is DENIED; and

3. Plaintiff C.H. Robinson’s Motion for Partial Summary Judgment (Clerk Doc. No. 93) is GRANTED in part and DENIED in part.

Wilshire v. Sentry

Court of Appeal, Fourth District, Division 3, California.

WILSHIRE INSURANCE COMPANY, INC., Plaintiff and Respondent,

v.

SENTRY SELECT INSURANCE COMPANY et al., Defendants and Appellants.

Nov. 15, 2004.

 

OPINION

 

IKOLA, J.

On cross-motions for summary judgment, the court applied Insurance Code, section 11580.9, subdivision (d), [FN1] and declared Wilshire Insurance Company, Inc. (Wilshire) entitled to contribution from Sentry Select Insurance Company (Sentry) [FN2] in the amount of one-half the expenses incurred by Wilshire in defending and settling a wrongful death action. Sentry appeals the judgment arguing the statute does not apply to the stipulated facts, but if it does, it was misapplied. Finding no error, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Because the parties based their respective motions for summary judgment on a joint statement of stipulated facts, we confine our summary of the facts to the matters contained in their stipulation, including the exhibits.

The Accident and the Underlying Litigation

In July 1999, Ken Holm, dba Kenway Enterprises (Kenway), was driving a 1989 Kenworth tractor (the tractor) hauling a 1981 Great Dane semi-trailer (the trailer) when the tractor/trailer rig was involved in an accident causing bodily injury and death. A wrongful death action was filed in the Orange County Superior Court against, inter alia, Kenway (the owner of the tractor) and Statewide Transportation (the owner of the trailer) (Statewide). At the time of the loss, Wilshire insured Kenway; Sentry insured Statewide. Wilshire made a timely demand that Sentry share in the investigative expenses, legal fees, and indemnity, but Sentry refused to contribute. Wilshire thereupon undertook the defense of both Kenway and Statewide, reserving its right to seek a pro rata contribution from Sentry. After expending $5,635.96 in investigative expenses, and $38,298.65 in attorney fees, Wilshire settled all claims made in the litigation against Kenway and Statewide by paying $210,000 on their behalf. The parties agree these amounts were reasonable and necessary to settle the action.

The Tractor Lease

At the time of the accident, Kenway was hauling Statewide’s trailer under the terms of a written agreement by which Statewide had leased the tractor from Kenway. Under the terms of the lease, Kenway also provided a driver for the leased tractor. As germane to arguments made on this appeal, the lease agreement also required Kenway “to fully indemnify [Statewide] for damage to property or person of a third party resulting from fire, theft, collision, or upset and to fully indemnify [Statewide] for damage to cargo arising from any or all of these same causes.” In other words, when Statewide hired Kenway’s tractor and driver to haul the Statewide load, it did so with the understanding that Kenway would bear the risk of liability to a third party.

The Insurance Policies

To protect itself against the risk of liability assumed under these and similar circumstances, Kenway had purchased an insurance policy from Wilshire. The Wilshire insurance policy covered Kenway for the subject accident with a policy limit of $1 million. Statewide had purchased its own insurance policy from Sentry that, inter alia, insured any driver hauling a Statewide trailer with Statewide’s permission. Thus, the Sentry insurance policy also covered the subject accident and it also had a policy limit of $1 million. Kenway’s tractor was scheduled as an owned vehicle on the Wilshire insurance policy, and Statewide’s trailer was scheduled as an owned vehicle on the Sentry insurance policy.

The Wilshire policy provided liability coverage for damages resulting from the use of the owned vehicles specifically described in the policy (such as the tractor). But it also provided liability coverage for damages resulting from the use of any nonowned trailer (such as the Statewide trailer) attached to any power unit specifically described in the policy declarations (such as the tractor). [FN3] Further, the Wilshire policy’s “other insurance” clause states that Wilshire’s liability coverage would be primary where a covered vehicle (the tractor) is hired by another (Statewide) and a written agreement with the other motor carrier as lessee (Statewide) requires Kenway to hold the lessee harmless. [FN4] Finally, under the terms of the Wilshire policy, if a covered trailer is connected to a covered tractor, the liability coverage for the trailer is also primary where coverage for the tractor is primary. [FN5]

The Sentry policy provides liability coverage for damages resulting from use of the trailer, but no provision of this policy covers liability resulting from the use of Kenway’s tractor. [FN6] The Sentry policy’s “other insurance” clause states the coverage is primary if the covered trailer is hired or borrowed by Statewide (which was not the case), and excess if the trailer is hired or borrowed from Statewide (also not the case). But where the covered trailer is connected to a power unit that is not covered under the policy, the coverage for liability resulting from use of the trailer is excess. [FN7] The operator of the tractor is nevertheless an “insured” because the trailer is being used with the permission of the owner. [FN8] Thus, the Sentry policy, by its terms, provides liability coverage for the accident, but the coverage is excess.

The Court’s Ruling

The court granted Wilshire’s motion for summary judgment and denied Sentry’s motion, stating: “It may not be the most equitable result in view of the circumstances of this case, but I just think I’ve got to apply 11580.9(d), and I think that dictates my ruling. I think if it weren’t for the application of that code section, [Sentry’s] argument would be much more persuasive.” The court no doubt was troubled making a decision that, under compulsion of a statute, ignored the entirely consistent provisions of the “other insurance” clauses in the respective insurance policies and arrived at a result at odds with those provisions. After all, Wilshire had agreed to provide primary coverage. Sentry had agreed to provide only excess coverage. Yet, in the trial court’s view, section 11580.9, subdivision (d), required Wilshire and Sentry to share the loss equally as co-primary insurers.

While we recognize the same anomaly, we nevertheless agree with the trial court and affirm the judgment. Section 11580.9, subdivision (d), provides a bright-line rule applicable to these circumstances, and the court correctly applied the statute.

DISCUSSION

Because the case was presented on summary judgment motions with stipulated facts, we conduct a de novo review to decide a pure question of law. (Oliver & Williams Elevator Corp. v. State Bd. of Equalization (1975) 48 Cal.App.3d 890, 894, 122 Cal.Rptr. 249 [trial on stipulated facts presents issue of law]; Hersant v. Department of Social Services (1997) 57 Cal.App.4th 997, 1001, 67 Cal.Rptr.2d 483 [summary judgment subject to de novo review on appeal].)

In 1970, the Legislature declared “it to be the public policy of this state to avoid so far as possible conflicts and litigation, with resulting court congestion, between and among injured parties, insureds, and insurers concerning which, among various policies of liability insurance and the various coverages therein, are responsible as primary, excess, or sole coverage.” (§ 11580.8.) To achieve this goal, “The Legislature further declare[d] it to be the public policy of this state that Section 11580.9 of the Insurance Code expresses the total public policy of this state respecting the order in which two or more of such liability insurance policies covering the same loss shall apply.” (Ibid.)

Section 11580.9 identifies four different circumstances under which two or more policies of automobile or motor vehicle insurance may afford liability insurance applicable to the same loss. As to each of these defined circumstances, the statute states a rule, in the form of a conclusive presumption, by which to determine that policy which provides primary coverage and that policy which provides excess coverage. (§ 11580.9, subds.(a), (b), (c) & (d).) The parties agree three of the scenarios under section 11580.9 do not apply. Wilshire contends, however, that section 11580.9, subdivision (d) applies, and the application of subdivision (d) to the agreed facts results in Wilshire and Sentry both providing primary coverage. Sentry contends section 11580.9, subdivision (d) does not apply because, if construed as Wilshire contends, the conclusion that the policies are co-primary does not “order” the policies as contemplated by the statute. Sentry then looks to the “other insurance” clauses of the respective policies to argue its policy was not primary, but excess. Alternatively, Sentry contends the statute should be interpreted under these facts to make Wilshire’s policy primary and Sentry’s policy excess.

We begin our analysis with the words of the statute. Section 11580.9, subdivision (d) states: “[W]here two or more policies affording valid and collectible liability insurance apply to the same motor vehicle or vehicles in an occurrence out of which a liability loss shall arise, it shall be conclusively presumed that the insurance afforded by that policy in which the motor vehicle is described or rated as an owned automobile shall be primary and the insurance afforded by any other policy or policies shall be excess.” The parties agree: Both the Wilshire and Sentry policies afforded valid and collectible liability insurance. However, other elements of section 11580.9, subdivision (d), require further discussion.

The Tractor/Trailer Rig Was a Single Motor Vehicle

At least for purposes of section 11580.9, subdivision (d), it is well established that a truck tractor hauling a trailer is treated as a single motor vehicle. On first impression in California, Mission Ins. Co. v. Hartford Ins. Co. (1984) 155 Cal.App.3d 1199, 202 Cal.Rptr. 635 (Mission ) adopted the rationale used in a number of federal diversity cases that had previously addressed the issue, and held a tractor/trailer rig to be a single motor vehicle for purposes of section 11580.9, subdivision (d). ” ‘[V]irtually every jurisdiction which has addressed the question has held that an accident involving a tractor-trailer unit “arises out of” the use of both, regardless of which part of the unit was actually involved in the accident. [Citations.] ‘The theory seems to be that a trailer is of no use without a tractor, and vice versa. [Citation.] But for the need to haul the trailer, the tractor would not have traveled the highway and been involved in the accident.’ ” (Mission, at p. 1212, 202 Cal.Rptr. 635.) ” ‘Where a truck and towed trailer are involved in an accident, the courts are well-advised to avoid the metaphysics and hold that the accident arose out of the use of each.’ ” (Id. at p. 1213, 202 Cal.Rptr. 635.)

Later, Transport Indemnity Co. v. Royal Ins. Co. (1987) 189 Cal.App.3d 250, 234 Cal.Rptr. 516 (Transport Indemnity ), held: “[T]he phrase ‘motor vehicle or vehicles’ in section 11580.9, subdivision (d), simply means one or more motor vehicles.” (Id. at p. 255, 234 Cal.Rptr. 516.) But Transport Indemnity also agreed with the holding of the Mission court that “an accident which involves a truck tractor/trailer rig should be viewed as arising out of the use of all components of the rig.” (Ibid.) Thus, as in Mission, the Transport Indemnity court held the insurance policies covering the tractor and the trailer respectively both applied to the “same motor vehicle.” (Ibid.)

Accordingly, by the rationale explained in the Mission and Transport Indemnity decisions, we also conclude the Wilshire and Sentry polices applied to the “same motor vehicle or vehicles in an occurrence out of which a liability loss shall arise.” (§ 11580.9, subd. (d).) The only remaining task is to identify the equipment “described or rated as an owned automobile” by the respective insurance policies. (Ibid.)

Each Policy Describes or Rates Its Insured’s Equipment as “Owned”–Wilshire Describes or Rates the Tractor and Sentry Describes or Rates the Trailer

Section 11580.9, subdivision (d), instructs: “[T]he insurance afforded by that policy in which the motor vehicle is described or rated as an owned automobile shall be primary.” (Italics added.) In Ohio Cas. Ins. Co. v. Aetna Ins. Co. (1978) 85 Cal.App.3d 521, 524, 149 Cal.Rptr. 562, the court held: a “description or rating … in commonsense understanding, means a particularization of the vehicle.” (Italics added.) Here, in the parties’ joint statement of facts they agree: In the Wilshire policy, the tractor was “scheduled as an owned vehicle”; in the Sentry policy, the trailer was “scheduled as an owned vehicle.” Thus, since the tractor/trailer rig is treated as a single vehicle, under section 11580.9, subdivision (d), it is “conclusively presumed” that each insurance policy is primary. Because each policy has the same limit for bodily injury liability, each insurer has an equal obligation to contribute to the loss.

Sentry’s Arguments Have Equitable Appeal, but Cannot Overcome the Plain Terms of the Statute

Sentry argues section 11580.9 cannot apply because co-primary coverage does not establish an order of priority. In Sentry’s view, the purpose of section 11580.9 is to determine “the order in which two or more … liability insurance policies covering the same loss shall apply” (§ 11580.8), and the word “order” means one policy must be primary and the other excess. We disagree. We find nothing in the statute prohibiting a result by which the “order” in which the policies apply is concurrent, or making the statute inapplicable merely because its application results in an equal ranking of priority. Indeed, without phrasing its conclusion in these terms, the Mission court held under similar circumstances that two insurance policies were “ordered” concurrently, i.e., they were co-primary. Whether section 11580.9, subdivision (d) applies to an occurrence depends upon the existence of the simply stated condition. Do two or more insurance policies cover the same motor vehicle in “an occurrence out of which a liability loss shall arise?” If the answer is “yes,” the statute applies. If the answer is “no,” the statute does not apply. But in no case does the result of the statute’s application determine whether it applies. Which is to say, we will not adopt an interpretation of the statute based upon our like or dislike of the outcome of its application.

Sentry also contends that because the “other insurance” clauses afforded by the two policies were entirely congruent under the agreed facts–Wilshire promised its insured it would provide primary coverage for use of both the tractor and trailer, but Sentry promised its insured it would only provide excess coverage for use of the trailer–both the tractor and trailer should be treated as “described or rated as owned” under the Wilshire policy. But the priority of coverage as contracted for in the policies must not be confused with the “description or rating” of the vehicles, which determines the priority of coverage under section 11580.9 without regard to the priority provisions of the respective policies. The Legislature’s conclusive presumption regarding the priority of coverage may not be avoided by unilaterally imposing “other insurance” clauses the other insurer has not bargained for. A desire to minimize or eliminate litigation over competing provisions of “other insurance” clauses in multiple policies was the impetus for enactment of the legislation. And even though the “other insurance” clauses do not compete in this case, the statute cannot be ignored.

Insurers dissatisfied with the operation of section 11580.9 may overcome its conclusive presumptions, although the process may be cumbersome. Section 11580.9, subdivision (f) provides: “The presumptions stated in subdivisions (a) to (d), inclusive, may be modified or amended only by written agreement signed by all insurers who have issued a policy or policies applicable to a loss described in these subdivisions and all named insureds under these polices.” (Italics added.) Of course, there was no such agreement in this case. [FN9]

Thus, we are compelled to conclude that section 11580.9, subdivision (d) controls, and its application results in the Wilshire and Sentry policies both providing primary coverage. With equal policy limits, equal sharing of the loss is proper.

We recognize the seeming inequity of this result. Wilshire agreed to provide primary coverage. Sentry agreed to provide only excess coverage. Wilshire will suffer only half the loss it promised to bear and Sentry will pay half of a loss it never promised to bear. Yet the Legislature believed a bright-line rule in these circumstances was beneficial. The inequity, if any, lies in the operation of a statute we are powerless to rewrite.

DISPOSITION

The judgment is affirmed. Wilshire shall recover its costs on appeal.

WE CONCUR: BEDSWORTH, Acting P.J., and ARONSON, J.

FN1. All further statutory references are to the Insurance Code unless otherwise stated.

FN2. Plaintiff named John Deere Insurance Company as the defendant, but the parties stipulated that Sentry Select Insurance Company and John Deere Select Insurance Company are the same entity, and the correct legal entity for purposes of this case is Sentry Select Insurance Company. Our caption for this opinion, and our discussion of the facts, refers to defendant as Sentry Select Insurance Company in accordance with the parties’ stipulation.

FN3. Section I, paragraph (A) of the Wilshire policy describes the “autos” covered by the policy as, “Only those ‘autos’ described in ITEM THREE of the Declarations for which a premium charge is shown (and for Liability Coverage any ‘trailers’ you don’t own while attached to any power unit described in ITEM THREE).” The tractor was scheduled in item three of the declarations. Section VI, paragraph (B) defines “auto” as “a land motor vehicle, ‘trailer,’ or semi-trailer designed for travel on public roads.”

FN4. Section V, paragraph (B)(5)(a)(1) of the Wilshire policy provides as follows. “While any covered ‘auto’ is hired or borrowed from you by another ‘motor carrier,’ this Coverage Form’s liability coverage is: (1) Primary if a written agreement between you as the lessor and the other ‘motor carrier’ as the lessee requires you to hold the lessee harmless.”

FN5. Section V, paragraph (B)(5)(c)(1) of the Wilshire policy states: “While a covered ‘auto’ which is a ‘trailer’ is connected to a power unit, this Coverage Form’s Liability Coverage is: (1) Provided on the same basis, either primary or excess, as the liability coverage provided for the power unit if the power unit is a covered ‘auto.’ “

FN6. Section I, paragraph (A) of the Sentry policy, like the Wilshire policy, covers “Only those ‘autos’ described in ITEM THREE of the Declarations for which a premium charge is shown (and for Liability Coverage any ‘trailers’ you don’t own while attached to any power unit described in ITEM THREE).” The Kenway tractor is, of course, not described in item three of the Sentry policy, and the coverage for a nonowned trailer attached to a tractor owned by Statewide is not applicable under the instant facts.

FN7. Section V, paragraph (B)(5)(a) of the Sentry policy states as follows: “This Coverage Form’s Liability Coverage is primary for any covered ‘auto’ while hired or borrowed by you and used exclusively in your business as a ‘trucker’ and pursuant to operating rights granted to you by a public authority. This Coverage Form’s Liability Coverage is excess over any other collectible insurance for any covered ‘auto’ while hired or borrowed from you by another ‘trucker’. However, while a covered ‘auto’ which is a ‘trailer’ is connected to a power unit, this Coverage Form’s Liability Coverage is:(1) On the same basis, primary or excess, as for the power unit if the power unit is a covered ‘auto’. (2) Excess if the power unit is not a covered ‘auto.’ “

FN8. Section II, paragraph (A)(1) of the Sentry policy defines an “insured,” inter alia, as “Anyone else while using with your permission a covered ‘auto’ you own, hire or borrow except [inapplicable exceptions].”

FN9. Wilshire contended at oral argument in the court below, and again on appeal, that an owner of a trailer, such as Statewide, may purchase a “trucker’s endorsement” which eliminates all coverage when the trailer is towed by another, thereby relying entirely on the insurance provided by the owner of the tractor. Sentry contends that if such a unilateral endorsement is effective to eliminate all coverage, by the same token the language of its “other insurance” clause must also be given effect to limit its coverage to that of an excess insurer. Because the agreed facts do not contain any information about the availability or the terms of such an endorsement, and because no such endorsement existed in the instant dispute, we do not address these arguments

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