Summary
finding insurer not liable for full amount of defense costs where other insurers had already settled, thereby barring contribution because those defense obligations had been terminated
Summary of this case from Turner Constr. v. Amer. Manufacturers Mutual Ins. Co.Opinion
Civil Action No. CV-00-3764 (DGT) (MDG).
January 24, 2005.
MEMORANDUM AND ORDER
Third-party plaintiffs Fyn Paint Lacquer Co., Inc. ("Fyn Paint") and William Feinstein ("Feinstein") (collectively "third-party plaintiffs") brought this third-party action against third-party defendants Providence Washington Insurance Company ("Providence") and The North River Insurance Company ("North River"), seeking a declaration that Providence and North River are obligated to defend and indemnify third-party plaintiffs with respect to an environmental pollution suit brought by Consolidated Edison Company of New York, Inc. ("Con Ed"). Providence subsequently brought a cross-claim against North River seeking contribution or indemnification of these defense costs.
Pending before the court are two motions. Providence moves to dismiss the third-party plaintiffs' complaint on the pleadings under Federal Rule of Civil Procedure 12(c) for failure to state a claim upon which relief may be granted. North River moves to dismiss third-party plaintiffs' complaint and Providence's cross claims for failure to state claims upon which relief may be granted under Federal Rule of Civil Procedure 12(b)(6). For the following reasons, Providence's motion is denied and North River's motion is granted.
Background
Fyn Paint manufactures and distributes paints and lacquers. (Defendant Fyn Paint and William Feinstein's Third-Party Complaint ("Third-Party Comp.") ¶ 1). Con Ed is currently suing third-party plaintiffs for damage to Con Ed's property allegedly caused by hazardous substances released by Fyn Paint into the ground and the cost of cleaning the contaminated soil. (Id. ¶ 12.) In its Second Amended Complaint, Con Ed added defendant Kent River Corporation ("Kent River"), which also manufactures paints, paint thinners, and lacquers out of the same building as Fyn Paint. (Second Amended Complaint ("Sec. Am. Comp.") ¶ 8.) Kent River and Fyn Paint are both owned by Feinstein. (Id. ¶ 9.)
In February 2002, third-party plaintiffs reached a tentative settlement agreement with Con Ed. (Id. ¶ 19.) Subsequently, Providence and third-party plaintiffs entered into a settlement agreement that was contingent upon the consummation of the Con Ed settlement. (Id. ¶ 20.) The settlement between Con Ed and third-party plaintiffs fell through and therefore rendered the contingent settlement a nullity. (Id. ¶ 21.)
After Con Ed withdrew its commitment to settle the underlying action, third-party plaintiffs impleaded two insurers that provided coverage during the time period alleged in Con Ed's complaint, Providence, with whom it had had the earlier contingent settlement agreement, and North River. (See generally, Third-Party Comp.) Providence issued policies to Fyn Paint allegedly covering the years 1962 and 1963. (Id. Exhibit A.) North River issued excess policies to Fyn Paint at an attachment point of $100,000 from June 30, 1967 to June 30, 1970. (Id. Exhibit E). Kent River also impleaded insurers The Hartford Accident and Indemnity Company ("Hartford") and National Union and Fire Insurance Company of Pittsburgh, PA d/b/a AIG Technical Services ("AIG") after the settlement with Con Ed in the underlying action fell through. Thereafter, Hartford and AIG settled as of December 8, 2003.
Providence claims that it only provided coverage to Fyn Paint during 1962, but not 1963 because the second policy was not a renewal of the first, but a "re-write". However, in their answer, Providence admitted that it had issued liability coverage for both years. Third-Party Defendant Providence Washington Insurance Company's Answer to Third-Party Complaint ¶ 6. In addition, the policy says on its face that the policy period is January 1, 1963 to January 1, 1964. Third-Party Comp. Exhibit A. This issue does not affect our consideration of Providence's duty to defend. Further, the parties did not address Providence's potential duty to indemnify third-party plaintiffs in their briefs.
This Hartford settlement has caused quite an uproar with respect to third-party plaintiffs' defense in the pending Con Ed suit. The Hartford settlement was a "buy-back" of its policies from 1966 to 1979 for a sum certain that was less than the aggregate limit of the policies. (Reply Memorandum of Law in Further Support of North River's Motion to Dismiss Fyn Paint's Third-Party Complaint and Providence Washington's Cross Claims ("North River Reply") at 3-4.) Prior to the buy-back, Hartford and Providence had evenly split the defense costs between themselves under an agreement executed by them. (Third-Party Comp. ¶ 17.) The buy-back releases Hartford from any duty to defend. (Id. ¶ 22.) Third-party plaintiffs then turned to Providence to provide it with the full cost of the defense. (Id.) Providence responded by ceasing to reimburse third-party plaintiffs for its attorney's fees altogether. (Id. ¶ 23-24.)
As a result of the Hartford buy-back, third-party plaintiffs now also seek reimbursement of defense costs from North River, an excess insurer. From June 30, 1967 to June 30, 1970, North River provided $1,000,000 in excess insurance above Hartford's policy at an attachment point of $100,000. (Id. ¶ 48, Exhibit E.) North River's policy states that it will assume the defense of the insured if the underlying insurance is exhausted. (Id. Exhibit E.) Third-party plaintiffs allege that as a result of the Hartford buy-back, the Hartford policy is exhausted and North River therefore has a duty to defend third-party plaintiffs and pick up all costs of the defense in the Con Ed suit. (Id. ¶ 53.) Providence alleges that North River has a duty to defend as well and must contribute to the defense costs in the underlying action. (See generally Third-Party Defendant Providence Washington Insurance Company's Answer to Third-Party Complaint.)
Third-party plaintiffs seek declaratory judgments against Providence and North River as to their duty to defend the underlying suit and for breach of contract. As to Providence, the complaint seeks a declaratory judgment that Providence has a duty to defend third-party plaintiffs, that Providence reimburse third-party plaintiffs for all expenses incurred in defending the underlying suit, that Providence acted in bad faith in breaching its obligation to continue to provide a defense to third-party plaintiffs and should therefore be assessed punitive damages, that Con Ed's claims against third-party plaintiffs are covered under the Providence policies, and that Providence pay any judgment rendered against third-party plaintiffs in the underlying action up to the policies' limits. As to North River, the complaint seeks a declaratory judgment that North River has a duty to defend third-party plaintiffs in the underlying action, that North River must reimburse third-party plaintiffs for all expenses incurred in defending the underlying action, that Con Ed's claims against third-party plaintiffs are covered under the North River policies, and that North River must pay any judgment rendered in the underlying action up to the policies' limits. In addition, Providence seeks a declaration that North River must contribute to any defense costs and any judgment rendered in the underlying case.
Discussion
A. The Legal Standards
1. Rules 12(b)(6) and 12(c) — Failure to State a Claim
The court's function in a motion to dismiss brought under Rule 12(b)(6) of the Federal Rules of Civil Procedure is merely to determine whether plaintiff's complaint is legally sufficient, not to determine whether plaintiff will ultimately prevail. See Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102 (1957). Therefore, a complaint should not be dismissed unless "it is clear that no relief could be granted under any set of facts which could be proven consistent with the allegations." Hishon v. King Spaulding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232 (1984). When evaluating whether plaintiff's complaint meets this standard, the court must accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff. See Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997).
A motion for a judgment on the pleadings under Rule 12(c) may assert a defense of failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(h)(2). The same standards that are applied when considering a motion to dismiss a complaint under Rule 12(b)(6) are applicable here. Ad-Hoc Comm. of the Baruch Black Hispanic Alumni Ass'n v. Bernard M. Baruch Coll., 835 F.2d 980 (2d Cir. 1987).
Third-party plaintiffs contend that Providence's motion is procedurally improper because Providence's notice of motion states that the motion seeks an order pursuant to Rule 12(c) and Providence's attorney's affirmation states that the motion is brought pursuant to Rule 12(b). While Providence's attorney's choice of phrasing may be inelegant, it does not render the motion procedurally improper since a motion to dismiss under Rule 12(c) for failure to state a claim upon which relief may be granted is evaluated under the same standard as a motion to dismiss brought under Rule 12(b)(6).
2. Converting a Motion to Dismiss to one for Summary Judgment
Providence in its Reply Memorandum requests that the court convert its motion to dismiss on the pleadings to a summary judgment motion. Third-party plaintiffs also point out in their opposition that Providence has offered substantial extrinsic evidence in its attorney's affirmation. Third-party plaintiffs also included extrinsic evidence in its attorney's affirmation, including transcripts of voice mails left by Providence's counsel.
A court must convert a motion under Rule 12(c) to one for summary judgment under Rule 56 where it considers materials outside the pleadings. N.Y. City Friends of Ferrets v. City of N.Y., 876 F.Supp. 529, 532 (S.D.N.Y. 1995) (citing Fonte v. Board of Managers of Cont'l Towers Condo., 848 F.2d 24, 25 (2d Cir. 1988); Carter v. Stanton, 405 U.S. 669, 671 (1972)). Because this opinion will consider all materials submitted by the parties Providence's application to convert the motion to one for summary judgment is granted.
Third-party plaintiffs' counsel was notified that the motion would likely be converted to one for summary judgment and it was requested that they send any supplemental materials they felt were necessary. Third-party plaintiffs sent no such materials.
3. Rule 56 — Summary Judgment
Summary judgment is granted when "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). On a motion for summary judgment, the court must consider "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). "Confronted with a properly supported summary judgment motion, a plaintiff must come forward with evidence sufficient to allow a reasonable jury to find in his favor." Lizardo v. Denny's, Inc., 270 F.3d 94, 101 (2d Cir. 2001). All factual inferences must be drawn in favor of the party against whom the summary judgment is sought, viewing the factual assertions in materials such as affidavits, exhibits, and depositions in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255; Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). However, "conclusory statements, conjecture, or speculation" by the non-moving party will not defeat the motion. Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996).
B. Duty to Defend
The duty to defend is "`exceedingly broad' and more expansive than the duty to indemnify." See Int'l Bus. Mach. v. Liberty Mut. Fire Ins. Co., 303 F.3d 419, 424 (2d Cir. 2002) (citing Cont. Cas. Co. v. Rapid-American Corp., 80 N.Y.2d 640, 593 N.Y.S.2d 966 (1993)). "An insurer must defend whenever the four corners of the complaint suggest — or the insurer has actual knowledge of facts establishing — a reasonable possibility of coverage." Id.; see also Inc. Vill. of Cedarhurst v. Hanover Ins. Co., 89 N.Y.2d 293, 298, 653 N.Y.S.2d 68, 70 (1996).
1. Providence Washington
Here, it is clear that Providence has a duty to defend third-party plaintiffs because Con Ed's second amended complaint alleges that the accident occurred sometime between 1959 and 1999, (Second Am. Comp. Exhibit C), a portion of which time Providence provided coverage. (Third-Party Comp. Exhibit A.) However, Providence is not the only carrier to provide coverage during the time the pollution allegedly occurred. (Affirmation in Support of Providence Insurance Company's Motion to Dismiss ("Providence Aff.") Exhibit G.) Therefore, it is not the only insurer potentially responsible for defense costs. In fact, Hartford recognized that it may have had a duty defend the suit and provided a defense until the parties agreed to a settlement. (Third-Party Comp. ¶ 16.)
When an insured seeks indemnification from its insurer, a court must decide whether to use a joint and several approach or a pro-rata allocation approach. See In re Prudential Lines, Inc., 158 F.3d 65, 84-85 (2d Cir. 1998). In a joint and several approach, the insured could choose any triggered policy and demand payment of its entire loss from that one policy, subject to that policy's limits. Id. at 84. That carrier could then seek contribution from the insured's other insurers. Id. In the pro-rata allocation approach, the court could determine what percentage of potential indemnity each insurer owes. Id. at 84-85. The latter approach is favored so that "a single insurer underwriting a small proportion of the risk does not get saddled with the full loss . . . a loss that may prove uncollectible from other companies." Id. at 85(citations omitted). Allocation of a loss to periods when the insured is self-insured and efficiency are also factors. Id.
The question of pro-rata allocation of defense costs (as opposed to indemnification) during an ongoing litigation has not been specifically addressed by the New York Court of Appeals. Instead, the Court of Appeals has merely stated that "[w]hen more than one policy is triggered by a claim, pro-rata sharing of defense costs may be ordered, but we perceive no error or unfairness in declining to order such sharing, with the understanding that the insurer may later obtain contribution from other applicable policies." See Cont. Cas. Co. v. Rapid-American Corp., 80 N.Y.2d 640, 655-656, 593 N.Y.S.2d 966, 974 (1993).
For the following reasons, Providence is not liable for the full amount of defense costs. Because of the settlements with Hartford and AIG, if Providence brought a contribution suit against Hartford and/or AIG, Hartford or AIG would likely either implead third-party plaintiffs or move to dismiss because their settlements terminated any defense obligations. In addition, Providence has already brought cross-claims against North River, the only other remaining insurer in this case. Therefore, it is clear that if Providence sought contribution from any of these insurers, it would either be re-paid some of the costs from third-party plaintiffs or the contribution action would be dismissed. Providence would thus be burdened with more than its share of the costs. Since Providence cannot seek contribution from all of its co-insurers at a later date because the settlement with AIG and Hartford buy-back release them from any duty to defend, the logic behind holding one insurer liable for all defense costs regardless of whether other insurers may have a duty to defend does not hold in this case.
While the circumstances in this case require the pro-rata allocation of defense costs, the exact allocation of costs cannot be determined at this time because of the ongoing nature of the litigation. However, judicial efficiency demands determining at least a temporary allocation of defense costs to Providence in this proceeding. To do otherwise would only "postpone resolution of the central dispute in this case, at significant additional expense to the parties, not to mention the effort to be expended by the court. The law does not require such a perverse result."U.S. Fid. Guar. Co. v. Treadwell Corp., 58 F.Supp.2d 77, 99 (S.D.N.Y. 1999). Since Providence can seek contribution from a few other insurers who provided coverage during the relevant time period, (Providence Aff. Exhibit G), Providence will merely be held to its earlier commitment to provide fifty percent of the defense costs. This allocation may be altered at a later date once the full liability and defense costs have been determined.
2. North River
An excess insurer's duty to defend is triggered only when there is a showing that "the potential liability of the insured is so great" that the primary insurers' coverage will be exhausted. See Schulman Inv. Co. v. Olin Corp., 514 F.Supp. 572, 577 (S.D.N.Y. 1981). Therefore, while third-party plaintiffs contend that Hartford's policies are exhausted by virtue of the settlement, the settlement has no relevance here. Instead, one must look to whether it is a "practical likelihood" that the judgments recovered will exceed $100,000 in each of the years North River provided excess coverage over Hartford's policies. Certain Underwriters at Lloyd's v. St Joe Minerals Corporation, 90 F.3d 671, 675 (2d Cir. 1996) (citing trial court decision).
Third-party plaintiffs' claim that the settlement with Hartford exhausts those policies and triggers North River's policies and its duty to defend misconstrues the existing law. To support their exhaustion argument, third-party plaintiffs cite Zeig v. Massachusetts Bonding Insurance Company, 23 F.2d 665 (2d Cir. 1928). Under Zeig, if an insured settles with a primary insurer for less than the full amount of the policy, the insured may still collect from its excess insurer if a judgment is rendered or a settlement reached for more than the limit of the primary policy. Id. at 666. This is so even though the entire amount of the primary policy was not paid. Id. at 666. A court thus considers a primary policy exhausted once a settlement is reached between the insured and the primary insurer for indemnification purposes. Id. However, Zeig is irrelevant here because an excess insurer's duty to defend is evaluated under a different standard that does not relate to the Zeig concept of exhaustion. The court in Zeig held that the insured was responsible for the amount between the settlement and the primary policy limit. Id. The excess insurer was obligated to pay everything between the primary policy limit and the excess policy limit. Id.
Hartford bought back fourteen years of its policies from Fyn Paint for less than the full value of the policies. (North River Opp. at 20.) This settlement is allocated evenly over the 14 years, see U.S. Fid. Guar. Co. v. Treadwell Corp., 58 F.Supp.2d 77, 112-13 (S.D.N.Y. 1999), making the pay out for each of the years when North River's policy was in effect far less than the $100,00 policy limits.
Any settlement or judgment in this case would likely be allocated over the forty years the tanks were installed on Fyn Paint's property.Consol. Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 224-225, 746 N.Y.S.2d 622, 630 (2002) (finding that pro-rata allocation by years was appropriate where there was uncertainty as to what occurred during the various policy periods). Third-party plaintiffs would therefore need to show that clean-up costs could exceed four million dollars in order to trigger North River's coverage obligation. Alternatively, if third-party plaintiffs could show that the damages incurred and clean up costs associated with the years North River provided coverage exceeded $100,000 each year the North River policy was in effect, North River's policy may provide coverage. Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368, 1391-94 (E.D.N.Y. 1988) (prorating coverage based on proportion of injuries during each policy period).
As stated above, to determine whether a duty to defend exists, a court must look to the four corners of the complaint. Con Ed's Second Amended Complaint does not allege that damages and/or clean-up costs will exceed four million dollars. Further, third-party plaintiffs have not plead nor presented any evidence that the total judgment could exceed four million dollars. Neither have they claimed that the pollution that occurred during the North River policy period may have caused damage or require clean-up costs in excess of $100,000 each year. Third-party plaintiffs have, therefore, not shown that the underlying Hartford policies will likely be exhausted and that the North River policies have been triggered. North River therefore has no duty to defend third-party plaintiffs and no obligation to share the cost of defense with Providence at this time.
Conclusion
Accordingly, Providence's motion for complete exoneration is denied. Providence's alternative request for relief is granted. Providence is hereby ordered to pay fifty percent of all costs incurred thus far in the underlying litigation and fifty percent of any future costs. North River's motion is granted. Third-party plaintiff's complaint is hereby dismissed as to the first claim against North River with prejudice but with the leave to move for reconsideration if total costs in the underlying litigation exceed four million dollars or the costs allocated to each of the North River policy years exceed $100,000. Providence's cross-claims against North River are similarly dismissed with prejudice.SO ORDERED.