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KLOCKNER STADLER HURTER v. INSURANCE CO.

December 11, 1991

KLOCKNER STADLER HURTER LTD., PLAINTIFF,
v.
THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, AND AMERICAN INTERNATIONAL UNDERWRITERS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Conboy, District Judge:

  MEMORANDUM AND ORDER

Defendants, the Insurance Company of the State of Pennsylvania ("ICSP"), National Union Fire Insurance Company of Pittsburgh ("NUFI"), and American International Underwriters Corporation ("AIU") move for summary judgment dismissing the remaining Counts I, II, and IV from the Plaintiff Klockner Stadler Hurter Ltd.'s ("KSH") complaint for insurance reimbursement. KSH cross-moves for partial summary judgment on Count II of its complaint.

BACKGROUND

This action involves insurance reimbursement for losses to: 1) an excavated construction site damaged by a landslide that occurred somewhere in the vicinity of the site in August, 1985; and 2) high density storage tanks that cracked and leaked in late 1986. Unless otherwise stated, the following facts are not in dispute:

In 1981, KSH, a Canadian corporation, together with its parent company, Klockner Industrie-Anlagen, Gmbh ("KIA") and Voest-Alpine, AG, formed a joint venture known as the KVC Consortium. In 1982, the KVC Consortium entered into a contract with Sabah Forest Industries, Sdn. Bdh ("SFI"), a Malaysian company, whereby the KVC Consortium undertook to act as general contractor in the construction of the Sabah pulp and paper complex in Sipitang, Malaysia (the "Sabah Project"). The Sabah Project involved the construction of a large pulp and paper mill with related facilities, to function as a manufacturer of large quantities of paper and other products. The Sabah Project included the construction of an effluent treatment plant consisting of large concrete waste water settling pool tanks. The Sabah project also included the construction of a series of large cylindrical, high density water towers in the area of the main pulp and paper mill. The KVC Consortium, whose on-site employees supervised the Sabah Project, sub-contracted portions of the construction work to several other entities.

To secure insurance for the Sabah Project, KSH, through its broker Reed Stenhouse ("RS"), negotiated on behalf of the KVC Consortium with several insuring organizations. Ultimately, RS obtained two policies of insurance relevant here. The first of these was a Contractor's All Risks/Erection All Risk Comprehensive General Liability Insurance Policy (the "CAR Policy") issued by Progressive Insurance Sdn. Bhd. ("Progressive"), a Malaysian insurance company. The second was a policy of Combined Contractor's All Risks/Erection All Risks Comprehensive General Liability Security Insurance And Difference in Conditions Policy (the "DIC Policy") issued by the Austrian branch of NUFI. RS also obtained reinsurance for the Progressive CAR Policy from ICSP in the form of a Guarantee (the "Guarantee").

During the negotiation of these policies, RS requested the establishment of a general claims handling procedure and recommended to Progressive and to AIU that the Malaysian office of Thomas Howell Kiewett ("THK") investigate and adjust all claims. ICSP, through AIU, accepted RS's recommendation in this regard, as did Progressive. Under the general claims handling procedure, KSH notified RS of any claims, and RS then reported any such claims to THK. THK investigated each such claim, advised whether coverage existed, and provided settlement amounts for each such claim. Once THK rendered such advice, RS requested settlement payments from Progressive and from AIU.

One of the claims involved in this action concerned a slope movement that occurred somewhere in the area of the excavation site for construction of the effluent treatment plant. The initial design of the Sabah Project placed the effluent treatment plant on the same plateau as the main pulp and paper mill. Ground Engineering, Inc. a Malaysian soil testing firm hired to conduct soil borings for the entire Sabah Project, issued a report on the soil test borings. Teratech, the primary subcontracting soils consulting firm hired by the KVC Consortium for the Sabah Project, also issued a written report recommending further soil borings. As of the date of Teratech's report, the actual site of the proposed effluent treatment plant had not been finally selected. During the design process, it was decided that certain components of the effluent treatment plant should be relocated from the upper part of the plateau where the main pulp and paper mill was located to a lower part of the slope. Two soil test borings were made near the originally proposed site of the effluent treatment plant. KSH concedes that these test borings were inadequate for design and construction purposes. The excavation took place in an area where no test borings had been made.

The terrain slopes downward from the upper level of the mill site into the valley where the effluent plant was to be built. A second grading design of the slope required cutting into the natural hillside, thereby making it steeper. We note that it is unclear exactly where the excavation is located with respect to the newly graded slope*fn1.

The parties agree that the natural hillside had little stability because of pressure caused by the seepage of high ground water at the top of the slope, and that the upper granular soils were underlain by a layer of soft clay. KSH concedes that making the slope steeper made the slope less stable. A landslide occurred on the slope somewhere in the vicinity of the excavated site in August, 1985. The parties state that "the design and excavation of the slope were defective because they did not adequately take potential difficulties into account before the slope movement occurred." Stipulation of January 9, 1991 ("Joint Stipulation") ¶ 24. However, the parties do not stipulate whether the landslide originated at a distance from the excavation or only within the excavation itself.

The second claim in this action involves cracks and leakage in high density storage tanks located in the main plant area of the Sabah Project. The tanks were constructed of clay tile liner on the inside face of their walls. Through faulty workmanship, water was added to the concrete at some point between its original mixing and its being pumped into certain forms, thereby substantially reducing the strength of the concrete. Cracks and leakage were observed in late 1986 during hydrostatic testing once the tanks had initially been filled to about eighty percent of capacity.

After each loss, KVC made claims for the costs of "reexcavating, redesigning, and relocating" the intended site for the construction of the effluent treatment plant and of "altering and strengthening the high density water tanks in order to complete their requirements, specifications and construction." Joint Stipulation ¶¶ 30 and 36.

The KVC Consortium and RS requested the removal of THK as adjuster for the two claims at issue here because of dissatisfaction with the adjustor's progress in resolving the claims. KSH duly informed ICSP, NUFI, and AIU of the effluent treatment plant claim and the storage tank claim and sought coverage under the CAR Policy and the DIC Policy. RS agreed to the hiring of Mr. George Marschhausen of Throop & Feiden, Marschhausen to investigate these claims, and Marschhausen duly submitted his reports. By letters dated February 13, 1989, AIU, in its capacity as foreign manager of ICSP, denied coverage for the effluent basin and storage tank losses under the CAR Policy. By letter dated June 14, 1989, NUFI denied coverage under the DIC Policy for the same reasons that AIU had denied coverage under the CAR Policy.

DISCUSSION

I. Defendants' Motion for Summary Judgment for Lack of
    Jurisdiction ("Defendants' Joinder" Motion)*fn2

Defendants contend that KSH's failure to name certain parties leaves the defendants' and the absent parties' interests inadequately protected. The necessary absent parties are said to be: SFI; RS; a British consortium of some of Progressive's reinsurers ("the Non-Party Reinsurers")*fn3; and Progressive.

Rule 19 of the Federal Rules of Civil Procedure provides for compulsory joinder of parties who are needed for just adjudication. Fed.R.Civ.P. 19(a), which sets forth the standards for determining when a party must be joined if feasible, states in pertinent part:

    A person who is subject to service of process and
  whose joinder will not deprive the court of
  jurisdiction over the subject matter of the action
  shall be joined as a party in the action if (1) in
  the person's absence complete relief cannot be
  accorded among those already parties, or (2) the
  person claims an interest relating to the subject of
  the action and is so situated that the disposition of
  the action in the person's absence may (i) as a
  practical matter impair or impede the person's
  ability to protect that interest or (ii) leave any of
  the persons already parties subject to a substantial
  risk of incurring double, multiple, or otherwise
  inconsistent obligations by reason of the claimed
  interest.

As to SFI, defendants contend that a substantial likelihood exists of a future lawsuit by SFI against Progressive and the defendants. Pointing to an assignment agreement between KIA and KSH (Defendants' Ex. 24), defendants contend that the absence of an assignment by SFI to KSH undermines our denial in our Memorandum and Order of July 11, 1990, 1990 U.S.Dist. LEXIS 8512 ("July, 1990 Order") of the defendants' previous motion to join SFI. Defendants' Joinder Memo at 3-4. In our July, 1990 Order, we based our finding that SFI lacked a direct interest in the relief sought here not on any formal assignment from SFI to KSH but rather on the understanding that KSH, not SFI, was the party "out of pocket" from the Sabah losses and therefore the real party in interest. Id. In addition, we found with respect to SFI: first, that there was not a substantial risk of subsequent litigation; and second, that SFI was not an indispensable party under Fed.R.Civ.P. 19(b). July 1991 Order at 5; 1990 U.S.Dist. LEXIS at * 4-9. Defendants have not controverted these findings; accordingly, their motion to join SFI is denied.

Defendants further argue that ICSP's broker, RS, has an interest in this litigation such that it must be joined as a party. Defendants contend that RS acted not only as an agent and broker for KSH during the Sabah project but also as drafter of the CAR Policy. Defendants argue that because RS drafted the CAR Policy, the rules of construction require us to interpret certain clauses of the policy against RS's principal KSH. Defendants' Joinder Memo at 5. Regardless of whether RS drafted the policy, RS's absence in this litigation does not preclude relief to those already parties or subject those already parties to multiple or inconsistent obligations. RS's purported activity as an agent and drafter may give it potential value as a witness, but this value does not necessarily give it a litigable interest. Because the defendants have not shown that RS should be joined under Fed.R.Civ.P. 19(a), we dismiss their joinder claim as to RS.

As to the Non-Party Insurers, defendants argue: first, that they should be joined if feasible because their absence would preclude complete relief to be accorded among those already parties; second, because they have an unprotected, direct interest in this litigation; and third, because such interest may subject those already parties to double or inconsistent obligations.

In support of their first argument, defendants merely contend that the Non-Party Reinsurers together hold a 14.085 percent of the reinsured interest in the Sabah Project. Afft. of Yap Mun Wai ¶ 9. The absence of a reinsurance party or parties with a certain share of liability does not change our inquiry as to whether ICSP and NUFI are liable to KSH for their respective shares. Therefore, this Court can accord complete relief to those already parties in the absence of the Non-Party Insurers.

As to defendants' second argument that the Non-Party Reinsurers have a direct interest in the litigation that cannot be protected in their absence, defendants contend that the substantial size of the potential liability award here "will be chargeable to the absent parties. . . ." Defendants' Joinder Memo at 6. Fed.R.Civ.P. 19(a) speaks of a disposition that may "as a practical matter impair or impede the [absent] person's ability to protect that interest." We lack sufficient information as to the nature of the Non-Party Reinsurers' obligation to say definitively whether they have an interest in this litigation. Furthermore, we will refrain from forecasting the possible preclusive effects of this action against the Non-Party Reinsurers in what would probably be a foreign tribunal. However, we do not believe that the agreement between the Non-Party Reinsurers and Progressive could impose more reinsurance obligations upon the Non-Party Reinsurers than the broadly-worded Guarantee between ICSP and Progressive imposes upon ICSP*fn4. Thus, even if the Non-Party Reinsurers have an interest in this action, ICSP can adequately protect those interests.

As for defendants' third argument that the non-Party Reinsurers have an interest in this litigation such that it leaves defendants subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations, defendants presumably believe that a future suit by KSH against the Non-Party Reinsurers could trigger an impleader motion against defendants. Even assuming that the Non-Party Insurers have an interest at stake in this litigation, and that a substantial risk to ICSP of inconsistent obligations exists, we find that the Non-Party Reinsurers are not indispensable parties under F.R.C.P. 19(b). It would not be feasible to join the Non-Party Reinsurers as parties, as they are foreign corporations whose presence could destroy our diversity jurisdiction. Therefore, as in our earlier consideration of whether this Court had jurisdiction over Progressive and SFI, we inquire as to the Non-Party Reinsurers whether "in equity and good conscience the action should proceed among the parties before the court." F.R.C.P. 19(b). We revisit the four "`interests' that must be examined in each case to determine whether in equity and good conscience the court should proceed." Provident Tradesmen Bank & Trust Co. v. Patterson, 390 U.S. 102, 109, 88 S.Ct. 733, 737, 19 L.Ed.2d 936 (1968).

"First, the plaintiff has an interest in having a forum," and thus the Court must determine "whether a satisfactory alternative forum exists." Id. As in their prior motion, defendants suggest that KSH should have brought suit in Malaysia, and we repeat our view that Malaysia does not appear to be a satisfactory alternative because of the uncertainty of subjecting defendants to personal jurisdiction in Malaysia. New York state courts would also not provide a satisfactory alternative because of the uncertainty of obtaining personal jurisdiction over the Non-Party Reinsurers in New York. Thus, this factor weighs in KSH's favor.

"Second, the defendant may properly wish to avoid multiple litigation, or inconsistent relief, or sole responsibility for liability he shares with another." Id. Assuming arguendo that the defendants might be party to future litigation, we will treat this factor as if it weighs in defendants' favor.

"Third, there is the interest of the outsider whom it would have been desirable to join." Id. As we have found earlier, the Non-Party Insurers' interests are sufficiently protected by ICSP's presence as a party here. Finally, "there remains the interest of the courts and the public in complete, consistent and efficient settlement of controversies." Id. at 111, 88 S.Ct. at 739. As we have determined above, complete relief may be accorded among those already parties by maintaining them in this forum. Thus, even if the Non-Party Reinsurers should be joined as a party, and we are not convinced that they should, we find that the above interests weigh in favor of denying defendants' joinder motion as to the Non-Party Reinsurers.

The defendants' arguments about the importance of joining Progressive do not differ in substance from the arguments that we considered and ultimately rejected in defendants' earlier motion to dismiss for lack of jurisdiction. July 11, 1990 Order at 3-7; 1990 U.S.Dist. LEXIS 8512 at * 4-9. We again reject these arguments, and therefore deny defendants' motion to join Progressive.

For the above reasons, we deny the defendants' motion to dismiss pursuant to Federal Rule 19.

II. ICSP's Summary Judgment Motion to Dismiss Count I, KSH's
    Claim for Reinsurance Reimbursement against ICSP

A. ICSP's Motion by Reason of Lack of Direct Right of Action

ICSP argues that KSH may not sue ICSP directly because the CAR policy requires that "settlement of loss" precede KSH's suit against a reinsurer. ICSP contends that the "plain meaning" of the CAR Policy's § 2.16(3)*fn5 is to make prior "settlement" of a claim a condition of the right to directly sue ICSP. Memo in Support of ICSP's Motion for Summary Judgment by Reason of Lack of Direct Right of Action ("ICSP Direct Right of Action Memo") at 2. Apparently anticipating the argument that § 2.16(3) is ambiguous, ICSP argues that the purpose of §§ 2.16(1)*fn6 and 2.16(3) was "to make sure that the insured had the right to proceed against a fiscally sound insurance company that they and their broker trusted in the event that Progressive proved irresponsible or unable to pay covered and allowed claims." ICSP Direct Right of Action Memo at 4. ICSP also cites part of a deposition transcript of Peter Deignan, an employee of RS, in which he states that RS knew as part of the insurance agreement that because Progressive "did not have the financial capacity to retain . . . [, Progressive] would have to go to their facultative contract works reinsurers. . . ." Deignan Depo. (Defendants' Ex. 19) at 86-87.

In attempting to show that KSH did not in fact "settle loss," ICSP cites the deposition transcript of Netto, who recalls telling Deignan sometime between August to December, 1985 that the excavated site loss was not covered by the CAR Policy. He further recalls that Deignan "acknowledged that the Progressive Policy contained an exclusion for land but reserved agreement with [Netto's] position on coverage until he sought the advice of others in other countries." Netto further recalls telling Deignan sometime during February or March, 1987 that the tank loss was not covered by the Progressive policy, and that "Peter Deignan agreed that said claim was not covered." Netto testified that his firm "never rendered a final report on [the land slope and concrete tank claims] and was instructed to cease its work with regard to th[ese] claim[s]." Netto Afft. ΒΆΒΆ 15-19. ICSP also cites the affidavit of Mr. Muthuveeramani A/P Nadesan, the Claims Executive of Progressive, ...


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