United States District Court,

D. Maryland.

COWAN SYSTEMS, INC.

v.

HARLEYSVILLE MUTUAL INSURANCE CO.

Sept. 30, 2005.

MEMORANDUM

BLAKE, J.

Now pending before the court are cross-motions for summary judgment in this declaratory judgment action. The issues have been fully briefed and no hearing is necessary. Local Rule 105.6. For the reasons that follow, the defendant’s motion will be denied and the plaintiff’s motion will be granted.

BACKGROUND

The defendant, Harleysville Mutual Insurance Company (“Harleysville”), issued a Commercial General Liability policy (“the policy”) to the plaintiff, Cowan Systems, Inc., (“Cowan”), effective November 1, 2000 to November 1, 2001. (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) The policy was in effect on January 9, 2001, the date on which George J. Shaffer (“Shaffer”) alleged that he was injured while on property owned, operated, and maintained by Erdner Brothers Inc., and leased by Linens N Things. (Id. at Ex. 2, Shaffer complaint.) Shaffer was employed as a tractor-trailer driver for Cowan. Cowan supplied tractor-trailer drivers to Linens N Things to move Linens N Things’ empty trailers to a temporary staging lot. On January 9, 2001, after dropping off an empty trailer at the lot in question, Shaffer fell as he was attempting to get back into the cab of the truck. (See Def.’s Mem.in Supp. of Summ. J. at Ex. 3, interrogatories.) Subsequently, in December of 2002, Shaffer filed a personal injury lawsuit in the Superior Court of New Jersey, Gloucester County, against Linens N Things and Erdner Brothers Inc., titled George Shaffer, et al v. Linens N Things, et al, Docket Number: L-2160-02 (“Shaffer” ) (Plf.’s Mem. in Opp’n. at Ex. 2, Shaffer complaint.) The complaint in Shaffer alleged that the defendants failed to properly maintain and supervise the lot, failed to comply with ordinary and customary safety procedures, carelessly and negligently failed to provide for removal of snow and ice, and failed to provide any guards, light or other device to warn of unsafe conditions. (Id.) The complaint further alleged that Shaffer’s injuries were the direct and proximate result of the defendants’ negligence. (Id.) Shaffer’s complaint did not name as a defendant, nor make an attribution of fault to, Cowan Systems, Inc.

FN1. In citing to the record, the court is relying on the paper copies filed with the court. The labeling of exhibits reflected in the electronically filed version on CM/ECF may not correspond with either this opinion or the citations to the record made by the parties in their respective pleadings.

In September of 2004, Linens N Things filed a third party complaint against Cowan in Shaffer. (Plf.’s Mem. in Opp’n. at Ex.3, third party complaint.) In Count I of the third party complaint, Linens N Things alleged that “it is entitled to insurance coverage, a defense, indemnification and to be held harmless by Harleysville Insurance Company and Cowan Systems, Inc. through their (Cowan’s) contract with Linens N Things and through a policy of insurance issued to Cowan Systems Inc.” (Id. ¶ 3.) In Count II, Linens N Things alleged that “third-party defendants Harleysville Insurance Company and Cowan Systems, Inc. are Joint Tortfeasors and this defendant/third-party plaintiff demands Joint Tortfeasor Contribution … and apportionment of negligence.” (Id. ¶ 5)

Cowan, pursuant to the policy issued by Harleysville, sought a defense of the third party complaint. Harleysville, in October of 2004, denied Cowan coverage under the policy, claiming that exclusions under the policy applied and Harleysville thus had no duty to defend. (Plf.’s Mem. in Opp’n at Ex. 5, Oct. 25 letter.) The initial October 25, 2004 denial letter was reiterated by a November 4, 2004 letter which indicated that the denial was based on evidence obtained from Shaffer’s Answers to Interrogatories and recorded statements in Shaffer. (Plf.’s Mem. in Opp’n at Ex. 4, Nov. 4 letter.)

Cowan retained counsel at its own expense in Shaffer and successfully defended the suit. Summary judgment on the third party complaint was granted on April 29, 2005. (Def.’s Answer and Countercl. at Ex. 1, Shaffer order.) In December of 2004, after the denial of coverage by Harleysville, but prior to the resolution of the third party complaint, Cowan, through a declaratory judgment action in the Circuit Court for Anne Arundel County, Maryland, sought a declaration that Harleysville did have a duty to defend under the policy. That case was removed to this court on January 25, 2005.

As Cowan successfully defended the third party complaint in Shaffer, it is not seeking indemnification for any judgment under the policy. Rather, Cowan seeks a declaration that Harleysville had a duty to defend Cowan in Shaffer, thus entitling Cowan to the fees and costs of both defending Shaffer and bringing this declaratory judgment action.

The policy in question states that:

We will pay those sums that the insured become legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply.

(Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) Harleysville maintains that three exclusions contained in the policy removed any obligation Harleysville might otherwise have had to defend Cowan: the “workers compensation exclusion,” the “employer’s liability exclusion,” and the “auto liability exclusion.” In turn, Cowan argues that the exclusions are inapplicable.

ANALYSIS

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment

shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

The Supreme Court has clarified that this does not mean that any factual dispute will defeat the motion:

By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis in original).

“A party opposing a properly supported motion for summary judgment ‘may not rest upon the mere allegations or denials of [his] pleadings,’ but rather must ‘set forth specific facts showing that there is a genuine issue for trial.” ‘ Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 525 (4th Cir.2003) (alteration in original) (quoting Fed.R.Civ.P. 56(e)). The court must “view the evidence in the light most favorable to … the nonmovant, and draw all reasonable inferences in her favor without weighing the evidence or assessing the witness’ credibility,” Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639, 644-45 (4th Cir.2002), but the court also must abide by the “affirmative obligation of the trial judge to prevent factually unsupported claims and defenses from proceeding to trial.” Bouchat, 346 F.3d at 526 (internal quotation marks omitted) (quoting Drewitt v. Pratt, 999 F.2d 774, 778-79 (4th Cir.1993), and citing Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).

I.

This case requires the court to determine whether Harleysville had a duty to defend Cowan in the underlying Shaffer lititgation. The question is to be decided under Maryland law. In Maryland, the duty to defend is considered a fundamental feature of commercial liability insurance policies. See Brohawn v. Transamerica Ins. Co., 276 Md. 396, 409-410, 347 A.2d 842 (Md.1975)( “Although the type of policy here considered is most often referred to as liability insurance, it is ‘litigation insurance’ as well, protecting the insured from the expense of defending suits brought against him.”). To determine whether there is a duty to defend the insured, a two-part inquiry applies:

1) What is the coverage and what are the defenses under the terms and requirements of the insurance policy? 2) Do the allegations in the underlying action potentially bring the tort claim within the policy’s coverage?

Aetna Cas. & Sur. Co. v. Cochran, 337 Md. 98, 103-104, 651 A.2d 859 (Md.1995)(quoting St. Paul Fire & Mar. Ins. v. Pryseski, 292 Md. 187, 438 A.2d 282 (Md.1981)).

Until modified by Cochran, the rule for applying this test, known as the “eight corners” rule, limited the court to reviewing the underlying complaint and the insurance policy to determine the “potentiality” of coverage. See Nationwide Ins. Cos. v. Rhodes, 127 Md.App. 213, 241 (Md.Ct.Spec.App.1999). Cochran modified the rule, holding that when the complaint fails to clearly establish coverage, the insured could look also to extrinsic evidence to demonstrate the potential for coverage. Cochran, 337 Md. at 107-108, 651 A.2d 859. The insurer, however, remains barred from offering extrinsic evidence to contest coverage. Id.; see also Montgomery Cnty. Bd. of Educ. v. Horace Mann Ins. Co., 154 Md.App. 502, 510-511, 840 A.2d 220 (Md.Ct.Spec.App.2003), aff’d, 383 Md. 527, 860 A.2d 909 (Md.2004).

This distinction in the ability to call upon extrinsic evidence has been explained as serving to protect the insured from deficient complaints filed by third-parties. See Montgomery Cnty. Bd. of Educ., 154 Md.App. at 511, 840 A.2d 220. It also allows a greater opportunity to obtain the representation that was part of the bargain reached by the parties under the policy. See id. Moreover, this distinction is consonant with the principle, often repeated in the caselaw, that liability insurance is fundamentally also “litigation insurance.” See Brohawn, 276 Md. at 409-410, 347 A.2d 842. As stressed in Baltimore Gas & Elec. v. Commercial Union Ins. Co., 113 Md.App. 540, 568, 688 A.2d 496 (Md.Ct.Spec.App.1997), it protects the insured from having to prove to its insurer that it “is, in fact, liable to the tort plaintiff under a theory covered by the policy, in order to obtain the insurer’s assistance in defending the insured against the same allegation.”

In applying this framework, the courts also have stressed the importance of distinguishing between the insurer’s duty to indemnify and its duty to defend. The critical distinction is that the duty to defend is to be determined upon the facts as alleged, whereas the duty to indemnify will logically depend on liability. See Walk v. Hartford Cas. Ins. Co., 382 Md. 1, 15, 852 A.2d 98 (Md.2004). Thus, the duty to defend is broader than the duty to indemnify and exists even where there is just a potentiality that the claim may be covered by the policy. Id. at 15-16, 852 A.2d 98 (quoting Brohawn, 276 Md. at 407- 408, 347 A.2d 842). “Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer must still defend if there is a potentiality that the claim could be covered by the policy”. Brohawn, 276 Md. at 407-408, 347 A.2d 842. Maryland courts have found the duty to exist even where the claim asserted against the insured cannot possibly succeed. BGE Home Prods. & Servs., Inc. v. Owens, 377 Md. 236, 246, 833 A.2d 8 (Md.2003)(quoting Litz v. State Farm, 346 Md. 217, 225, 695 A.2d 566 (Md.1997)). Moreover, if any claims potentially come within the policy coverage, the insurer is obligated to defend all claims. Utica Mut. Ins. Co. v. Miller, 130 Md.App. 373, 383, 746 A.2d 935 (Md.Ct.Spec.App.2000).

It is well-settled that any doubt about the potentiality of coverage is resolved in favor of the insured. See Hartford Cas. Ins. Co. v. Chase Title, Inc., 247 F.Supp.2d 779, 780 (D.Md.2003)(citing Chantel Assocs. v. Mount Vernon Fire Ins. Co., 338 Md. 131, 145, 656 A.2d 779 (Md.1995)); see also Nationwide Ins. Cos., 127 Md.App. at 24, 730 A.2d 1260; Utica Mut. Ins. Co., 130 Md.App. at 383, 746 A.2d 935. Cognizant that the duty to defend should be construed liberally in favor of the insured, I will now take up the policy exclusions claimed by Harleysville to be applicable.

A.

The policy in question contains an exclusion mandating that the policy does not apply to “bodily injury” or “property damage” arising out of the ownership maintenance, use, or entrustment to others of any …”auto”… owned or operated by or rented or loaned to any insured. (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) The exclusion further states that “use” includes “operation” and “loading or unloading.” (Id.) Relying on Shaffer’s deposition testimony, Harleysville argues that this “auto” exclusion applies, because the accident occurred as he was attempting to get into his tractor cab shortly after he dropped off an empty trailer for Cowan.

As addressed above, with respect to determining an insurer’s duty to defend, as opposed to the duty to indemnify, the insurer is prohibited from looking to extrinsic evidence to deny coverage. See Montgomery Cnty. Bd. of Educ., 154 Md.App. at 510-511, 840 A.2d 220. Neither Shaffer’s complaint nor Linens N Things’ third party complaint filed in Shaffer alleged that the injury related to the use, operation, loading, or unloading of the truck. Shaffer’s complaint alleged that the conditions at the “mud lot” were the cause of his injury. (See Plf.’s Mem. in Opp’n. at Ex.2, Shaffer complaint, and Ex. 3, third party complaint). Linens N Things, in Count I of its third party complaint against Cowan and Harleysville, sought insurance coverage, a defense, indemnification, and to be held harmless based on a contract with Cowan. (Plf.’s Mem. in Opp’n at Ex. 3 ¶ 3). In Count II, Linens N Things sought contribution from Cowan and Harleysville as joint-tortfeasors. (Id. ¶ 5, 840 A.2d 220). Count II merely asserted that they were joint-tortfeasors. Nowhere in the third party complaint were there any allegations that the injury arose from the operation or unloading of the vehicle.

Moreover, outside of the letters denying coverage and the pleadings filed in this court, it does not appear that anyone ever put forth a theory that the operation or condition of the automobile had anything to do, in even a minimal causal sense, with Shaffer’s injury. Even if such a theory had been put forth at some point in the Shaffer litigation, the eventual emergence thereof would be irrelevant to Harleysville’s duty to defend. Both in its initial letters informing Cowan of the denial of coverage, and in its motion for summary judgment before this court, Harleysville stated that it relied on answers to interrogatories, recorded statements, and deposition testimony in reaching its conclusion to deny coverage. The insurer’s reliance on extrinsic evidence beyond “the eight-corners” of the policy and complaint in order to deny coverage is improper. See Montgomery Cnty. Bd. of Educ., 154 Md.App. at 510- 511, 840 A.2d 220. It is not difficult to see the incongruity of relying on information that comes to light during the litigation to deny the insured a defense of that same litigation under a “litigation insurance” policy.

The conclusion, however, that the “auto” exclusion does not justify a refusal to defend need not rest upon the well-settled rule that extrinsic evidence may not be used in the manner Harleysville used it here. Even without making a distinction between the permissible “eight corners” evidence and the impermissible extrinsic evidence cited by Harleysville, Maryland law and the broader nature of the duty to defend further instructs that the “auto” exclusion does not apply.

First, Harleysville’s reliance on LINK”http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=162&FindType=Y&SerialNum=1987146556″Northern Assurance Company of America v. EDP Floors, Inc., 311 Md. 217, 533 A.2d 682 (Md.1987), is misplaced. The import of EDP, like other cases where similar exclusions were upheld, is to make clear that the operation of the automobile need not be the sole or proximate cause of the injury in order for the exclusion to apply. Id. at 230-231, 533 A.2d 682; see also Beretta U.S.A. Corp. v. Fed. Ins. Co., 117 F.Supp.2d 489, 494 (D.Md.2000); and Rubins Contractors Inc. v. Lumbermens Mut. Ins. Co., 821 F.2d 671, 676 (D.C.Cir.1987). The EDP court held that the “auto” exclusion can apply even when the injury may also be said to have arisen out of other negligent acts, such as the employer’s negligent entrustment or failure to supervise, so long as the vehicle component remains essential to establish the insured’s liability. EDP, 311 Md. at 226, 533 A.2d 682.

In EDP, the injury occurred when an intoxicated employee, attempting to assist with unloading, operated a hydraulic lift at the rear of the truck. Id. at 220, 533 A.2d 682. The dispute over the exclusion’s applicability did not involve a disagreement, as is present in this case, about whether the automobile was involved at all. Rather, the dispute was whether the plaintiff’s putting forth a theory of liability based on negligent hiring, retention, and supervision rendered the “auto” exclusion inapplicable, because hiring, retention, and supervision were distinct from the operation of the automobile. Id. at 225, 533 A.2d 682. Because the acts in question are “inseparably associated with the operation, use or unloading of the truck,” the EDP court held that applying a proximate cause analysis and looking to other contributory acts, such as negligent supervision, to negate the “auto” exclusion’s applicability would be improper. Id. at 231, 533 A.2d 682.

Therefore, where the operation of an automobile, or similarly the occurrence of an assault and battery, are indisputably causes of the injury and necessary elements of the cause of action, claims of underlying negligent hiring or entrustment, or other similar claims of negligence, will not defeat the common automobile- and assault and battery-based exclusions. See id. at 226, 533 A.2d 682; see also First Fin. Ins. Co. v. GLM, Inc., 88 F.Supp.2d 425 (D.Md.2000). Cases clarifying as much are common and are relied upon by the defendant here. See EDP, 311 Md. at 226, 533 A.2d 682; Rubins, 821 F.2d at 676; Travelers v. Citgo Petroleum, 166 F.3d 761 (5th Cir.1999); Titan Indem. v. Estes, 825 So.2d 651 (Miss.2002); A.J. Cameron Sod Farms v. Continental Ins. Co., 142 N.H. 275, 700 A.2d 290 (N.H.2000); Grain Dealers Mut. Ins. v. Pats Reynolds, 228 Ga.App. 854, 492 S.E.2d 702 (Ga.Ct.App.1997); Massachusetts Bay Ins. v. Unique Presort Servs., 287 Ill.App.3d 741, 223 Ill.Dec. 291, 679 N.E.2d 476 (Ill.App.Ct.1997); Wright v. American States Ins. Co., 765 N.E.2d 690 (Ind.Ct.App.2002); Meyers v. Mississippi Ins. Guar. Ass’n, 883 So.2d 10 (Miss.2004). Such a rule, however, does not bring the present case within the exclusion.

Holding that the operation of the automobile need not be the sole or proximate cause is not the same as saying an automobile need merely be present in order for the exclusion to apply. Nor does such a holding even mean that the automobile’s “involvement” necessarily triggers the exclusion. More to the point, EDP’s holding has no bearing on a dispute over the duty to defend where, as here, there is significant disagreement over whether the operation or unloading of the automobile was related to the injury at all. Harleysville is correct that there are cases upholding the “auto” exclusion where other acts of negligence were alleged and arguably played a causal role. In those cases, however, including the cases cited by Harleysville, the automobile was actually being driven or unloaded and there was no dispute as to those facts. See EDP, 311 Md. at 220, 533 A.2d 682 (employee actually operating the hydraulic lift on the truck); Rubins, 821 F.2d at 672-73 (employee actually driving the truck and injuring another); Belmonte v. Employers Ins. Co., 83 Cal.App.4th 430, 99 Cal.Rptr.2d 661, 662-63 (Cal.Ct.App.2000)(insured’s niece actually driving the van that struck another); Travelers, 166 F.3d at 764 (collision between insured’s oil tanker truck and automobile); Titan Indem. 825 So.2d at 653 (fire truck struck automobile); Hall v. Auto Owners Ins., 265 Neb. 716, 658 N.W.2d 711, 713 (Neb.1999)(actual automobile collision); A.J. Cameron Sod, 700 A.2d at 292 (employee fell off the top of cargo stacked on bed of truck); Grain Dealers, 492 S.E.2d at 703 (automobile collision); Massachusetts Bay Ins., 223 Ill.Dec. 291, 679 N.E.2d at 477 (automobile collision); Wright, 765 N.E.2d at 692 (death resulting from automobile collision); Meyers, 883 So.2d at 11 (automobile collision); Conduit & Found. Corp. v. Hartford Ins., 329 N.J.Super. 91, 746 A.2d 1053, 1054 (N.J.Super.Ct.App.Div.2000)(automobile accident resulting in death); USF & G v. Employers Cas., 672 F.Supp. 939, 940 (E.D.La.1987)(dump truck backed over the top of worker); Columbia Mut. Cas. Ins. Co. v. Coger, 35 Ark.App. 85, 811 S.W.2d 345, 346 (Ark.Ct.App.1991)(cargo of moving truck fell from truck and collided with other moving vehicle); Okley Trans., Inc. v. Zurich Ins. Co., 271 Ill.App.3d 716, 208 Ill.Dec. 177, 648 N.E.2d 1099, 1101 (Ill.App.Ct.1995)(employee drove truck off the road and into several homes).

FN3. Cf. Almayor v. State Farm Fire & Casualty Co., 613 So.2d 526, 527 (Fla.Dist.Ct.App.1993). In Almayor, the homeowner’s policy’s “automobile exclusion” did not preclude coverage for severe injuries suffered by an individual who was working on a motor vehicle parked in the insured’s driveway. The policy excluded “bodily injury or property damage arising out of ownership, maintenance, [or] use” of a motor vehicle owned by the insured. An automobile repairman came to the insured’s home to diagnose and perhaps repair her car. The repairman siphoned gasoline from the gas tank into a bucket, which he placed next to the steps of the house. A resident of the house came out with a freshly lit cigarette in his hand, and the cigarette ignited gasoline fumes, causing fire and explosion. The court found that the car had little, if anything, to do with the fire. The court explained that the car was merely a coincidental and legally remote source of gasoline, which was itself harmless until acted upon by the resident’s negligence. Thus, the accident did not “arise out of” ownership, maintenance, or use of a vehicle but from the resident’s allegedly negligent use of flammable material.

Further, similar exclusions have been held inapplicable because the operation or presence of the vehicle had no real causal relationship to the injury, even where the tort occurred inside the vehicle. See Almayor v. State Farm Fire & Casualty Co., 613 So.2d 526, 527 (Fla.Dist.Ct.App.1993)(exclusion did not apply to injury caused, in part, by gasoline previously removed from vehicle while vehicle was being repaired in driveway); State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 97-98, 109 Cal.Rptr. 811, 514 P.2d 123 (Cal.1973)(exclusion did not apply to an injury caused by the discharging of a modified firearm in the moving vehicle); State Farm Fire & Cas. Co. v. Kohl, 131 Cal.App.3d 1031, 1034, 182 Cal.Rptr. 720 (Cal.Ct.App.1982)(exclusion did not apply to injury caused from truck driver’s negligent moving of accident victim away from scene of the accident); Brown v. Dilworth, 331 So.2d 379, 379-80 (Fla.Dist.Ct.App.1976)(exclusion did not apply to injuries arising out of children playing with a chemical found on a truck parked at apartment complex).

FN4. In fact, the court in Belmonte, a case relied on by Harleysville, emphasized that the exclusion could be inapplicable even though the accident occurred inside the vehicle, where the liability exists independently of any “use” of the car. See Belmonte, 99 Cal.Rptr.2d at 663 (discussing State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 109 Cal.Rptr. 811, 514 P.2d 123 (Cal.1973)).

The standard for assessing the applicability of the “auto” exclusion, therefore, is not whether an automobile was present, was used in bringing the individual to the site of the injury, or even whether the tortious or negligent act occurred in the car. Rather, as the words of the policy indicate, the test is whether the injury “arises out of” the operation of the vehicle or the loading or unloading thereof. In construing insurance policies, the words are to be given their customary, ordinary, and accepted meaning. Hartford Cas. Ins. Co., 247 F.Supp.2d at 780 (citing Sullins v. Allstate Ins. Co., 340 Md. 503, 508, 667 A.2d 617 (Md.1995)). Affording these words their common understanding suggests meanings such as “originating from, growing out of, flowing from, or the like.” Beretta, 117 F.Supp.2d at 493-94 (quoting EDP, 311 Md. at 230, 533 A.2d 682). At bottom, this suggests at least some minimal causal relationship, even if not requiring proximate cause.

Moreover, as to the duty to defend in particular, exclusions have been held inapplicable where the facts related to the triggering of the exclusion were in dispute, a conclusion consistent with the “potentially covered” duty to defend rule followed in Maryland. Compare 7416 Baltimore Ave. Corp. v. Penn-Amer. Ins. Co., 83 Md.App. 692, 699-700, 577 A.2d 398 (Md.Ct.Spec.App.1990)(rejecting the applicability of the exclusion and distinguishing EDP on the grounds that the exclusion there was supported by an established fact accepted by all parties and was not a case where causation was a contested issue); with GLM, 88 F.Supp.2d at 430 (applying the exclusion because no set of facts would remove the case from the exclusion); and Northfield Ins. v. Boxley, 215 F.Supp.2d 656, 660-61 (D.Md.2002)(holding that the “task at hand” was determining whether there is any dispute over material facts that would trigger the exclusion and applying the exclusion where it found no such dispute).

The law is clear that when there is doubt as to coverage and the duty to defend, such doubt is resolved in favor of the insured. See Hartford Cas. Ins. Co., 247 F.Supp.2d at 780 (citing Chantel Assocs. v. Mount Vernon Fire Ins. Co., 338 Md. 131, 145, 656 A.2d 779 (Md.1995); see also Baltimore Ave. Corp., 83 Md.App. at 699, 577 A.2d 398. Here, unlike in First Financial, Northfield, and EDP, it is not agreed upon that the injury involved the vehicle at all. As interpreted by the courts, this exclusion is framed in terms of the instrumentality causing the harm. Rubins, 821 F.2d at 677. The only suggestion of such an “instrumentality” found in any of the complaints in Shaffer related to the condition of the “mud lot.” Searching the discovery that was taken in Shaffer, as the insured, but not the insurer attempting to avoid coverage, is entitled to do, one finds more evidence that the causal “instrumentality” was the condition of the lot. Further, even viewing any evidence suggesting some involvement of the automobile in the light most favorable to Harleysville, the circumstances do not begin to approach those present in the cases that found the exclusion applicable.

The insurer has an obligation to defend when there exists a “potentiality that the claim could be covered under the policy.” INK”http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=4637&FindType=Y&ReferencePositionType=S&SerialNum=2002541795&ReferencePosition=660″Northfield, 215 F.Supp.2d at 660 (quoting Litz v. State Farm Fire and Cas. Co., 346 Md. 217, 225, 695 A.2d 566 (Md.1997)). Based on the foregoing, any claim that the “auto” exclusion applied was tenuous at best, and thus for the purposes of determining the duty to defend, the exclusion is inapplicable.

B.

The policy in question also contains an exclusion which mandates that the policy does not apply to “any obligation of the insured under a worker’s compensation, disability benefits or unemployment compensation law or any similar law.” (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.)

Harleysville relies on Nationwide Ins. Cos. v. Rhodes, 127 Md.App. 231, 732 A.2d 388 (Md.Ct.Spec.App.1999), in claiming that the “workers compensation” exclusion applies. Nationwide involved an insured’s claim that it was entitled to coverage and a defense of a home health aide’s claim filed with the Worker’s Compensation Commission. Id. at 233, 732 A.2d 388. No matter the outcome of the underlying worker’s compensation claim in that case, the insured was seeking a defense in a direct worker’s compensation claim by one of its alleged employees, thus bringing the case under the policy’s exclusion. The insured put forth the rather tenuous argument that if the aide failed in convincing the Worker’s Compensation Commission that she was an “employee” entitled to benefits, then she would no longer be a “person eligible to receive benefits” under a worker’s compensation law, as defined under the exclusion. Thus, the insured argued, a duty to defend would lie. Id. at 244, 732 A.2d 388. The court correctly rejected that argument. Id. Cowan’s position, however, is not so overreaching.

In this case, Cowan was not seeking a defense in a direct workers’ compensation action against it. In Shaffer, the relevant underlying case, neither Shaffer’s complaint nor the third party complaint involved any “obligation of the insured under a worker’s compensation, disability benefits or unemployment compensation law or any similar law.” Nothing presented by Harleysville, nor any other authority identified by this court, suggests the “workers compensation” exclusion at issue here applies to the circumstances in this case.

While Maryland does not follow the rule that insurance policies are to be construed most strongly against the insurer, GLM, 88 F.Supp.2d at 428, it does apply to insurance cases the general maxim of construing contracts against the drafting party. Home Exterminating Co., Inc., v. Zurich Amer. Ins. Group, 921 F.Supp. 318, 322 (D.Md.1996); see also Rubins, 821 F.2d at 675. Notably, Harleysville’s exclusion did not contain the broader language contained in the policy at issue in Nationwide, which excluded coverage for claims by a “person eligible to receive benefits.” Had Harleysville wanted its worker’s compensation exclusion to be broader and reach more than “obligations of the insured under a worker’s compensation law,” it could have drafted the policy differently and excluded all persons entitled to receive such benefits. It did not. Had Cowan incurred some obligation to the worker’s compensation fund as a result of a claim by Shaffer, and in turn sought indemnification from Harleysville for that monetary obligation, perhaps the exclusion would apply. That was not the case here. Harleysville, in its response to Cowan’s cross-motion for summary judgment, cites several cases for its assertion that Maryland courts have followed the majority view that workers’ compensation exclusions are to be enforced. (Def.s’ Mem. in Resp. at 7). To be sure, they are to be enforced, but only where applicable. The exclusion here is inapplicable.

That Shaffer eventually received worker’s compensation benefits does not alter this conclusion. First, it is irrelevant. At issue here is Harleysville’s duty to defend the third party complaint in Shaffer, not any claim under a worker’s compensation or similar law. Second, it is extrinsic evidence coming to light in the deposition testimony of Shaffer in Shaffer, which Harleysville is prohibited from relying on in denying Cowan a defense. See Montgomery Cnty. Bd. of Educ., 154 Md.App. at 510-511, 840 A.2d 220.

C.

The policy also contains an “employer’s liability” exclusion which mandates that the policy does not apply to “bodily injury” to “an employee of the insured arising out of and in the course of employment by the insured or performing the duties related to the conduct of the insured’s business.” (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) The exclusion applies “whether the insured may be liable as an employer or in any other capacity” and “to any obligation to share damages with or repay someone else who must pay damages because of the injury,” but “does not apply to liability assumed by the insured under an ‘insured contract.” ‘ (Id.).

FN5. Under the policy, “insured contract” is defined as: “That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in conjunction with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.” (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.)

First, Harleysville’s reliance on Hastings v. William H. Knott, Inc., 114 Md.App. 403, 689 A.2d 1323 (Md.Ct.Spec.App.1997), is inapposite. In Hastings, the dispute was over whether two workers, opposing parties in the underlying tort suit, were co-employees where one was a subcontractor and the other a temporary laborer. Id. at 404-05, 689 A.2d 1323. The court held that they were co-employees, thus triggering the co-employee exclusion in the insurance policy. INK”http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=162&FindType=Y&SerialNum=1997064859″Id. at 407-08, 689 A.2d 1323. The exclusion stated that while employees counted as an “insured,” employees were not covered for injuries to co-employees in the course of employment. Id. at 404, 689 A.2d 1323. The “employer’s liability” exclusion at issue in this case is different from the one in Hastings, and, in any event, there is no question about the relationship between Shaffer and Cowan.

FN6. In Hastings, a workers’ compensation exclusion was at issue, but, finding the co-employee exclusion applicable, the court did not address it.

Harleysville also relies on Riviera Beach Volunteer Fire Co., Inc. v. Fid. and Cas. Co. of New York, 388 F.Supp. 1114 (D.Md.1975). While Riviera Beach offers more guidance, it is not helpful to Harleysville’s cause. The exclusion in Riviera Beach was styled more as a “fellow employee exclusion” than the “employer’s liability” exclusion here, but the court’s delineation of the issues is relevant and instructive. There, similar to here, the court was faced not with a direct claim between co-employees, but rather a question of the duty to defend a third-party claim for indemnification or contribution against an employee of the insured. Riviera Beach, 388 F.Supp. at 1117-18. The exclusion in Riviera Beach read: “the insurance with respect to any person or organization other than the named insured … does not apply: … (2) to any employee with respect to injury to … or death of another employee of the same employer.” Id. at 1123. In considering the applicability of this “co-employee” exclusion the court reasoned:

The phrase ‘with respect to’ indicates that the exception encompasses any suit alleging damages arising out of an ‘injury to … or death of another employee of the same employer,’ whether that suit is between two co-employees or between one employee and any other person trying to recover damages in connection with an injury to, or the death of, a fellow employee of the person being sued.

Id. Riviera Beach, however, made a critical distinction between cases where the third party complaint alleges that the insured’s liability is based in tort and its own negligence, and cases where the third party complaint bases liability on the insured’s alleged assumption thereof through a contract. Id. at 1123. As Riviera Beach noted, courts have found a duty to defend in the latter cases, even in the face of similar co-employee exclusions. Id.

FN7. Harleysville, in support of its claims that both the “workers compensation” and “employer’s liability” exclusions apply, also cites Riviera Beach in its response to Cowan’s cross-motion for summary judgment, pointing to the court’s statement that “if a person is considered as being an employee of another for purposes of the state Workmen’s Compensation Act, he should also be so considered for purposes of determining the applicability of exclusionary provisions in an insurance contract.” (Def.s’ Mem. in Resp. at 7). This statement by the court was solely addressing the issue of whether the employee in question could be considered a co-employee for purposes of a “co-employee exclusion,” and has no direct bearing on the issues in this case.

In this case, Harleysville’s own policy seems to recognize the critical distinction made in Riviera Beach. Harleysville’s “employer’s liability” exclusion states that it applies “whether the insured may be liable as an employer or in any other capacity” and “to any obligation to share damages with or repay someone else who must pay damages because of the injury,” but “does not apply to liability assumed by the insured under an ‘insured contract.” ‘ (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) The first part of the above cited language suggests exclusion of coverage where a third party complaint seeks indemnification or contribution on the basis of the insured’s own negligence, as in Riviera Beach. However, the exception to the exclusion tracks the distinction recognized in Riviera Beach, whereby the duty to defend does attach when the third party complaint bases liability on a contractual assumption of such liability.

Looking to Linens N Things’ third party complaint, two theories of liability are raised in separate counts. In Count I, Linens N Things alleges that “it is entitled to insurance coverage, a defense, indemnification and to be held harmless by Harleysville Insurance Company and Cowan Systems, Inc. through their (Cowan’s) contract with Linens N Things and through a policy of insurance issued to Cowan Systems In.” (Plf.’s Mem. in Opp’n at Ex. 3 ¶ 3). In Count II, Linens N Things alleges that “third-party defendants Harleysville Insurance Company and Cowan Systems, Inc. are Joint Tortfeasors and this defendant/third-party plaintiff demands Joint Tortfeasor Contribution … and apportionment of negligence.” (Id. ¶ 5).

I recognize, without deciding, that the second count may sound in tort and be based on a theory of negligence that could trigger the “employer’s liability” exclusion at issue here. However, Count I clearly bases liability on the assumption of liability in a contract between Cowan and Linens N Things, placing it outside of the exclusion under Riviera Beach and, as further addressed below, under the “insured contract” exception to the exclusion under the policy itself. If any claims potentially come within the policy coverage, the insurer is obligated to defend all claims. Utica Mut. Ins. Co., 130 Md.App. at 383, 746 A.2d 935; see also Montgomery Cnty. Bd. of Educ., 154 Md.App. at 512, 840 A.2d 220; and Hartford, 247 F.Supp.2d at 782-783. That one cause of action is not covered by the policy does not excuse the insurer if a separate cause of action is covered. See Utica, 130 Md.App. at 383, 746 A.2d 935.

Under the terms of the policy itself, the exclusion “does not apply to liability assumed by the insured under an ‘insured contract.” ‘ (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) Cowan entered into such a contract with Linens N Things. Under the “Truckload Transportation Agreement” (“the Agreement”), Cowan agreed to “indemnify, defend and hold harmless” Linens N Things “from and against any and all claims, actions, losses, damages, expenses, judgments, and costs … arising out of injury to persons caused in whole or in part” by Cowan’s performance. (Plf.’s Mem. in Opp’n. at Ex. 7, truckload transportation agreement.) Cowan therefore, under the Agreement, agreed to indemnify Linens N Things for all damages related to Cowan’s performance under the contract, even where Cowan itself is only partially responsible. Had Linens N Things been found substantially liable, and Cowan only minimally so, Cowan, to borrow the language from Harleysville’s own definition of an “insured contract,” would have had to “assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage. (Plf.’s Mem. in Opp’n. at Ex. 1, the policy.) Thus, by the definition of “insured contract” provided in Harleysville’s own policy, the “Truckload Transportation Agreement” is an insured contract.

The existence of the “insured contract,” in the form of the Truckload Transportation Agreement, was the very basis for Linens N Things bringing Count I of its third party complaint. (Plf.’s Mem. in Opp’n at Ex. 3 ¶ 3). Based on the foregoing, as was the case with the “auto” and “worker’s compensation” exclusions, the “employer’s liability” exclusion is inapplicable here.

II

The insurer has an obligation to defend when there exists a “potentiality that the claim could be covered under the policy.” Northfield, 215 F.Supp.2d at 660 (quoting Litz v. State Farm Fire and Cas. Co., 346 Md. 217, 225, 695 A.2d 566 (Md.1997). As explained above, any claim that the “auto” exclusion applied was tenuous at best, the “workers compensation” exclusion simply does not apply, and the “employer’s liability” exclusion, by its own terms, was rendered inapplicable by the existence of an “insured contract.” Thus, there was, at the very least, a potentiality that the third-party claim could be covered under the policy. The record presents no genuine issues of material fact that would bear on the duty to defend, and the evidence before the court, even viewed in the light most favorable to Harleysville, cannot support a conclusion that there was no potentiality of coverage under the policy. Harleysville had a duty to defend. For the reasons stated above, the defendant’s motion will be denied and the plaintiff’s motion will be granted.

Cowan is therefore entitled to fees and costs incurred in defending the Shaffer lawsuit, as well as those incurred in bringing this declaratory judgment action. See Riviera Beach, 388 F.Supp. at 1120; see also Bankers and Shippers Ins. Co. of New York v. Electro Enterprises, Inc., 287 Md. 641, 660, 415 A.2d 278 (Md.1980).

A separate order follows.

ORDER

For the reasons stated in the accompanying Memorandum, it is hereby ORDERED and

DECLARED that:

1. the defendant’s motion for summary judgment (docket entry no. 19) is Denied;

2. the plaintiff’s cross-motion for summary judgment (docket entry no. 21) is Granted;

3. Harleysville Mutual Insurance Company had a duty to defend Cowan Systems, Inc. in the action captioned George Shaffer, et al v. Linens N Things, et al. Case No.: L-2160-02, previously pending in the Superior Court of New Jersey for Gloucester County;

4. Harleysville Mutual Insurance Company shall reimburse Cowan Systems, Inc. for all costs and expenses, including attorneys fees, that Cowan incurred defending the third party complaint in the Shaffer case, as well as all costs and expenses, including attorneys fees, for having to prosecute the declaratory judgment action; and

5. The Clerk shall CLOSE this case.

United States District Court,

N.D. Indiana, South Bend Division.

PLUMROSE (USA) INC., Plaintiff,

v.

PENSKE TRUCK LEASING CO., L.P., and Rollins Leasing Corp., Defendants.

Sept. 30, 2005.

MEMORANDUM AND ORDER

 

MOODY, J.

I. BACKGROUND

This matter is before the court on defendants’ motion to dismiss plaintiff’s claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff Plumrose seeks damages for losses it claims it incurred when refrigerated container trucks it leased from defendants Rollins/Penske to carry meat products across the midwest failed to function properly. Plaintiff claims that it leased refrigerated containers, called “reefer units,” from defendants on two occasions pursuant to a lease and service agreement signed on May 4, 1998. (Compl. ¶ ¶ 3-5; Ex. A). Plaintiff further claims that it loaded and carried temperature-sensitive meat products in the reefer units from Mississippi to consignees in Wisconsin, Illinois, and Michigan. (Compl.¶ 7). Plaintiff alleges that when it attempted to deliver the products, “part or all of the shipments were refused by the consignees.” (Compl.¶ 8). The shipments were then taken to Elkhart, Indiana, where they were “declared a total loss.” (Compl.¶ 10).

FN1. Originally, the lease agreement was made between plaintiff Plumrose and defendant Rollins. Rollins has since been acquired by defendant Penske. (Defs.’ Mem. Supp. Mot. to Dismiss 1 n. 1). Defendants treat themselves collectively as one for purposes of their motion, and so the court does the same for purposes of this order.

In section 4(A) of the agreement, defendants agreed to maintain and repair the rental vehicles. According to plaintiff, “[i]n breach of its duties and obligations, defendants provided Plumrose with Reefer Units that were not in good repair and condition, and which did not perform the function for which they were intended.” (Compl.¶ 11). Plaintiff alleges that “[d]efendants’ failure to properly repair and/or maintain the Reefer Units, and/or defendants’ failure to provide a proper working Reefer Unit, was the sole proximate cause of the loss of the meat products carried in the Reefer Units.” (Compl.¶ 12). Plaintiff seeks damages in the amount of $111,629.62. (Compl.¶ 13).

In their motion to dismiss and accompanying brief (docket # 10, 11), defendants argue that according to the plain language of the parties’ contract, defendants cannot be held responsible for the losses alleged by plaintiff. Specifically, defendants argue that subsections (1) and (2) of section 6(C) bar plaintiff’s cause of action. (Defs.’ Mem. Supp. Mot. to Dismiss 2). Section 6(C) of the agreement consists of the following:

FN2. To facilitate the court’s analysis, the enumerated subsections of section 6(C) are presented here in list form. In the actual lease agreement, the subsections were strung together in one paragraph.

C. LESSEE SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS ROLLINS AND ROLLINS’ OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS AND REPRESENTATIVES FROM AND AGAINST ANY CLAIM, CAUSE OF ACTION, DAMAGE, LIABILITY AND EXPENSE (INCLUDING REASONABLE ATTORNEYS’ FEES), EVEN IF ROLLINS IS CLAIMED TO HAVE BEEN OR PROVEN TO BE NEGLIGENT, ARISING OUT OF:

(1) LOSS OR DAMAGE TO ANY CARGO, GOODS OR OTHER PROPERTY PLACED IN OR CARRIED ON ANY VEHICLE(S) WHETHER SUCH LOSS OR DAMAGE OCCURS IN ROLLINS’ FACILITY OR ELSEWHERE;

(2) LOSS OR DAMAGE RESULTING TO LESSEE BY REASON OF DELAY IN DELIVERY OR FAILURE TO DELIVER PRODUCTS OWNED OR TRANSPORTED BY LESSEE OR ANY OTHER CONSEQUENTIAL OR SPECIAL DAMAGES;

(3) LOSS OR DAMAGE (INCLUDING FINES) RESULTING FROM THE TRANSPORTATION OF “HAZARDOUS MATERIALS” (AS THAT TERM IS DEFINED BY THE FEDERAL HIGHWAY ADMINISTRATION DEPARTMENT OF TRANSPORTATION OR THE FEDERAL OR ANY STATE ENVIRONMENTAL PROTECTION AGENCY) OR SPILLS THEREOF INCLUDING ALL FLUIDS CONTAINED IN VEHICLE(S); AND

(4) LOSS OR DAMAGE INCURRED BY ROLLINS FROM LESSEE’S USE OF A VEHICLE(S) NOT OWNED OR INSURED BY ROLLINS, REGARDLESS OF ROLLINS’ OBLIGATIONS IMPOSED BY THE INSURANCE PROVISIONS OF THE MOTOR CARRIER ACT OF 1980 OR OF THE ICC OR ANY STATE AGENCY.

In its response to defendants’ motion, plaintiff contends that “it was never the intent of the contracting parties for the lessee (Plumrose) to defend the lessor (Penske/Rollins) from direct actions between them,” but rather only from third-party claims. (Pl.’s Response to Defs.’ Mot. to Dismiss 3). Defendants insist in their reply that the indemnification clause, which states that plaintiff must hold defendants harmless for “any claim,” applies to claims between the parties, unless a third-party limitation is present in the contract’s language. (Defs.’ Reply 2-3). According to defendants, plaintiff’s interpretation of the clause imposes an impermissible gloss on the literal language of the contract. (Defs.’ Reply 2-3).

II. LEGAL STANDARD

A cause of action will be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim only if there is no set of facts consistent with the allegations of the complaint that could be proved which would entitle the plaintiff to relief. Brown v. Budz, 398 F.3d 904, 908-09 (7th Cir.2005). The court will accept as true all of the well-pleaded facts alleged by the plaintiff and all reasonable inferences that can be drawn therefrom. Horowitz v. Bd. of Educ. of Avoca Sch. Dist. No. 37, 260 F.3d 602, 618 (7th Cir.2001).

The court must decide whether portions of the indemnification provision in the parties’ contract require plaintiff to “defend, indemnify, and hold harmless” defendants for a lawsuit brought by plaintiff itself, thus effectively barring plaintiff’s cause of action. The parties agreed that the contract should be interpreted according to Delaware law. (Defs.’ Mot. to Dismiss, Ex. A, section 13). Courts in other jurisdictions have addressed the issue of whether a broadly worded indemnification agreement, requiring indemnification for “all” or “any” claims or costs of litigation, should be presumed to include or exclude claims or costs of litigation between the parties (also known as “inter se” or “inter-party” claims). However, the Delaware courts have not created a definitive rule on this issue. Nevertheless, the Seventh Circuit advises that federal courts should not shy away from deciding issues of state law. Diginet, Inc. v. Western Union ATS, Inc., 958 F.2d 1388, 1395 (7th Cir.1992) (“Some federal judges are timid about deciding issues of state law, because they fear that by doing so they will confuse that law. The fear is groundless.”); Erie Ins. Group v. Sear Corp., 102 F.3d 889, 892 (7th Cir.1996) (holding that absence of state supreme court precedent did not justify certification of a question to that state’s supreme court where the court could forge a holding out of general principles of contract interpretation and other persuasive caselaw). As a federal court sitting with diversity jurisdiction over this case, the court’s role is to predict what decision the Delaware Supreme Court would make if it were confronted with this issue. McKenna v. Ortho Pharm. Corp., 622 F.2d 657, 661 (3d Cir.1980); see also Estate of Kuba by Kuba v. Ristow Trucking Co., 660 F.Supp. 1069, 1073 (N .D. Ind.1986).

FN3. For example, compare Ray D. Baker Contractor, Inc., v. Chris Nelsen & Son, Inc., 136 N.W.2d 771, 773 (Mich.App.1965) (“This type of clause has traditionally been used to indemnify one of the contracting parties against tort liability to third parties … The defendant’s attempt to use what is a commonly encountered indemnity clause as a defense to its own breach of contract is an ingenious argument, but one which we cannot accept.”); with Edward E. Gillen Co. v. United States, 825 F.2d 1155, 1156-57 (7th Cir.1987) (“The provision explicitly applies to ‘all suits.’ It is inappropriate for the court to read in a clause, such as ‘all suits, except those brought by the contractor.’ The Court cannot add terms to an agreement.”).

As a preliminary matter, it is important to note that cases related to this issue come in three basic flavors. First, the courts distinguish between indemnification for the costs of attorneys’ fees and legal expenses, and indemnification for other costs, including, for example, damages and arbitration awards. Under the umbrella of indemnification for attorneys’ fees and legal expenses, the courts further distinguish between indemnification for attorneys’ fees and legal expenses incurred in defending a “substantive” cause of action (e.g., for fraud or breach of contract), and those incurred in bringing suit to enforce the indemnification agreement itself, also known as “fees on fees.” In the case at hand, defendants’ motion to dismiss is not a request for indemnification for attorneys’ fees and legal expenses, but rather it falls under the category of a request for “other costs.” More accurately, defendants argue that plaintiff’s suit is barred altogether. Nonetheless, a discussion of the rules associated with the other genres of indemnification claims is warranted in order to better understand the reasoning behind the rule that the court believes applies to this case.

For example, assume that an indemnitee expended funds defending against a third-party claim, and the indemnitor refused to reimburse these expenses as required by the indemnification agreement. Assume that the indemnitee then brought a second suit to compel the indemnitor to pay, expending fees on this proceeding as well. A prayer for the fees expended in the latter action is known as a request for “fees on fees.”

A. Indemnification for “fees on fees”

The Delaware Supreme Court settled any doubts about its policy on “fees on fees” in Pike Creek Chiropractic Center v. Robinson, 637 A.2d 418, 422-23 (Del.1994). The court held that the indemnification clause at issue, which was “very broad in scope and require[d] Robinson to hold harmless and indemnify PCCC against ‘any liabilities and expenses, including attorneys’ fees,” ‘ compelled an award of “fees on fees” because “[the indemnitee] will not be held harmless unless it receives all the legal expenses and attorneys’ fees it has incurred, including those incurred in enforcing the Indemnification Clause.” Id. at 423 (emphasis in original). Later, the Delaware Supreme Court similarly held that a broadly worded corporate bylaw providing for indemnification of officers “to the full extent authorized by law” would be construed as including attorneys’ fees and expenses resulting from an action brought to enforce the indemnification bylaw itself, unless the parties provided otherwise in their agreement. Stifel Fin. Corp. v.. Cochran, 809 A.2d 555, 561 (Del.2002).

Courts interpreting Delaware law show continued adherence to the principles set forth in Pike Creek and Stifel. See, e.g., DRR, LLC, v. Sears, Roebuck, & Co., 949 F.Supp. 1132, 1143 (D.Del.1996) (refusing to award “fees on fees” because other language in the contract strongly indicated that third-party claims were the only ones contemplated by the parties when they agreed to the indemnification clause); Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 182 (Del. Ch.2003) (holding that corporate official who brought suit to enforce an indemnification clause providing for advancement of legal expenses was entitled to “fees on fees”); Morgan v. Grace, No. Civ. A. 20430, 2003 WL 22461916, at (Del. Ch. Oct. 29, 2003) (same).

B. Indemnification for attorneys’ fees and legal expenses, generally

The Delaware courts have not ruled on the related issue of whether an indemnification clause should be presumed to require reimbursement for attorneys’ fees and legal expenses incurred as a result of “substantive” litigation between the parties (not merely a “fees on fees” action to enforce the indemnification clause). However, the Ninth Circuit, interpreting Delaware law, addressed the issue in Atari v. Ernst & Whinney, et al., 981 F.2d 1025, 1031-32 (9th Cir.1992). In that case, Atari sued the officers of Federated, a corporation Atari was attempting to acquire, for, amongst other things, securities fraud and racketeering. The officers won the case, and sought indemnification from Atari for expenses incurred in defending against the lawsuit brought by Atari. The Ninth Circuit ordered Atari to reimburse the officers for these expenses, concluding that the indemnification agreement was not drafted in a way that would suggest it was limited to indemnification for expenses involving the officers’ litigation with third-parties only. The court held that “Atari could have limited its obligation to compensate Federated officers to actions brought by third parties, but it did not. Instead, it agreed to indemnify the officers against ‘all acts and omissions’ to the extent permitted by law.” Id. at 1032.

Defendants cite no cases interpreting Delaware law other than Atari to support their argument that the indemnification clause at issue should be read to presumptively encompass inter se claims. (Defs.’ Reply 1-3). Indeed, Atari is consistent with Delaware law to the extent of its holding, but, nevertheless, the court finds that Atari does not stand for the proposition attributed to it by defendants. Defendants fail to cite the part of Atari that mandates a much more narrow reading: “Public policy may prohibit one party from contracting out of its liability to another for intentional torts. But exoneration for fraud is not the issue here. The issue is whether Federated could contract to have Atari indemnify its officers for their legal expenses incurred defending a lawsuit brought by Atari, in which the officers were found to be not liable. We are aware of no public policy precluding indemnification under those circumstances.” Atari, 981 F.2d at 1032 (emphasis added). Thus, the Atari court, keenly aware of its role as a federal circuit court deciding a case involving an unsettled question of Delaware law, made clear that its holding was limited to the factual scenario before it. The court was careful to point out that there might be instances where it would be inappropriate to construe an indemnification agreement as applicable to inter se claims, but the case before it was not one of those instances. The Atari court emphasized that the officers were seeking indemnification for legal expenses and that the officers were found not liable in the suit brought against them by Atari. The court found that these particular facts presented no problems from a policy standpoint that would preclude allowing the indemnification agreement to include the costs of the inter se securities fraud and racketeering claim.

Thus, the holdings of Atari, Pike Creek, and Stifel on the issue of indemnification agreements for attorneys’ fees and legal expenses can be read together harmoniously. While Atari dealt with indemnification for expenses incurred in defending a substantive lawsuit and Pike Creek and Stifel dealt with indemnification for expenses incurred in enforcing an indemnification agreement (“fees on fees”), the basic premise is the same: a broadly worded indemnification agreement for legal expenses and attorneys’ fees will be read to encompass inter se claims unless the parties provide otherwise in the agreement. However, these cases do not dispose of the issue before the court today. Defendants are asking not for attorneys’ fees and legal expenses, but for dismissal of an entire breach of contract cause of action. Because, as explained below, Delaware precedent points to a presumption against construing an indemnification clause as requiring reimbursement for costs resulting from litigation between the indemnitor and the indemnitee, other than legal expenses and attorneys’ fees, the court rejects defendants’ argument that the Atari rule should be applied to this case.

C. Indemnification for “other” costs besides attorneys’ fees and legal expenses

The court is mindful that the Delaware courts have not directly addressed the issue of whether an indemnification clause should be presumed to require reimbursement for costs, other than legal expenses and attorneys’ fees, incurred in inter se litigation. However, the aforementioned Stifel decision is a useful and instructive tool for determining how the Delaware Supreme Court would decide this issue if it were before that court today. The Stifel court, in addition to deciding that indemnification for “fees on fees” was appropriate in the context of broadly worded corporate bylaws, dealt with the awkward question of whether an indemnification agreement should be presumed to require that an indemnitee be compensated by an indemnitor for an arbitration award that the indemnitee is required to pay to the indemnitor’s subsidiary. Cochran v. Stifel Fin. Corp., No. Civ. A. 17350, 2000 WL 1847676, at (Del. Ch. Dec. 13, 2000), aff’d in part and rev’d in part, 809 A.2d 555 (Del.2002). Stifel involved a parent corporation Stifel Financial, its wholly owned subsidary Stifel Nicolaus, and Robert Cochran, one of Stifel Nicolaus’ former officers. Stifel Nicolaus brought an arbitration action against Cochran alleging that Cochran had breached his fiduciary duties, as well as provisions of his employment contract with Stifel Nicolaus that required him to return excessive compensation to the company and repay a promissory note. Stifel, 809 A.2d at 556-57.

The arbitrator overseeing the action found in Cochran’s favor on the breach of duty claim. However, the arbitrator also found that Cochran had in fact breached his employment contract and awarded Stifel Nicolaus approximately $1.2 million. Stifel, 809 A.2d at 557. Stifel Financial’s bylaws included a provision promising to indemnify its officers with regard to any suits brought against those officers. With these bylaws in hand, Cochran brought suit against Stifel Financial, asking the court to order Stifel Financial to abide by its promise to indemnify him and pay the $1.2 million arbitration award that Cochran owed to Stifel Nicolaus. Id. Because Stifel Nicolaus was a wholly owned subsidiary of Stifel Financial, Cochran’s interpretation of the agreement would therefore require the corporation to pay its own subsidiary for Cochran’s breach of his employment contract.

The Delaware Supreme Court specifically affirmed the Delaware Court of Chancery’s refusal to adopt Cochran’s interpretation. Stifel, 809 A.2d at 559. The Delaware Court of Chancery found that “[s]uch a conclusion would render the officer’s duty to perform his side of the contract in many respects illusory.” Cochran, 2000 WL 1847676, at . The court noted that “[h]ad the parties intended Cochran to be held harmless [for breaches of his contract with Stifel Nicolaus] through indemnification by Stifel Financial, surely it would have been clearer to simply state that.” Id. The court found that Cochran’s interpretation “subverts the contractual arrangement” and “leaves Stifel Nicolaus without a genuine remedy against Cochran.” Id. at . The court further pointed out that “Cochran is a sophisticated businessman and cannot have rationally believed that Stifel Financial would indemnify him if he breached his own contractual obligations to Stifel Financial’s corporate child, Stifel Nicolaus.” Id.

The court is aware that several nuances of Stifel make it factually different from the present case. First, Stifel involved corporations and their promises to indemnify their officers and directors, necessarily invoking complexities and intricacies of corporate law that are not at issue in this case. Nonetheless, since the Delaware courts have not ruled on the precise issue involved here, the principles underlying the Stifel holding are of great significance in attempting to determine how the Delaware courts would approach this problem by analogy. Second, the Stifel case is not the “purest” form of inter se litigation, because the purported indemnitor (Stifel Financial) was not technically the same as the party in the substantive breach of contract dispute (Stifel Nicolaus). Nonetheless, the chancery court’s opinion suggests that the parent-subsidiary relationship was a major reason why Cochran’s argument failed; the court was unwilling to accept a result where the corporation would be required to pay its own subsidiary for Cochran’s breach of contract, unless the language of the agreement made it clear that such was the parties’ intent. Based on the reasoning of the Stifel decisions, the Delaware courts would likely respond as incredulously, if not more so, if the case involved a “pure” inter se claim, where a party would be required to pay itself.

Accordingly, it is the opinion of this court that the Delaware Court would extend the logic and reasoning underlying Stifel to presumptively reject construing a broad indemnification agreement as including costs of inter se litigation, other than attorneys’ fees and legal expenses, particularly when doing so would effectively eviscerate other contractual duties and produce a result where a party is essentially required to pay his own damages for the other party’s breach of contract. However, the Delaware Supreme Court might recognize a provision producing a pay-your-own-award result, however awkward it might be, if the parties simply state their willingness to abide by such an arrangement in the contract.

D. Reconciling the rules

The holdings of Atari, Pike Creek, and Stifel could be read to present sharply contrasting presumptions. On one hand, Atari and Pike Creek represent a presumption in favor of interpreting indemnification agreements as including inter se legal expenses and attorneys’ fees. However, at the same time Stifel represents a presumption against interpreting an indemnification agreement as covering awards owed by an indemnitee to the indemnitor’s subsidiary, a situation that is strikingly similar to inter se litigation. Despite the contrast, both rules fit squarely under Delaware precedent.

The Stifel court’s holding that broadly worded indemnification agreements for legal expenses and attorneys’ fees will be interpreted literally is an extension of the already well-settled principle of Delaware law that parties may agree to shift fees amongst themselves. While Delaware adheres to the “American rule,” whereby each party generally bears his own costs of litigation, Montgomery Cellular Holding Co. v. Dobler, 880 A.2d 206, 227 (Del.2005), the Delaware courts have held that it does not violate public policy for parties to agree by contract that one party will pay the legal fees of the other, even in the event of his own breach. See, e.g., Clark v. Equitable Life Assurance Soc., 316 A.2d 554, 555 (Del.1974); Petition of Warrington, 179 A. 505 (Del.1935). Indemnification for legal expenses and attorneys’ fees related to inter se litigation is very similar, if not functionally identical, to fee-shifting. Thus, considering Delaware precedent, it makes perfect sense that if parties choose to take advantage of their legal right to shift fees amongst themselves, the court will not view the agreement as against Delaware public policy, and the parties will be bound by the literal agreement they have made.

In contrast, a rule presumptively interpreting a broadly worded general indemnification provision to encompass inter se judgments and awards would not be in line with Delaware policy and precedent. The Delaware Supreme Court reviewed cases involving different types of exoneration clauses, and concluded that “[t]hose decisions demonstrate the policy of this Court to look with disfavor upon clauses which exonerate a party from the consequences of his own negligence or that of his agent. The contract must clearly and unequivocally spell out the intent to grant such immunity. If the language used can be construed as not conferring immunity, it will be so interpreted. This policy was enunciated as the law in Delaware in [1921], and has been followed ever since.” Blum v. Kauffman, 297 A.2d 48, 49 (Del.1972) (internal citations omitted). Thus, the Delaware courts have a longstanding tradition of requiring that parties make clear their intent to absolve a party from his responsibilities. Additionally, a presumption in favor of interpreting a broadly worded general indemnification provision to encompass inter se judgments and awards could result in an interpretation where the indemnification provision would essentially nullify other duties and obligations in the contract. That is, if a party makes a promise in a contract, but will be indemnified from any financial responsibility resulting from a breach of that promise, the party has really made no promise at all. The words constituting those promises in the contract would have no meaning and serve no function. This would be contrary to the Delaware rule of contract interpretation that requires that courts attempt to give effect to all of a contract’s terms, leaving no provision illusory or meaningless. E.I du Pont de Nemours v. Shell Oil Co., 498 A.2d 1108, 1113 (Del.1985); Seabreak Homeowners Ass’n, Inc. v. Gresser, 517 A.2d 263, 269 (Del. Ch.1986), aff’d, 538 A.2d 1113 (Del.1988). Thus, it follows that if parties wish to make an agreement whereby a party will indemnify another party, even for an award of damages resulting from litigation between them, the parties should explicitly state this in the contract and the court will not assume that such an arrangement was intended by a general, broadly worded indemnification clause. The court is convinced that the Delaware Supreme Court was fully aware of the fact that its decision in Stifel created contrasting presumptions and that this was intentional and in line with precedent in that state.

III. ANALYSIS

The court now turns to how the indemnification clause at issue fares under the rule this court has fashioned based on Delaware precedent. In this case, plaintiff’s duty to defend, indemnify, and hold harmless defendants arises in four situations described in section 6(C) of the lease agreement. Given the structure of section 6(C) and the separate enumeration of each scenario triggering the plaintiff’s duty to indemnify, the court will consider each subsection of section 6(C) to be its own independent agreement to indemnify. However, the court will analyze these subsections in the context of section 6(C) and the contract as a whole to determine the meaning of the subsections. Shell Oil Co., 498 A.2d at 1113.

Under Delaware law, “[t]he proper interpretation of language in a contract, while analytically a question of fact, is treated as a question of law.” Pellaton v. Bank of New York, 592 A.2d 473, 478 (Del.1991) (citing Klair v. Reese, 531 A.2d 219, 222 (Del.1987)). When interpreting a contract, the goal of the Delaware courts, and the goal of this court when considering a contract governed by Delaware law, “is to ascertain the intent of the contracting parties based on the contract terms.” Hercules, Inc. v. AIU Ins. Co., 784 A.2d 481, 489-90 (Del.2001). However, “the Delaware courts should not destroy or twist … language under the guise of construing it.” O’Brien v. Progressive Northern Ins. Co., 785 A.2d 281, 288 (Del.2001) (internal quotation marks omitted). Further, a court may not manipulate clear and unambiguous contract language to create a “more perfect contract that the parties never agreed to.” E.I. du Pont de Nemours & Co. v. Admiral Ins. Co., 711 A.2d 45, 57 (Del.Super.1995). As explained in detail above, the parties will not be deemed to have contemplated requiring an indemnitor to pay his own award for an indemnitee’s breach of contract unless the contract makes it clear that such an arrangement was the parties’ intent.

A. Section 4(A): Maintenance and Repair

Plaintiff has sued for breach of section 4(A) of the lease agreement, which allocates responsibility between the parties for maintenance and repairs. For example, the provision states that “Rollins shall provide, at Rollins facilities, oil, lubricants, tires, tire replacements, tire repairs, and operating supplies necessary for the proper and efficient operation of the Vehicle(s).” On the other hand, “Lessee shall pay the cost of any anti-pollution and safety devices, including installation expenses, required to be installed on any Vehicle(s) after the execution of the applicable Schedule(s).” For the sake of argument, the court assumes that defendants did in fact breach section 4(A) by failing to provide maintenance and repairs as required. Defendants argue that breach or no breach, the indemnification clause prohibits this suit. (Defs.’ Mem. Supp. Mot. to Dismiss 3). However, plaintiff argues that “the provision relied on by defendants, Section 6(c) of the LSA [lease and service agreement], provides for indemnity of Rollins in the case of third-party claims, and not for direct actions between the contracting parties for breach of the LSA.” (Pl .’s Response to Defs.’ Mot. to Dismiss 2).

Defendants also argue, as an aside, that defendants fixed the units after they broke down, and therefore defendants did not breach the contract provision in which defendants agreed to maintain and repair the reefer units. (Defs.’ Mem. Supp. Mot. to Dismiss 3). The court does not consider this a serious argument for dismissal or summary judgment, as defendants have presented no evidence to substantiate the statement.

B. Section 6: Indemnification

Section 6 of the lease agreement is entitled “Indemnities and Insurance Coverage.” Preceding part C are parts A and B, which together deal with automobile liability and delegate responsibility between the parties for claims of bodily injury, death, or property damage arising from the “ownership, management, use or operation of any vehicle.” These sections conjure up images of lawsuits that might arise when property has been damaged or a person has been killed or injured in an automobile accident. Part D describes the parties’ respective responsibilities in situations involving physical damage and theft, including “collision, upset, fire, theft, malicious mischeif, vandalism, and glass breakage.” The theme of part D is damage caused by the lessee’s reckless behavior-the lessee is fully responsible for the insurance policy’s deductible amount when such damage results because lessee carries hazardous or explosive materials, wilfully causes damage, or drives recklessly or under the influence of alcohol or drugs. Parts A/B and D both require certain types of insurance coverage, and provide that lessee is responsible for any liability and expenses to the extent that the parties’ insurance policies fall short of fully satisfying any amount owed, except that Plumrose will not have this responsibility when Rollins’ sole negligence is responsible for the loss or damage.

In contrast to parts A/B, and D, part C primarily focuses on items that might be placed or transported in the vehicle and includes no exception to the lessee’s liability in cases where Rollins’ sole negligence caused the damage. Part C includes four subsections which describe the four instances that trigger the lessee’s duty to indemnify. The first subsection of part C provides that the lessee will hold Rollins harmless for any claims arising from “loss or damage to any cargo, goods, or other property.” The second subsection states that the lessee will hold Rollins harmless for “loss or damage resulting to lessee by reason of delay in delivery or failure to deliver products owned or transported by lessee, or any other consequential or special damages.” The third makes the lessee responsible for any fines arising from the “transportation of ‘hazardous materials.” ‘ Finally, the fourth provision requires the lessee to indemnify Rollins for “loss or damage incurred by Rollins from lessee’s use of a vehicle(s) not owned or insured by Rollins.” The first three subsections focus on the lessee’s obligations when losses or damages occur that are related to cargo placed in or carried in the vehicle by the lessee. As stated previously, defendants argue that the first two subsections bar plaintiff’s breach of contract claim. (Defs.’ Mem. Supp. Mot. to Dismiss 2).

C. The scope of Section 6(C)

The court cannot accept plaintiff’s argument that “[c]ommon sense dictates that it was never the intent of the contracting parties for the lessee (Plumrose) to defend the lessor (Penske/Rollins) from direct actions between them.” (Pl.’s Response to Defs.’ Mot. to Dismiss 2). On the contrary, common sense demands otherwise, at least with regard to section 6(C)(2). In this clause, plaintiff promises to defend, indemnify, and hold harmless Rollins from and against any claim arising out of “loss or damage resulting to lessee by reason of delay in delivery or failure to deliver products owned or transported by lessee or any other consequential or special damages.” There is no way to read section 6(C)(2) except that a claim arising out of “loss or damage resulting to lessee” would be brought by the lessee, not a third-party. If a third-party were to sue defendants, it would not be for loss resulting to the lessee, it would be for loss resulting to that third-party. It would be an endeavor in creative reading to interpret this statement, clearly articulating “losses or damages resulting to lessee,” as somehow referring to the losses or damages resulting to a third-party. The provision does not read “loss or damage resulting”; instead it reads “loss or damage resulting to lessee.” This implicates the lessee, Plumrose, as the only possible plaintiff in a claim arising under this section. The fact that no third-party could function as a plaintiff in one of the scenarios triggering Plumrose’s responsibilities to indemnify refutes Plumrose’s assertion that the indemnification clause only applies when a third-party brings a claim against Rollins.

10 Thus, the court finds that, based on the contract’s plain language, the presumption that the indemnification clause refers to third-party claims only is overcome with respect to section 6(C)(2). Plaintiff must therefore hold defendants harmless for any lost profits or other consequential or special damages incurred as a result of plaintiff’s inability to make timely delivery of properly refrigerated meat products to the intended recipients. For two reasons, this holding does not violate the rationale underlying Stifel by rendering defendants’ contractual obligation to maintain and repair the rental vehicles meaningless. First, a breach of section 4(A) might result in damages beyond those resulting to lessee due to failed or delayed delivery of the cargo. For example, if defendants refused to abide by their part of the deal under section 4(A), leaving plaintiff to purchase replacement tires out of its own pocket, a suit for reimbursement of the cost of those tires would not be barred by section6 (C)(2) because the cost of replacement tires is not a loss resulting to lessee due to delayed or failed delivery of cargo.

Second, the presumption in favor of interpreting indemnification clauses as encompassing third-party claims only still controls section 6(C)(1), which refers to claims arising from “loss or damage to any cargo, goods, or other property.” At this point in the litigation, the court is not convinced that the parties intended that plaintiff would hold defendants harmless for claims arising from “loss or damage to any cargo, goods, or other property,” brought by plaintiff itself. Unlike section 6(C)(2), the clause does not include same clear language signaling the parties’ intent that the lessee would hold Rollins harmless for that type of claim brought by the lessee. The words “to the lessee,” which so clearly indicate that section 6(C)(2) was meant to reach inter se litigation, is not used as an umbrella term to apply to all the enumerated clauses of section 6(C). Those words are limited to section 6(C)(2), and therefore the court will not apply them to section 6(C)(1). Accordingly, a cause of action for breach of section 4(A) might include an inter se claim for damages for “loss or damage to any cargo, goods, or other property,” which would not be barred by the indemnification clause. In this way, not all suits brought by the lessee for damages due to breaches of section 4(A) are barred by section 6(C). Thus, section 4(A) is not rendered meaningless by interpreting section 6(C)(2) as prohibiting suit by plaintiff to recover any losses incurred due to the fact that plaintiff was unable to deliver cargo.

The difference between the two sections may be slight, but this result is required by the court’s reading of the law of Delaware and the language of the contract. Such complexities could have been avoided had the parties more carefully drafted their agreement. As stated previously, a court may not manipulate clear language to create a “more perfect contract.” Admiral Ins. Co., 711 A.2d at 57.

IV. CONCLUSION

While the court holds that section 6(C)(2) encompasses inter se litigation, defendants’ motion to dismiss is nevertheless denied. Defendants have not met their burden on this motion to dismiss to convince the court that plaintiff states no claim. When reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court’s review is limited to the pleadings. All factual inferences are to be made in the non-movant’s favor. Horowitz, 260 F.3d at 618. It is not clear from the pleadings that the entirety of the damages alleged by plaintiff in paragraph 13 of the complaint is attributable to delayed or failed delivery of cargo, or other losses prohibited by section 6(C)(2). As explained above, a breach of section 4(A) could result in damages other than those associated with the failed or delayed delivery of that cargo. Because defendant has not shown that plaintiff’s prayer for damages addresses only damages prohibited by section 6(C)(2), and a reasonable inference can be made that other permissible damages have been alleged, defendants’ motion to dismiss for failure to state a claim (docket # 10) is DENIED.

11 SO ORDERED.