Green Mountain Propane Gas v. Kimball, No. S486-01 CnC (Norton, J.,
Feb. 16, 2005)

[The text of this Vermont trial court opinion is unofficial. It has been
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STATE OF VERMONT                                     SUPERIOR COURT
Chittenden County, ss.:                           Docket No. S486-01 CnC




GREEN MOUNTAIN PROPANE GAS

v.

KIMBALL




                                 ENTRY

       Plaintiff Green Mountain Propane Gas (Gas Company) seeks to
recover settlement funds, attorneys’ fees, and other costs that its insurer
incurred defending a wrongful death and personal injury claim. Defendant
Kimball and his insurance company argue that he is only liable for failing
to procure insurance and that his damages for any breach should be limited
to actual out-of-pocket expenses that the Gas Company had, which, because
it was insured, are limited. Both parties have motioned for summary
judgment and have submitted a joint stipulation of undisputed facts.

       The court adopts this stipulation, which establishes the events
leading to this suit. In May 1996, the Gas Company signed an agreement
with Kimball, a contractor living in Barton, for him to install and service
Gas Company’s propane gas-fired equipment. The written agreement that
Kimball signed contained the following two sections:

      7. Insurance
      [Kimball] shall maintain policies of insurance providing . . . for
      general liability (bodily injury, property damage and completed
      operations) in the amount of at least $500,000, and shall provide
      the [Gas] Company with Certificates of Insurance to this effect,
      naming [Gas Company] as additional insured, prior to
      commencement of work under this agreement.

And

      8. Indemnification
              [Kimball] shall indemnify, defend and hold harmless the
      [Gas] Company against all losses, damages, claims or demands,
      including reasonable attorney’s fees by it, its employees and third
      parties, whether for injury or damage to persons, loss of life, or
      damage to property arising out of, or claimed to arise out of, or in
      any way connected with worked performed pursuant to this
      Agreement . . . .

Shortly after signing, Kimball began installing and servicing gas-fired
equipment for the Gas Company. He obtained general liability coverage
for $1,000,000, but he did not make the Gas Company a co-insured. In
June 1996, Kimball serviced a propane powered refrigerator in Westmore,
Vermont. Three days later, it malfunctioned, sending carbon monoxide
into the house, killing one and injuring several others. In the resulting
lawsuit, Kimball and the Gas Company, through their respective insurance
companies, settled with the victims and their families. Kimball’s insurer
paid well over $500,000 in its part of the settlement. Beyond their
deductibles, neither the Gas Company nor Kimball had any out-of-pocket
expenses from the incident.

        Subsequent to the settlement, Gas Company and its insurer initiated
this suit to recover expenses, including the settlement funds and attorney’s
fees. In 2002, this court made a preliminary ruling on the claims for
settlement funds. Green Mountain Propane Gas v. Kimball, Docket No.
S0486-01 CnC (Teachout, J., June 28, 2002). In that decision, Judge
Teachout made three important rulings. First, she ruled that the indemnity
claim for the settlement funds was untimely because the statute of
limitations for the underlying tort had expired prior to the Gas Company’s
filing. 

Second, she granted summary judgment to Kimball on the
question of the settlement funds resulting from the breach of contract claim
because the Gas Company and its insurer were “unable to show a loss as
the amount of insurance coverage available and paid through [Kimball’s
insurer] . . . exceeded the amount required under contract.” 

Finally, Judge Teachout refused summary judgment on the remaining
claims and ruled that “[t]o the extent this case is being pursued as a claim
for a breach of a contract to defend, or for a breach of contract to acquire
insurance in the name of [Gas Company] . . . . the claim has been timely
filed.” 

(emphasis in the original). Since the settlement funds have
been ruled out, damages under these remaining claims are limited to
attorneys fees and any other costs. In the meantime, parties have conducted
additional discovery on these issues and both have motioned for summary
judgment on the remaining claims.

                               Duty to Defend

        Judge Teachout’s ruling on the question of whether Kimball had a
duty to defend appears to break section 8 of his contract with the Gas
Company into three separate promises, one to indemnify, one to defend,
and one to hold harmless. In analogous case law concerning an insurer’s
duty to defend and duty to indemnify, the Vermont Supreme Court has
implied that such promises are indeed separate and that the duty to defend
is broader than the duty to indemnify. E.g., Garneau v. Curtis & Bedell,
Inc., 

, 366 (1992). Yet, the duty to defend is not completely
independent as it is limited correspondingly by breadth of the party’s right
to indemnity and the terms of the contract. City of Burlington v. Nat’l
Union Fire Ins. Co., 

, 127 (1993); 

. A
party’s duty to defend does not extend beyond its duty to indemnify, City of

, and its scope is defined by the language of the
contract. 

case Kimball’s duty to defend is tied closely to his
duty to indemnify for any claims arising from his work. Unlike either
Garneau or City of Burlington, Kimball is not the Gas Company’s general
insurer, and his duty to them with regards to indemnity or defending them
must come from or involve his activities. Or, as section 8 of the agreement
puts it, he had a duty to indemnify or defend for “damage to property
arising out of, or claimed to arise out of, or in any way connected with
worked performed pursuant to the Agreement.”

       The difficulty here is that the facts of the underlying tort have been
left vague. All that has been established is that Kimball serviced the
propane-powered refrigerator, and three days later, it leaked deadly carbon
monoxide gas into the house. This would not be enough evidence to
establish Kimball as a probable causative source of the accident, but it does
establish him as a possible one. If this was a claim for indemnity, it would
raise questions about the scope of the contract in light of the legal limits to
indemnity. Investment Properties, Inc. v. Lyttle, 

, 493 (1999)
(“We allow such loss shifting as a matter of fairness so that the party
‘without active fault’ does not end up shouldering the loss, while the
actively-negligent party escapes liability.”); see also 41 Am. Jur. 2d
Indemnity § 12 (noting that indemnity contracts should be strictly construed
and given effect only if consistent with legal principles). That is, should
Kimball and his insurers be required to indemnify the Gas Company where
the Gas Company cannot show that Kimball caused the underlying tort?
This is an open question, but given the constrained nature of indemnity, it
would, at the very least require further evidence evincing Kimball’s
negligence. Otherwise, without a preponderance of proof—a probability
that Kimball’s negligence caused or was a factor in the accident—
indemnity would be impossible to assign, notwithstanding the broad
language of the agreement.

        Yet, this case is no longer about the duty to indemnify but rather the
duty to defend. As a broader duty than indemnification the duty to defend
only required a possibility to trigger it. Under the broad contract language,
Kimball’s duty was to defend the Gas Company against any claim that
arose out of or was in any way connected to his work. The fact that neither
party has demonstrated whether or not Kimball’s actions caused the injuries
is irrelevant. What is important is that the facts demonstrate a potential
connection, one of which Kimball was aware and had notice. This fits
within the legal concept of the duty to defend as a duty that exists where
there is a possibility of indemnity. 

(citing 7C J.
Appleman, Insurance Law & Practice § 4684.01, at 99 (1979)). Even if the
court would have limited Kimball’s contractual indemnification to only
what he probably caused, his duty to defend is not so limited as it is
premised on possible, not probable, indemnity.

        The factual causes and parties in this case are limited to three
possible sources—Kimball’s negligence, a defective product from the Gas
Company, or comparative negligence by the owners. Given that Kimball
was the last to work on the appliance, that he serviced the propane burner
(the source of the carbon monoxide), and that there were only three days
between the servicing and the accident, the court cannot not rule out his
possible causative connection and liability for the injuries. This, according
to the terms of his contract with the Gas Company, required him to defend
them. His failure to defend the Gas Company in the underlying tort claims
was a breach of that duty. Furthermore, the relatively straightforward facts
and limited number of parties in this case distinguish it from the decisions
of other courts where they have withheld on the duty to defend so long as
the right of indemnity remains unsettled. Cf. Regan Roofing Co. v.
Superior Court, 

, 436–37 (Cal. App. 1994) (refusing to
rule on a duty to defend where liability and indemnity between 24
subcontractors involved in a multi-phase construction project had not been
established). As a result of Kimball’s breach, Gas Company claims that it
has had to pay attorneys, expert witnesses, and settlement costs to defend it
in the underlying claim. To the extent that these expenses are reasonable,
they naturally flow from Kimball’s breach of the duty to defend as they
would not have been incurred if Kimball had defended the Gas Company
from the beginning. A. Brown, Inc. v. Vermont Justin Corp., 

,
195–96 (1987) (noting that the law allows for recovery of damages that
flow naturally from the breach of the contract). Kimball shall compensate
the Gas Company and its insurer for these costs and fees.

        To a certain extent, Kimball seems to argue that the duty to defend is
such a function of, and closely tied to, the right of indemnity that the same
statute of limitation should be applied and the court should not have
considered the merits of the claim. In other words, since the duty to defend
existed only to the extent that the Gas Company had a right of indemnity,
the failure of the claim for indemnity should also eliminate the duty to
defend. This issue does raise a serious question of law, but Kimball fails to
provide any caselaw supporting this proposition. Without such support or
persuasive reasoning, the court is loathe to overturn its prior ruling refusing
to grant Kimball summary judgment on this issue. Furthermore, it is to an
extent irrelevant as the following analysis demonstrates a second source for
Kimball’s liability to the Gas Company for attorney’s fees and expenses.



                Breach of Contract to Procure Insurance

       The Gas Company and its insurer’s remaining claim comes from
Kimball’s breach of section 7 of the contract. In that section, Kimball
promised to make the Gas Company a co-insured on his general liability
policy. Kimball failed to do so, and his failure was a breach of the
agreement, a fact Kimball does not dispute. What Kimball does dispute is
how to measure the resulting damages.

        Kimball and his insurer point out that a promise to procure insurance
is different than a promise to indemnify. See, e.g., Inchaustegui v. 666 5th
Ave Ltd. P’ship, 

, 198–99 (N.Y. 2001). This statement is
correct but not in the way in which Kimball intends. Kimball attempt to
distinguish the promise to insure from the promise to indemnify as a way of
limiting the damages. The distinction that Inchaustegui and similar cases
make is merely that the two promises are separate and create separate
causes of action. As one court explained it:

       Under an indemnity agreement, the promisor agrees to assume all
       responsibility and liability for any injuries or damages. Under an
       agreement to obtain insurance the promisor merely agrees to
       procure the insurance and pay the premium on it. Once the
       insurance is obtained, the promisor bears no responsibility in the
       event of injury or damage, even if the insurer should breach the
       insurance agreement through no fault of the promisor. While the
       joint venture in this case is suing to recover any monies it may
       have to pay to the injured parties plus all costs of defense, this is
       not because [the promisor] promised to indemnify the joint
       venture; it is because if a person breaches a contract to obtain
       insurance, he is liable for any damages caused by the breach. In
       this case this would be the amount of any judgments up to the
       amount of the policy limits bargained for (or perhaps beyond if an
       insurer under the facts presented would have settled the cases
       rather than allowed them to go to judgment) plus the costs of
       defending the tort action.

Zettel v. Paschen Contractors Inc., 

, 192 (Ill. App. 1981);
see also Robinson v. Janay, 

, 819–20 (N.J. 1969) (“A liability
insurance policy . . . would have required the insurance company to provide
and pay for Janay’s defense . . . as well as . . . the judgment entered . . . and
this without any necessity that Janay first pay the judgment. The policy
called for was one insuring against liability, not a policy of indemnity.”);
Kennelty v. Darlind Const. Inc., 

, 586–87 (N.Y. App.
Div. 1999) (“[B]ecause the insurance procurement clause is entirely
independent of the indemnification provisions in the contracts, a final
determination of the liability . . . ‘for [their] failure to procure insurance
need not await a factual determination as to whose negligence, if anyone’s,
caused the plaintiff’s injuries’ . . . .”). Thus Kimball’s promise to make the
Gas Company a co-insured was a promise to procure insurance, and it
breach created a separate cause of action for the Gas Company to pursue,
nothing more.

       The heart of Kimball’s opposition to Gas Company’s proposed
measure of damages is that Gas Company was already insured prior to the
accident and as a result Kimball’s breach caused no actual damages. This
is essentially an argument that a promise to procure insurance is merely a
promise to cover a risk and not assume that risk; so that if a collateral
source covers the risk and no out-of-pocket harm comes to the party, then
there are no damages.

       Kimball’s argument places a great deal of emphasis on the
Inchaustegui case and necessitates some familiarity with its facts. In
Inchaustegui, a landlord signed an agreement with a tenant that included a
promise that the tenant would procure insurance and make the landlord a
co-insured on the 

. Tenant failed to do so. 

two were sued by tenant’s employee, the tenant and landlord’s
insurance companies settled, and landlord sued tenant for breach of
contract. 

the present case, the real dispute was about the
measure landlord’s damages. The New York Court began its analysis by
noting that if landlord had not been separately insured, tenant would have
been liable for all of the resulting costs. 

ruled, however,
that because the landlord was insured the proper measure of damages was
limited to landlord’s out-of-pocket expenses, such as insurance premiums,
deductibles, and any increase in its insurance rates caused by the claim. 

Their goal was to put the landlord in the same position it would
have been if the tenant had named him as a co-insured. 

refused to include the settlement funds, attorney’s fees, and litigation costs
incurred by landlord’s insurer because, as it explained, New York does not
apply the collateral source rule to contract actions. 

fact that
landlord had obtained its own insurance, enabled the tenant to minimize his
liability.

        From Inchustegui, this court is urged to adopt the conclusion that the
remedy for breach of a promise to procure insurance is limited to out-of-
pocket expenses. This is not the conclusion that Vermont law proscribes.
There is no question that a party, such as Kimball, is liable for damages that
flow naturally from a breach of a promise. As Inchustegui suggests in the
beginning of its analysis, these damages include the amounts that would
have been due under the insurance contract should it have been obtained.

(“A landlord who has no knowledge of a tenant’s failure to
acquire the requisite insurance and is left uninsured may recover the full
amount of the underlying tort liability and defense costs from the tenant.”);
see also Doherty v. Davy Songer, Inc., 

, 926–27 (7th Cir.
1999) (applying Indiana law); Shell Oil Co. v. Nat’l Union Fire Ins. Co., 

, 588–91 (Cal. App. 1996); Swickey v. Silvey Co., 

, 269 (Okla. App. 1999); Kobbeman v. Oleson, 

,
635 (S.D. 1998); Action Ads, Inc. v. Judes, 

, 312 (Wyo.
1983); 44 C.J.S. Insurance § 259; 4 P. Bruner & P. O’Connor, Construction
Law § 11:104 (2005).

       The real question is whether Kimball should benefit from the
collateral coverage that Gas Company had from its own insurance
company. In Inchustegui, the New York Court reduced the amount of
damages because it included the landlord’s insurance recovery in its
calculation. This collateral source was not barred from consideration
because New York has rejected the collateral source rule for contract
claims. Vermont has also adopted the collateral source rule and has
extended its application explicitly to cases sounding in contract. Hall v.
Miller, 

, 141–44 (1983). Thus, Kimball’s reliance on
Inchustegui to the extent that it limits damages through a refusal to apply
the collateral source rule is improper.

        The real measure of Gas Company’s damages from Kimball’s failure
to make it a co-insured are its deductible, its rate of increase in premiums as
a result of this claim, its attorney’s fees, and litigation costs. All of these
naturally flow from Kimball’s failure to obtain insurance as each one would
not have occurred but for the failure to be named a co-insured. The fact
that the last two were paid by Gas Company’s insurer does not relieve
Kimball of his liability for them. Since this is a subrogation action, there is
no real question of unjust enrichment. Gas Company’s insurer, by stepping
into the shoes of the Gas Company, will only be recouping its actual
expenses. Neither the insurer nor the Gas Company will receive a windfall
from this decision. Further, there is no reason to distinguish Gas
Company’s right to recovery simply because its insurance company is
subrogating. A subrogation under V.R.C.P. 17(a) allows an insurer to sue
in the name of the party for whose rights the insurer claims. As the prior
analysis explains, the right to recovery is Gas Company’s, not its insurers.
Subrogation simply allows the insurer to pursue those rights. See, e.g.,
Lopez v. Concord Gen. Mut. Ins. Group, 

, 324–27 (1990).
Therefore, the fact that this is a subrogation claim does not modify the
court’s analysis.
       Finally, apart from the collateral source rule, there is evidence to
support the conclusion that the Gas Company intended to shift its insurance
burden aware from its insurer to Kimball’s. See 

(“In our view, central to a resolution of this issue is the principle that
parties may shift, by contract, their burdens of risk, and therefore affect the
obligations of their insurers.”). In this respect, the Gas Company relied on
Kimball to provide insurance, not because the Gas Company lacked
insurance, but, because it desired to shift the risk of liability for his work
wholly onto Kimball’s insurer. Thus, the Gas Company incurred reliance
damage from Kimball’s failure to shift insurance coverage. See
Restatement (Second) of Contracts § 344. For this further reason, the court
concludes that the proper measure of damages for the breach of section 7 by
Kimball is attorney’s fees and litigation costs, as well as Gas Company’s
deductible, and rise in premiums.

       Based on the foregoing, plaintiff Green Mountain Propane Gas’s
motion for summary judgment is granted. Parties will submit proposed or
stipulated calculations of damages in conformity with this entry.

       Dated at Burlington, Vermont________________, 2005.