Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-3-2004

Staples Inc v. Wausau Underwriters
Precedential or Non-Precedential: Non-Precedential

Docket No. 03-1317




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                                                                NOT PRECEDENTIAL

         UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


                                        No. 03-1317


                                     STAPLES, INC.,

                                                       Appellant

                                             v.

                WAUSAU UNDERWRITERS INSURANCE COMPANY


                      On Appeal from the United States District Court
                         for the Eastern District of Pennsylvania
                               (D.C. Civil No. 01-cv-03882)
                         District Judge: Hon. Legrome D. Davis


                                 Argued December 4, 2003

    Before: SLOVITER and ALITO, Circuit Judges, and OBERDORFER, District Judge*

                                    (Filed: June 3, 2004)


Kimberly A. Boyer (Argued)
Marshall, Dennehey, Warner,
Coleman & Goggin
Philadelphia, PA 19103

        Attorney for Appellant




*       Hon. Louis F. Oberdorfer, United States District Court for the District of
        Columbia, sitting by designation.
Steven L. Chung     (Argued)
Kelley, McLaughlin, Foster, Bracaglia,
Daly, Trabucco & White, LLP
Philadelphia, PA 19103

       Attorney for Appellee


                                OPINION OF THE COURT


SLOVITER, Circuit Judge.

       Staples, Inc. appeals from the District Court’s order denying it reimbursement

from Wausau Underwriters Insurance Company (Wausau) for money Staples paid to

satisfy and defend an arbitration award rendered against it in an action filed by Robert

Kline. The District Court had diversity jurisdiction pursuant to 28 U.S.C. § 1332, and we

have jurisdiction pursuant to 28 U.S.C. § 1291. For reasons set forth below, we will

reverse the decision of the District Court in part and affirm it in part.

                                               I.

       Inasmuch as we are writing solely for the parties, we will recite only those facts

necessary in the consideration of this appeal. There are two insurance policies at issue:

one covers liability; the other covers workers’ compensation. We consider first the

liability policy.

       On October 15, 1996, Robert Kline, an employee of Brenner Associates, d/b/a

National Marketing Services (Brenner Associates), sustained an injury while performing

work at a Staples store, located in West Chester, Pennsylvania. Staples hired Brenner to

                                               2
set up the floor and displays in its stores, and Kline was resetting a back room when a

Staples employee allegedly swung open a door that caused two tables to fall on Kline’s

back, causing injury.

          Kline’s attorney presented a claim to Staples for his injuries by letter dated

December 5, 1996. Staples’ claims coordinator, Karla Petery, reported the incident to its

insurer, CNA Insurance Company (CNA).

          Brenner was insured by Wausau under a policy (Wausau Policy) that contained the

following “Additional Insured Endorsement:”

          WHO IS AN INSURED (Section II) is amended to include as an insured
          the person or organization shown in the Schedule, but only with respect to
          liability arising out of “your work” for that insured by or for you.

          The coverage afforded by this endorsement does not apply to “bodily
          injury” or “property damage” included in the “products/completed
          operations hazard” unless such coverage is required by an “insured
          contract” between you and the additional insured shown in the Schedule.

App. at 246 (capitals in original). The Wausau Policy defined “your work” as:

          a.     Work or operations performed by you or on your behalf; and
          b.     Materials, parts or equipment furnished in connection with such
                 work or operations.

App. at 219. Staples was listed as an additional insured under the Wausau Policy. App.

at 244.

          On March 24, 1997, Staples1 formally tendered a request for defense and

   1
     The communication on behalf of Staples was made to and from Jeff Luhrs, a claims
adjuster for CNA. To simplify the parties, we have substituted “Staples” in the text
where appropriate.

                                                 3
indemnification from Wausau based on the additional insured provision of the Wausau

Policy, and requested that Wausau inform it of any information it might need to consider

the request. This request was tendered again on April 23, 1997.

       On May 13, 1997, Wausau informed Staples that it was in the process of reviewing

the request, but asked Staples to “provide [it] with more information,” such as “all

documentation relating to the investigation of this claim [including] statements, scene

photographs and diagrams, contracts involving parties, and claimant’s letter of

representation.” App. at 255. Staples responded by sending Kline’s letter of

representation and the certificate of insurance, but stated, “[we] do not have any

statements, photographs and diagrams, or contracts to send you.” App. at 257. The CNA

adjuster explained this lack of documentation by stating, “I’ve conducted an extensive

investigation with our employees and cannot find anyone who recalls this incident in any

way, shape or form. I am beginning to have my doubts as to claimant’s version of what

happened.” App. at 257.

       Wausau had not responded by August 20, 1997, prompting another letter on behalf

of Staples to W ausau. App. at 259. When this met with no response, CNA sent Kline’s

attorney a letter stating, “Please be advised that we are unable to consider your request for

reimbursement. Due to the circumstances of this incident, we tendered this claim to

Wausau Insurance to defend and indemnify our insured, Staples. . . . I am sending a copy

of this letter to Wausau Insurance, so they can initiate negotiations with you.” App. at



                                             4
260.

       On October 8, 1997, Wausau responded to CNA and copied the correspondence to

Kline’s attorney in a letter which stated,

       Please accept this letter as a formal denial of your request for defense and
       indemnification. The basis for our denial is there appear to be independent
       acts of negligence alleged against an employee of Staples.

App. at 262 (emphasis added). In that letter, Wausau did not point to any provision in the

Wausau Policy that precluded indemnification in the event of independent acts of

negligence of an additional insured, nor could Wausau recite any such provision during

oral argument before us.

       On June 16, 1998, Kline filed suit against Staples. Staples did not forward the

Kline action documents to Wausau because Wausau had already denied coverage.

Staples used its own defense counsel in order to protect itself in light of Wausau’s

previous refusal to do so.

       The Kline action proceeded to binding arbitration, resulting in an award of

$75,000 entered against Staples on June 5, 2000. Staples paid the award, and on June 13,

2000, it tendered a request to Wausau to indemnify it for the $75,000 plus $20,757.96 in

attorneys’ fees and expenses incurred defending the action.

       On July 28, 2000, Wausau sent Staples’ attorney a letter stating that

       while Staples did enjoy status as an additional insured under our coverage at
       the time of this accident, the status was far from unconditional. In order to
       qualify for protection under our policy, the injury would have to arise out of
       our work. Our investigation reflects that Mr. Kline was in the Staples’

                                             5
       storeroom putting a display together when a stack of folded tables behind
       him collapsed, hitting him.

              To further consider your demand, please submit depositions or other
       evidence available to you which would counter the initial versions of what
       took place.

App. at 327 (emphasis in original).

       On March 26, 2001, Wausau formally denied the claim for a lack of

“substantiation for the basis of making this claim, other than the fact that [Staples was]

named as a qualified additional insured under [its] policy.” App. at 328. It further noted,

“[I]n the first place, the coverage only applies to accidents resulting from the acts of

Brenner Associates. In the instant case . . . liability rested with Staples.” App. at 328. It

also concluded that Staples failed to comply with the “Duties in the event of Occurrence,

Offense, Claim or Suit” provision of the Wausau Policy, in particular, the notification

requirement and the obligation to provide certain details, and thus forfeited the right to

reimbursement under it. App. at 328-29.

       Following this denial, on July 31, 2001, Staples sued Wausau seeking a declaratory

judgment that Wausau owed a duty to defend and indemnify it in the Kline action and

reimbursement for the $75,000 award and costs and fees incurred. Wausau filed a

counterclaim seeking judgment in the amount of $6,079 for its workers’ compensation

lien. The District Court conducted a bench trial on October 7, 2002, and on January 3,

2003, denied Staples’ claim and granted W ausau’s counterclaim. Staples, Inc. v. Wausau

Underwriters Ins. Co., 

(E.D. Pa. 2003).

                                              6
       In doing so, the District Court concluded that W ausau “did not have a duty to

defend Staples at the time of Staples’ March 24, 1997 correspondence, because Mr. Kline

had not yet filed a Complaint against Staples.” 

With regard to reimbursement

for the actual arbitration award and costs, the District Court concluded that “Staples’

failure to cooperate with Wausau Insurance and to provide information necessary to

consider Mr. Kline’s claim . . . constitute a material breach of Staples’ duty to cooperate.”

Court also found that “Wausau Insurance is entitled to recover its

Workers’ Compensation lien from Staples.” 

the judgment on January 31, 2003. We consider first whether the

District Court erred in finding that Staples was not entitled to indemnification and defense

from Wausau under the Wausau Policy.

       We review findings of fact under the clearly erroneous standard, and exercise

plenary review of conclusions of law. Mellon Bank, N.A. v. Metro Communications,

Inc., 

, 642 (3d Cir. 1991).

                                     II. DISCUSSION

A. Defense and Indemnification

       Wausau conceded at oral argument that Staples was covered under the Wausau

Policy for this particular matter. Indeed, the District Court found as a matter of fact that

Staples was listed as an additional insured, and that “Mr. Kline sustained injuries arising

out of the work he was performing as an employee of Brenner Associates . . . .” Staples,



                                              7


, at *2. Wausau does not appeal this finding. Therefore the only

remaining question is whether Staples, which had notified Wausau at the time of the

occurrence, violated its duty to cooperate by failing to notify Wausau when Kline’s

complaint was filed, thereby relieving Wausau of any liability under the claim. We hold

that Staples did not violate its duty under the policy and therefore that Wausau was not

relieved of liability.

       First, the District Court’s conclusion that Wausau “did not have a duty to defend

Staples at the time of Staples’ March 24, 1997 correspondence, because Mr. Kline had

not yet filed a Complaint against Staples,” Staples, 

, at *4,

constituted an error. Under the Wausau Policy, Staples was obligated to inform Wausau

at the time of the occurrence. That Kline’s attorney attempted to enter into settlement

discussions shortly after the occurrence, but before filing a complaint, underscores the

logic behind the timely notification requirement. Had Wausau agreed to defend Staples at

this time, the ultimate lawsuit could have been avoided. We reject any suggestion that

Staples notified Wausau too soon.

       Second, the District Court erred in concluding that Staples failed to cooperate by

not providing information necessary to consider Kline’s claim. Staples stated “[it does]

not have any statements, photographs and diagrams, or contracts to send.” App. at 257.

Wausau argues that the failure to provide this information prevented it from adequately

considering the claim. This argument is disingenuous for several reasons. Wausau



                                             8
specifically denied the claim based on alleged independent acts of negligence, not based

on a lack of information. Further, it is difficult to understand what specific information

Wausau needed to consider the claim when it was clear that the injury arose while Kline

was performing work for Brenner on behalf of Staples. Finally, Staples could not send

information that it could not gather. From the record, it appears Staples forwarded

Wausau everything in its possession. There was no failure to cooperate in the initial

investigation.

       Third, Staples was not obligated to inform Wausau of the Kline action. We have

stated that “‘[w]here an insurance carrier breaches its insurance contract by unjustifiably

refusing to defend its insured, it cannot assert as a defense to an action by the insured or

the injured party that the insured did not comply with the ‘actual trial’ provisions of the

insurance contract.’” Apalucci v. Agora Syndicate, Inc., 

, 634 (3d Cir.

1998) (quoting Brakeman v. Potomac Inc. Co., 

, 200-01 (Pa. 1977)

(Roberts, J., concurring and dissenting) (citations omitted)). Here, Wausau’s refusal to

defend its insured, Staples, was unjustified.

       Pursuant to the Wausau Policy, Staples informed Wausau at the time of the

occurrence, namely Kline’s injury. The District Court concluded that Kline’s injuries

arose out of work he was performing as an employee of Brenner and on behalf of Staples.

This puts the incident squarely within the Additional Insured Endorsement provision, and

“your work” definition outlined in the Wausau Policy.



                                                9
       Despite this, Wausau denied coverage on October 8, 1997 in a letter stating, “The

basis for our denial is there appear to be independent acts of negligence alleged against an

employee of Staples.” App. at 262. Nothing in the Policy provides that Wausau’s

requirement to defend and indemnify can be excused on the basis of independent acts of

negligence. Wausau’s initial denial was unjustified thereby relieving Staples of its duty

to inform Wausau of the suit. This follows as a matter of law, but also as a matter of

common sense. Once Wausau had denied the claim without a good faith reason for doing

so, Staples was forced to undertake its own defense. There was no reason to believe that

making a second request after Kline filed suit would have elicited a different response

from Wausau.

       An “insurance company’s initial repudiation of the contract in denying liability

under the policy relieve[s] the insured of strict performance of those provisions intended

for the protection of the insurer.” 

(quoting 

). Because Wausau’s refusal to defend “cut at the very root of the mutual

obligation [between the insurer and the insured, it] put an end to its right to demand

further compliance with the . . . term of the contract.” 

marks and

citation omitted). It follows that the District Court erred when it found that Wausau was

not obligated to reimburse Staples for the amount it paid for the arbitration award, and

costs and fees associated with the arbitration.




                                             10
B. Workers’ Compensation Lien

       Wausau was also Brenner’s workers’ compensation insurer. Wausau notified

Staples, via letter to its insurer CNA, on February 12, 1997 that it had been called upon to

extend workers’ compensation to Kline and that no settlement should be made without

protection of its workers’ compensation lien. CNA did not respond to this letter.

       Staples contends that the District Court erred in holding that Staples (the third-

party tortfeasor) was required to reimburse Wausau for the amount of its workers’

compensation payment to Kline. Pursuant to the Pennsylvania Workers’ Compensation

Act, the subrogation rights of an employer of an insurer are absolute. The insurer, here

Wausau, may recover the entire amount of workers’ compensation paid to the injured

employee out of any recovery paid by the third-party tortfeasor, here Staples. 77 P.S. §

671. This provision prevents the injured party from receiving a double recovery. Skoda

v. National Mines Corp., 

(Pa. Super. 1968).

       To this end, Wausau notified Staples of its workers’ compensation lien by letter to

CNA which stated:

       This letter is to advise you of our rights to recovery of all payments.

       Under the law we have the right to recovery of all payments made and no
       settlement should be made with the injured party without protection of our
       lien for any payments we are called upon to make.

       When you are ready to settle this claim, please contact us so that we may
       advise you of the amount of our lien.

App. at 249.

                                             11
       On April 25, 1997, Kline’s attorney sent Wausau a letter stating, “Please note my

client will certainly protect your lien out of any 3rd party recovery pursuant to the

Workers’ Compensation Act . . . .” App. at 253.

       Staples contends that “while the employer’s subrogation rights are generally

absolute, they are not automatic and can be abrogated if the subrogee does not exercise

‘reasonable diligence.’” Appellant’s Br. at 34 (quoting Harford Mut. Ins. Co. v. Decker,

, at *4 (E.D. Pa. 1989)). The court in Harford stated that what constitutes

“reasonable diligence” is vague, but that it “requires more than mere notice of the

insurer’s intent to assert a subrogation claim, but less than actual intervention in the

third-party action.” 

Ins. Co. v. Hartford Accident & Indem. Co.,

(Pa. Super. 1972)). In Travelers, the Pennsylvania Superior Court

stated that a court must inquire into the nature of the communications between the parties

to see whether the subrogration claim was abrogated in any way. 

.

       The notice from Wausau to Staples requesting coverage was clear and

unequivocal. Had Staples notified Wausau of the Kline action, Wausau could have taken

steps to protect its subrogration rights. Staples’ failure to notify it of the Kline suit

prevented it from undertaking any such protection.

       Staples argues that because Kline’s attorney promised to protect Wausau’s lien out

of any third party recovery, Staples was not required to do so. Wausau’s subrogation



                                               12
rights are absolute under Pennsylvania law and cannot be excused because of Kline’s

failure to fulfill his independent promise. Therefore, the District Court did not err when it

concluded that Wausau was entitled to recover its workers’ compensation lien from

Staples.

                                      III. CONCLUSION

       For the reasons set forth, we will reverse that portion of the District Court’s order

concluding that Wausau was not obligated to reimburse Staples for money it expended on

the arbitration award and in fees and costs defending the Kline action. We will affirm

that portion of the order concluding that Wausau is entitled to recover its workers’

compensation lien from Staples. The case is remanded to the District Court to enter an

order consistent with this opinion.




                                             13