Appeal from a judgment of the United States District Court for the Southern District of New York, Robert J. Ward, Judge, awarding defendant-appellee certain expenses incurred in defending the present litigation.
Oakes, Kearse, and Winter, Circuit Judges.
Plaintiffs Long Island Lighting Company ("LILCO"), et al., appeal from a judgment of the United States District Court for the Southern District of New York, after a bench trial before Robert J. Ward, Judge, awarding defendant-counterclaimant Pirelli Cable Systems, Inc. ("Pirelli"), $231,855.25 in damages, plus interest and costs, representing all legal fees and expenses incurred by Pirelli in the present action following service on Pirelli of crossclaims by other defendants. The court found that LILCO had agreed to obtain for Pirelli insurance covering third-party claims of the type asserted in the crossclaims and that the insurance companies engaged by LILCO for that purpose had disclaimed coverage and refused to defend Pirelli on the crossclaims. On appeal, plaintiffs contend principally that the district court erred (1) in finding that proper coverage was not obtained and that the insurers denied coverage, and (2) in failing to limit the damage award to expenses incurred in defending the crossclaims. Finding merit only in the latter contention, we affirm the trial court's ruling on liability but vacate the judgment and remand for further proceedings to determine the proper amount of damages to be awarded.
The pertinent events leading to the present controversy are not in dispute. In 1977 LILCO engaged Pirelli to repair certain cables located on the bottom of Long Island Sound. In reaching agreement with Pirelli, LILCO obligated itself to obtain for Pirelli insurance coverage in the amount of $1,000,000 against claims of third parties. LILCO arranged for The Home Insurance Company ("Home") to provide primary insurance coverage for Pirelli in the amount of $100,000 and arranged for Midland Insurance Company ("Midland") to provide $900,000 in excess coverage.
During the course of the repair operations, additional damage was sustained by the cables, and in 1978 plaintiffs commenced the present action to recover for the new damage. They sued Pirelli and others, including certain marine subcontractors (the "Marine Subcontractors") who had furnished personnel, equipment, and services in connection with the repair job. Pirelli notified both insurers of plaintiffs' claims against it and demanded that the insurers defend it. Home responded by disclaiming coverage, pointing to two policy exclusions, including one (hereinafter "Exclusion (g)") for claims relating
to property damage to (1) property owned by or occupied by or rented to the insured, (2) property used by the insured, or (3) property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control.
Those listed as insureds in the policy included Pirelli and the plaintiffs.
On September 29, 1978, the Marine Subcontractors asserted crossclaims against Pirelli, alleging that in the course of the repair project Pirelli had managed and controlled the operation of their equipment and had caused damage to that equipment. On October 5, 1978, Pirelli notified both Home and Midland of the crossclaims and demanded that the insurers defend these claims. Home did not respond. Midland responded only by stating that as excess carrier, it would not defend, but that with respect to whether there was coverage, it would follow whatever position was adopted by Home. Midland suggested that Pirelli "contact the Home . . . to discuss their position on their denial of coverage." Pirelli sent Home a second letter requesting that it acknowledge coverage and take over the defense of claims against Pirelli. Home never replied. Nor did it assume the defense of any claims against Pirelli. Pirelli counterclaimed against LILCO for the cost of defending both LILCO's claim and the crossclaims.
After a bench trial on all issues except Pirelli's counterclaims, the court found, inter alia, that Pirelli was not liable to either the plaintiffs or the Marine Subcontractors.
Thereafter a separate bench trial was held on Pirelli's counterclaims for its defense costs. The court found that Pirelli had understood that LILCO would obtain insurance for it against claims of third parties and that both Home and Midland had disclaimed coverage and refused to defend Pirelli on the crossclaims. The court found that the policy's Exclusion (g), quoted above, which had been invoked by Home when it expressly denied coverage of the claims asserted against Pirelli by plaintiffs, was applicable to the crossclaims asserted by the Marine Subcontractors.
The court concluded that LILCO had thus, in breach of its contractual obligation, deprived Pirelli of insurance coverage as to the cost of defending the crossclaims. It held that LILCO was liable for Pirelli's damages, which "consist[ed] of the attorney's fees and expenses [Pirelli] incurred in defending the claims asserted against [Pirelli] by the crossclaimants in their answer served on September 29, 1978." The court made no finding that LILCO had undertaken to procure insurance covering the cost to Pirelli of defending a suit by LILCO, and it did not conclude that plaintiffs were liable for Pirelli's costs of defending the main suit. The court entered judgment awarding Pirelli $231,855.25 plus interest and ...