JOHN R. TUNHEIM, Chief Judge, United States District Court.
This Order addresses the longstanding
The Court will grant the summary judgment motion for the following reasons. First, the Court has already decided on the correct interpretation of the contracts in prior orders in a manner that differs from Donaldson's counterclaim for declaratory relief; therefore, it will grant AIG's motion as to that claim. Second, the Court will grant the motion as to Donaldson's breach-of-contract claim because Donaldson does not seek recoverable damages and AIG's filing of the instant lawsuit was not a breach of contract. Finally, the Court will also grant the motion as to the claimed breach of the covenant of good faith and fair dealing for two reasons: there is insufficient evidence of bad faith, and Mississippi law regarding an insurer's duties to an insured are inapplicable under Minnesota's choice-of-law rules.
Plaintiffs are two related insurance companies — National Union and American Home. National Union is a Pennsylvania corporation with its principal place of business in New York, while American Home is a New York corporation with its principal place of business in New York. Nat'l Union Fire Ins. Co. of Pittsburgh v. Donaldson Co. (Donaldson I), No. 10-4948, 2012 WL 1072329, at *2 (D. Minn. Mar. 30, 2012); (Am. Compl. ¶¶ 3-4, June 28, 2011, Docket No. 45). Donaldson is a Delaware corporation with its principal place of business in Minnesota. (Am. Compl. ¶ 5.)
AIG companies insured Donaldson from July 31, 1996 to July 31, 2002, with largely identical consecutive annual CGL policies. Donaldson I, 2012 WL 1072329, at *2. Each policy contained a $1,000,000 per-occurrence limit and a $500,000 per-occurrence deductible for bodily injury or property damage. Id. The policies imposed on AIG (1) a duty to defend Donaldson in actions seeking damages for property damage caused by an occurrence, and (2) a duty to "pay those sums [Donaldson] becomes legally obligated to pay as damages because of ... `property damage' ... caused by an `occurrence.'"
The CGL policies also contain a Batch Clause Endorsement, which combines certain property damage that might otherwise
(E.g., Am. Compl., Ex. A, Pt. 2 at 28.)
In addition to the CGL policies and other insurance policies not relevant to the instant motion, National Union issued two consecutive annual commercial umbrella liability policies to Donaldson from July 31, 2000 to July 31, 2002. (See Decl. of Cody S. Moon ("Moon Decl."), Ex. 16 at 19, Oct. 28, 2016, Docket No. 462.) The National Union umbrella policies do not contain a batch clause endorsement, nor do they contain "follow-form" language.
Throughout the 1990s, Donaldson designed and manufactured plastic air-intake ducts for logging and construction trucks manufactured and sold by Western Star Trucks ("Western Star"). Donaldson I, 2012 WL 1072329, at *1. On January 5, 2000, a Western Star representative notified Donaldson that air ducts in Western Star trucks were malfunctioning because of a defect that in some instances caused engine failure. Nat'l Union Fire Ins. Co. of Pittsburgh v. Donaldson Co. (Donaldson II), No. 10-4948, 2015 WL 1292561, at *2 (D. Minn. Mar. 23, 2015). Starting in 2001, various purchasers of Western Star trucks filed actions against Donaldson because of the defect. Id. at *1.
In one such lawsuit, fifteen purchasers of Western Star trucks filed a case, Otho Arender v. Burroughs Diesel, Inc., on November 8, 2001, in Mississippi state court against Burroughs Diesel, Inc. ("Burroughs"), Donaldson, and Western Star, alleging that the Western Star trucks they purchased were inoperable. Id. Burroughs, a commercial dealer of Western Star trucks, filed a cross-claim against Donaldson (the "Burroughs cross-claim") alleging the premature failure of engines was due to the defective air-intake ducts. Id.
Donaldson notified American Home of the cases regarding the defective ducts
On March 11, 2002, AIG's claims administrator sent a letter regarding the faulty duct lawsuits to Gallagher Bassett, copying Donaldson, which stated:
Id.
On May 28, 2002, AIG sent Donaldson a reservation of rights letter, stating that AIG would defend Donaldson in the Arender litigation pursuant to the 2001-2002 CGL Policy. (Moon Decl., Ex. 7 at 5.) The letter contained a broad reservation of rights, including the right "to decline coverage... should there be a future determination that there is no potential for coverage." (Id.)
On June 9, 2003, National Union's claims administrator sent a letter to Donaldson purporting to reserve its rights related to the National Union umbrella policy in effect beginning July 31, 2001. (Moon Decl., Ex. 8.) The letter broadly reserved National Union's rights as to the faulty air duct lawsuits. (Id. at 8.) The letter also stated:
(Id. at 5.)
The underlying liability claims against Donaldson by purchasers of Western Star trucks eventually settled, with Donaldson making payments totaling $214,408.56 to the settling plaintiffs. Donaldson I, 2012 WL 1072329, at *2; (Joint Stipulation at 1-2, May 18, 2015, Docket No. 376). By March 2008, the only outstanding action against Donaldson was the Burroughs cross-claim. See Donaldson I, 2012 WL 1072329, at *2.
In early 2009, the state court scheduled a mediation regarding the Burroughs cross-claim for October 15, 2009. Id. at *5. On July 23, 2009, Donaldson advised AIG's attorney of the mediation and explained that the Burroughs cross-claim was in the early stages of discovery. (Moon Decl., Ex. 10.) In response to AIG's request for information about the case, Donaldson's counsel advised AIG that under Mississippi law, Moeller v. Am. Guarantee & Liab. Ins. Co., 707 So.2d 1062 (Miss. 1996), defense counsel for an insured is "not permitted to provide any recommendation or advice with respect to settlement to an insurer if there is a reservation of rights." (Moon Decl., Ex. 10 at 1; see also id., Ex. 15 (similar communication in September 2009).) However, between July and September 2009, Donaldson decided to provide AIG with some documents related to the Burroughs cross-claim litigation. Donaldson I, 2012 WL 1072329, at *4.
According to AIG, as a result of the various pieces of information Donaldson provided starting in July 2009, AIG learned for the first time that Donaldson received notice of the damage that was the subject of the underlying litigation in January 2000, as opposed to first learning about the damage at the time the Arender lawsuit was filed, in November 2001. On September 2, 2009, AIG sent Donaldson new reservation-of-rights letters. (Moon Decl., Ex. 16.) For the first time, the letters reserved AIG's rights specifically regarding the Burroughs cross-claim. The letters referred to the CGL policies issued for all six policy years (spanning July 1996-July 2002). (Id. at 3-18.) In the letters, AIG also reserved its rights with respect to the Burroughs cross-claim under the National Union umbrella policies issued between July 2001 and July 2003. (Id. at 19-32.) The letters discussed the policies' deductible requirement. (Id. at 5, 21.) As with the initial reservations of rights, these updated letters contained broad language reserving all of AIG's rights under the policies. (Id. at 5, 8-9, 24-25.) Unlike the initial reservation of rights, the updated versions advised that "[i]f you wish to have your own personal counsel become involved in this matter, at your own expense, please feel free to do so, and we will cooperate fully with such counsel." (E.g., id. at 9.)
The parties in the Burroughs litigation failed to resolve the cross-claim during mediation in October 2009. According to Donaldson, the "mediation failed, in large
On December 29, 2009, and January 21, 2010, AIG further supplemented its coverage position with respect to the Burroughs cross-claim. Id. In the December 2009 letter, AIG explained in more detail the requirement that Donaldson pay a $500,000 deductible per policy year before CGL coverage would kick in under each annual policy between July 31, 1996 and July 31, 2002. (Decl. of Matthew J. Fink, Ex. R at 6, June 1, 2011, Docket No. 32.) AIG also explained that it was of the understanding that there were at least three "lot[s]" of defective products and explicitly reserved "the right to assert that Burroughs' [cross-claim] involves multiple occurrences implicating multiple deductible limits under each applicable policy." (Id.) In the January 2010 letter, AIG requested for the first time that Donaldson pay five additional deductibles (totaling $2.5 million), equal to one deductible per policy year.
On February 22, 2010, the Burroughs cross-claim settled for $6 million. Donaldson I, 2012 WL 1072329, at *5. AIG contributed $3,548,387.10 toward the settlement and Federal contributed $2,451,612.90; Donaldson paid nothing. Id. On June 30, 2010, AIG sent Donaldson an invoice reiterating the demand for $2.5 million in deductibles. Id.
AIG initiated this action on December 21, 2010, (Compl., Dec. 21, 2010, Docket No. 1), and amended the complaint on June 28, 2011, (Am. Compl.). AIG alleged that it paid too much toward the Burroughs settlement, seeking $2.5 million from Donaldson under the theory that there was one occurrence per policy year over six years, and therefore Donaldson (or Federal, as Donaldson's insurer) owed AIG reimbursement of one deductible per policy year. (See Am. Compl. ¶¶ 45-75.)
Donaldson filed three counterclaims against AIG. (Answer to Am. Compl. & Countercl. ("Answer") ¶¶ 81-170, Aug. 30, 2011, Docket No. 84.) Donaldson alleges that AIG breached the applicable insurance contracts and also breached the covenant of good faith and fair dealing.
On March 30, 2012, the Court issued an order interpreting the term "occurrence" in the CGL policies' Batch Clause Endorsement. Donaldson I, 2012 WL 1072329, at *12-14. Under that order, as long as all loss is attributable to one lot of goods, such loss counts as one "occurrence" even if the damage to the claimants occurred over multiple years. Id. at *12 ("The Court finds that [the] language [of the Batch Clause Endorsement] unambiguously combines property damage, including damage that may take place across multiple policy periods, into one `occurrence' that takes place when Donaldson is notified of that damage."). This decision eviscerated AIG's position that it could demand one deductible per policy year from Donaldson under the Batch Clause Endorsement, but it left open the argument that AIG could collect one deductible
In an order dated March 23, 2015, the Court found that Donaldson was first notified of the defect in the ducts in January 2000. Donaldson II, 2015 WL 1292561, at *12. The Court also determined that there were two separate "lots" of defective ducts, and therefore, there were two separate "occurrences" under the 1999-2000 insurance policies. Id. at *9-12. In the same order, the Court denied AIG's motion for judgment on the pleadings regarding Donaldson's counterclaims. Id. at *5-9.
On October 28, 2016, AIG filed the instant motion for summary judgment on Donaldson's counterclaims.
Summary judgment is appropriate where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). A fact is material if it might affect the outcome of the lawsuit, and a dispute is genuine if the evidence is such that it could lead a reasonable jury to return a verdict for either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A court considering a motion for summary judgment must view the facts in the light most favorable to the non-moving party and give that party the benefit of all reasonable inferences to be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). A court may order summary judgment if the nonmoving party "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "To defeat a motion for summary judgment, a party may not rest upon allegations, but must produce probative evidence sufficient to demonstrate a genuine issue [of material fact] for trial." Davenport v. Univ. of Ark. Bd. of Trs., 553 F.3d 1110, 1113 (8th Cir. 2009).
The core of Donaldson's breach-of-contract claim is that AIG's act of suing Donaldson in this litigation to recover additional deductibles was a breach of contract.
AIG argues that attorney fees incurred in a breach-of-contract action are not recoverable damages for breach of contract absent a rule or contractual provision making attorney fees recoverable. Ly v. Nystrom, 615 N.W.2d 302, 314 (Minn. 2000) ("[It is] a fundamental principle of law deeply ingrained in our common law jurisprudence ... that each party bears his [or her] own attorney fees in the absence of a statutory or contractual exception."). Because Donaldson cites no rule or contractual provision entitling it to attorney fees incurred during this lawsuit, AIG argues those fees are not recoverable as damages. The Court agrees and will grant AIG's motion as to Donaldson's claim seeking attorney fees incurred in this litigation as breach-of-contract damages.
An insurer's duty to defend generally does not require an insurer to pay for coverage counsel, though Minnesota has carved out a narrow exception allowing recovery of attorney fees when an insurer breaches the duty to defend. In re Silicone Implant Ins. Coverage Litig., 667 N.W.2d 405, 422-25 (Minn. 2003) (citing Morrison v. Swenson, 274 Minn. 127, 142 N.W.2d 640, 644-47 (1966)). The record is clear that AIG did not breach the duty to defend — AIG paid Donaldson's legal fees in the underlying liability litigation. Therefore, Morrison does not apply, so to the extent Donaldson argues that it is entitled to coverage counsel fees incurred prior to this litigation because of AIG's breach of contract, the argument fails as a matter of law.
In Count III, Donaldson argues AIG breached the covenant of good faith and
"Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing requiring that one party not `unjustifiably hinder' the other party's performance of the contract." In re Hennepin Cty. 1986 Recycling Bond Litig., 540 N.W.2d 494, 502 (Minn. 1995) (quoting Zobel & Dahl Constr. v. Crotty, 356 N.W.2d 42, 45 (Minn. 1984)). In other words, the covenant of good faith and fair dealing "requires a party in a contractual relationship to refrain from arbitrary and unreasonable conduct that has the effect of preventing the other party to the contract from receiving the fruits of the contract." Erickson v. Horing, No. 02-138, 2002 WL 31163611, at *13 (Minn. Ct. App. Oct. 1, 2002) (quoting Wilmington & N. R.R. Co. v. Del. Valley Ry. Co., No. 97C-09-297-WTQ, 1999 WL 463705, at *6 (Del. Super. Ct. Mar. 30, 1999)). "Actions are done in `good faith when done honestly, whether it be negligently or not.'" Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 125 (Minn. Ct. App. 1998) (quoting Minn. Stat. § 520.01, subd. 6 (1996)). Conversely, actions are in bad faith when "a party's refusal to fulfill some duty or contractual obligation [is] based on an ulterior motive, not an honest mistake regarding one's rights or duties." Id. (citing Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 837 (Minn. Ct. App. 1994)).
First, the Court addresses Donaldson's argument that AIG changed its coverage position and delayed notifying Donaldson of the change in bad faith. Donaldson alleges that it was AIG's position beginning in March 2002 (and up until early 2010) that the damages claimed in the Arender litigation, including the Burroughs cross-claim, fell under one occurrence under the 2001-2002 policy year, and thus Donaldson would owe AIG only one deductible. See Donaldson I, 2012 WL 1072329, at *4. According to Donaldson, AIG "promised" to seek only one deductible, then abruptly changed course years later by demanding additional deductibles in bad faith. (Answer ¶¶ 165-67.) Donaldson argues that even if it is not entitled to reimbursement of coverage counsel fees in general, the fact that AIG disclosed its true coverage position so late meant that Donaldson's coverage counsel fees were higher than they would have otherwise been had AIG acted in good faith because coverage counsel had to quickly get up to speed on years of litigation. Thus, Donaldson argues that some portion of its coverage counsel fees is recoverable as damages for breach of the covenant of good faith.
As evidence of AIG's bad faith, Donaldson points the Court to internal AIG documents showing that AIG personnel were aware that there was a coverage gap between the 2001-2002 CGL policy, issued by American Home, and the 2001-2002 umbrella policy, issued by National Union. (See Aff. of Rikke Dierssen-Morice ("Dierssen-Morice Aff."), Ex. K, Jan. 29,
But even assuming there were such a duty, there is simply no evidence that AIG sought to exploit this allegedly "secret" coverage position. When arguing that Donaldson owed multiple deductibles in this lawsuit, AIG's analysis rested on its interpretation of the Batch Clause Endorsement in the CGL policies,
Donaldson also argues that when AIG changed its coverage position in 2010, suddenly asserting for the first time that Donaldson might owe multiple deductibles, that change in position was arbitrary and in bad faith. The Court agrees that AIG's communications in 2009 and 2010 were somewhat clumsy.
Because there is insufficient evidence of bad faith related to AIG's handling of Donaldson's claim, the Court will grant AIG's motion on Donaldson's counterclaim regarding this issue.
Donaldson argues that in the course of providing a defense to Donaldson in the Arender litigation and the Burroughs cross-claim, AIG breached the covenant of good faith and fair dealing as defined in Mississippi law. (See Answer
The Court must determine whether Mississippi or Minnesota law applies to this claim. Donaldson argues that because AIG provided a defense in the Arender litigation in Mississippi, Mississippi law supplies the duties applicable to AIG as insurer. Because AIG provided a defense subject to a reservation of rights, then under Donaldson's view, the Mississippi duties regarding conflicts of interest would apply. AIG argues, on the other hand, that Minnesota substantive law applies to interpret the contractual rights and duties of the parties to the relevant insurance contracts, and therefore, Donaldson's claim that AIG violated a duty imposed by Mississippi law must fail as a matter of law.
Minnesota's choice-of-law rules govern the Court's analysis. Highwoods Props., Inc. v. Exec. Risk Indem., Inc., 407 F.3d 917, 920 (8th Cir. 2005) ("In diversity cases, we apply the choice of law principles of the state in which the district court is located."). In general, Minnesota applies a significant contacts test for choice-of law-analysis. Nodak Mut. Ins. Co. v. Am. Family Mut. Ins. Co., 604 N.W.2d 91, 93-94 (Minn. 2000).
More specifically, the Minnesota Court of Appeals has held that when an insurance contract covering national risks does not contain a choice-of-law provision, "if any states are to be involved in a choice-of-law analysis, it should be ... the home states of the parties to the litigation." Cargill, Inc. v. Evanston Ins. Co., 642 N.W.2d 80, 89-90 (Minn. Ct. App. 2002); see also Hawkins, Inc. v. Am. Int'l Specialty Lines Ins. Co., No. A07-1529, 2008 WL 4552683, at *4 (Minn. Ct. App. Oct. 14, 2008) (same). This rule ensures predictability of results; otherwise, an insurer's duties to the insured would vary based solely on the forum in which a plaintiff sues the insured. "It strains credulity to believe that either party to [a] contract of insurance could have intended such a result." Cargill, 642 N.W.2d at 89.
Donaldson has not argued why any other factor in the significant contacts test weighs in favor of applying Mississippi law here, and the Court finds Cargill's reasoning persuasive. Furthermore, Donaldson does not argue that there is a conflict between the laws of Minnesota and AIG's home state, so the Court will apply Minnesota substantive law. The Court will grant AIG's motion on this issue because under the applicable law, the existence of a reservation of rights did not amount to a per se conflict of interest triggering a duty on AIG's part to notify Donaldson of the conflict and its right to independent counsel.
Based on the foregoing, and all the files, records, and proceedings herein,
(Am. Compl., Ex. A, Pt. 1 at 19.) The policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id. at 18.)
Also in Count II, Donaldson alleges that AIG "breached its contract of insurance with Donaldson by refusing to completely indemnify Donaldson for the settlement of the Burroughs Cross-Claim under the 2001-2002 Policy." (Answer ¶ 161.) Other than attorney fees, discussed below, Donaldson does not provide evidence of any other items for which it is entitled to indemnification.
Nodak, 604 N.W.2d at 94.
