United States District Court, Eastern District of New York
September 24, 1991
HARTFORD ACCIDENT AND INDEMNITY COMPANY, PLAINTIFF,
COMMERCIAL UNION INSURANCE COMPANY AND MINUTEMAN PRESS INTERNATIONAL, INC., DEFENDANTS.
The opinion of the court was delivered by: Wexler, District Judge.
MEMORANDUM AND ORDER
In the above-referenced action, trial was scheduled for July
of 1991. On July 29, 1991, the parties appeared for trial and
submitted documents and a statement of stipulated facts for
trial, ("S.F."), although no live witnesses were called.
Thereafter, each party submitted a reply memorandum. Following
a brief recitation of the background facts, the Court will turn
to address both the issue of standing and the merits of
This case involves a dispute between two insurance companies
as to which is liable for an underlying claim. The incident
which gave rise to the claim occurred on February 11, 1986,
when Michael Jutt, an employee of Minuteman Press
International, Inc. ("Minuteman"), was vacationing off the
Florida coast. During the vacation Jutt sustained an injury
while aboard a boat owned by Minuteman, the "Sea Duce."
Apparently, Jutt, along with his father and brothers, was
fishing ". . . when a fish approached the boat and the captain
fired a shot from an M-16 rifle. The shot was fired close to
Mr. Jutt's left ear and he allegedly sustained permanent injury
to his left as well as the right [ear]." S.F.*fn1 at para. 2.
Plaintiff Hartford Accident and Indemnity Company
("Hartford") had issued an "Umbrella Liability Policy" to
Minuteman, under policy number 12RHUTV1915, with limits of five
million dollars. Hartford's umbrella policy comes into effect
when an underlying policy reaches its limits, or when an
underlying policy does not apply. Defendant Commercial Union
Insurance Company ("Commercial Union") issued a policy of
marine insurance covering the Sea Duce. The policy issued by
Commercial Union contains the following provision (hereinafter
Notwithstanding, anything contained herein to the
contrary, it is further understood and agreed that
this company will not pay for any loss, damage,
expense or claim with respect to paid employees of
the assured and paid members of the crew.
See S.F. at para. 5. Both policies were in full force and
effect at the time of the accident.
Subsequently, Jutt filed suit against Minuteman; Commercial
Union denied coverage and refused to defend Minuteman in that
action. Hartford provided Minuteman with a defense in the
action, eventually settling out of court for the sum of
$145,000. More particularly, Minuteman paid Jutt $10,000 as
part of its self-insured reduction, and Hartford paid the
balance of $135,000.
On or about March 12, 1987, Commercial Union instituted a
declaratory judgment action against Minuteman. That action was
discontinued on April 5, 1988, when Minuteman signed a general
release which abandoned Minuteman's right to contest Commercial
Union's denial of Jutt's claim.
Subsequently, Hartford instituted the current action against
Commercial Union for breach of a fiduciary obligation. As noted
above, neither plaintiff nor defendant presented witnesses at
trial; both submitted a stipulation of facts and schedule of
documents which included various letters, agreements, policies,
and depositions. In addition, plaintiff's counsel read into the
record those portions of the depositions which both plaintiff
and defendant agreed were important. The two issues pending
herein are whether Hartford has standing to sue, and whether
Commercial Union is liable to Hartford for the settlement of
the Jutt claim.
Commercial Union charges that Hartford does not have standing
to sue. Both parties agree that Hartford could not sue on a
theory of equitable subrogation, inasmuch as Minuteman's
release waived any rights to which Hartford might be entitled
under such a theory. Rather, Hartford is suing for a breach of
the fiduciary duty which a primary carrier of insurance owes to
an excess carrier. See Hartford Accident and Indemnity Co. v.
Michigan Mutual Ins. Co., 61 N.Y.2d 569, 475 N.Y.S.2d 267,
463 N.E.2d 608 (1984) (recognizing a direct duty between primary
and excess insurance carriers).
As to this theory, Commercial Union makes two arguments.
First, it claims that it is not a primary insurer under the
Hartford policy. To substantiate this, Commercial Union points
to the fact that its policy is not listed on the Extension
Schedule of Underlying Insurance Policies annexed to the
Hartford policy. However, this is not dispositive of the issue
since the Commercial Union policy was obtained after the
Hartford policy was written. To this point it must be noted
that among the conditions of the Hartford policy, section 7,
entitled "Other Insurance" states:
The insurance afforded by this policy shall be
excess insurance over any other valid and
collectible insurance (except when purchased
specifically to apply in excess of this insurance)
available to the insured, whether or not described
in the Extension Schedule of Underlying Insurance
Policies, and applicable to any part of ultimate
net loss, whether such other insurance is stated to
be primary, contributing, excess or contingent. . ..
See Schedule of Documents at "O" (emphasis added). Thus, there
is little weight to the argument that Commercial Union is not a
primary insurer under Hartford's policy.
Commercial Union argues that even if it were a primary
insurer, it would not be liable to Hartford for any breach of
a fiduciary duty. Commercial Union acknowledges that in
Hartford, the New York Court of Appeals upheld the right of an
excess insurer to recover from the primary insurer based upon a
direct duty owed by the primary insurer to the excess insurer.
See 475 N.Y.S.2d at 269, 463 N.E.2d at 610. However, Commercial
Union maintains that courts have only recognized two direct
duties: (1) a duty to exercise good faith in handling the
defense of claims, and (2) a duty to safeguard the rights and
of the excess insurer by not placing the primary carrier's own
interest above that of the excess carrier. Commercial Union
further asserts that it could not have breached either of these
duties because it never provided Minuteman with a defense to
the underlying claim. See Defendant's Trial Memo. at 21.
In this Court's view, defendant's argument that refusing to
provide a defense to Minuteman precluded any liability to
Hartford, while at the same time acknowledging that
participation in a defense which ignored the rights of Hartford
would trigger liability, is both irreconcilable and artificial.
In trying to distinguish the Hartford case from the instant
action, defendant makes both conclusory allegations*fn2 and
distinctions based on immaterial facts.*fn3
The fact pattern of this case does differ from
Hartford. There the primary insurer handling the defense
refused to implead an additional defendant, as requested by the
excess insurer, because to do so would have increased the
primary insurer's potential liability for the underlying claim.
However, the holding in Hartford was not so narrow as to
foreclose standing in this case, particularly given the rule
that "the primary carrier owes to the excess insurer the same
fiduciary obligation which the primary insurer owes to the
insured." Hartford, 475 N.Y.S.2d at 269, 463 N.E.2d at 610.
Thus, the Hartford court recognized a direct and independent
relationship between primary and excess insurance carriers.
Based on the above discussion, it is clear that Minuteman is
not at the center of this lawsuit. Once Hartford agreed that it
would be liable if Commercial Union was not, and since Hartford
was already handling the defense of the claim, it was in the
interest of Minuteman to release Commercial Union instead of
continuing to defend itself in the declaratory judgment action.
At that point, Minuteman knew it would not be wholly liable,
and therefore cut its costs by signing the release. However,
this in no way affects the direct relationship between the
primary and excess carriers. Accordingly, this Court finds that
Hartford has standing to sue for enforcement of Commercial
Union's policy. See Hartford, 475 N.Y.S.2d at 269, 463 N.E.2d
at 610; Continental Casualty Co. v. Pullman, Comley, et al.,
929 F.2d 103, 107 (2d Cir. 1991) (noting that New York is a
jurisdiction which allows a direct action by an excess carrier
against the primary carrier).
At issue is whether the exclusion in the Commercial Union
policy, which excludes coverage for "paid employees of the
assured," is ambiguous. This Court finds that the term "paid
employees" is ambiguous; the common meaning of the term
"employee" would by definition be someone who is paid, the
addition of the word "paid" to employee makes the phrase
ambiguous. As used herein, paid may merely be a superfluous
adjective, or it might signify an employee performing a
specific function for remuneration at the time of injury or
Exclusionary clauses in insurance policies "are given the
interpretation most beneficial to the insured," M.H. Lipiner &
Son, Inc. v. Hanover Ins. Co., 869 F.2d 685, 687 (2d Cir. 1989)
(citation omitted); see also Western World Ins. Co. v. Stack
Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990) (citation omitted).
This is particularly true when the exclusionary clause is found
to include an ambiguous term. See McCormick & Co., Inc. v.
Empire Ins. Group, 878 F.2d 27, 30 (2d Cir. 1989) (citations
omitted). Additionally, much of the evidence suggests that
denying coverage for Jutt's claim was not the intent of the
parties to the primary insurance contract; the reason
Commercial Union added the non-standard clause was because it
did not want to cover
anything which might involve worker's compensation. Since Jutt
was not injured while acting in his capacity as an employee, he
would not be eligible for worker's compensation.
Accordingly, this Court finds for plaintiff in the amount of
$135,000, plus interest commencing August 1, 1988, the date
plaintiff paid Jutt. Plaintiff is directed to submit a judgment
consistent with this opinion.