The opinion of the court was delivered by: LEONARD B. SAND
HONORABLE LEONARD B. SAND, U.S.D.J.
This case arises out of negotiations for settlement of a products liability action brought on behalf of Michael Hyde in 1985 in Washington state. The defendants in the present case, Key Pharmaceuticals ("Key") and Schering-Plough Corp. ("Schering"), were defendants in the Washington action. Employers Mutual Casualty Company ("Employers"), one of the plaintiffs in the present case, served as one of Key and Schering's excess insurers and provided coverage for the period of time at issue in the Washington action. Defendants ultimately settled the Washington suit on March 7, 1991.
On March 11, 1991, the present plaintiffs filed this action seeking a declaratory judgment that they are relieved from any obligation to contribute to the settlement. Plaintiffs' first, second, and fourth causes of action sound in tort, and essentially allege that the defendants exhibited both negligence and bad faith in failing to settle the Washington action for an amount below the level at which Employer's excess policy coverage would kick in. Plaintiffs' third cause of action alleges a breach of various provisions of the insurance contract between Employers and the defendants, all of which in some manner concern the way defendants should have dealt with plaintiffs in handling and defending the Washington action.
In an opinion dated January 16, 1992 (the "1992 opinion"),
the Court denied defendants' motion to dismiss this action on grounds of improper venue, forum non conveniens, and failure to state a claim upon which relief can be granted. We also denied both defendants' and plaintiffs' motions for summary judgment on the contract and tort claims, without prejudice to renewal at the close of discovery.
Discovery in this case is now complete, and the Court once again has before it cross-motions for summary judgment. Both parties move for summary judgment on plaintiffs' claim that defendants' breach of express and implied contractual duties under the Employers policy, as well as their failure to satisfy fiduciary duties owed plaintiffs, relieve plaintiffs of any obligation to indemnify defendants for any portion of the Hyde settlement. Defendants move for summary judgment on their counterclaim that plaintiffs breached the Employers policy by unjustifiably disclaiming coverage thereunder. For the reasons stated below, we grant defendants' motion for summary judgment on each of plaintiffs' causes of action, as well as defendants' motion for summary judgment on their counterclaim.
Key is a Florida corporation, and until its acquisition by Schering in 1986, maintained its main offices in Miami, Florida. After its purchase, Key became a subsidiary of Schering, a New Jersey corporation with headquarters in Madison, New Jersey. In January 1988, Hyde amended his complaint to add Schering as a defendant, invoking the theory of successor liability.
From October 27, 1979 through October 27, 1980, the period during which Hyde's claims arose, Key maintained three different levels of insurance protection against the kind of products liability claims brought against it in the Hyde litigation. Canadian Universal Insurance Co. ("Canadian") served as Key's primary insurer, providing the first $ 2 million in primary and umbrella coverage. Excess Insurance Co. ("Excess") supplied a second layer of coverage, which had per occurrence and aggregate limits of $ 1 million in excess of Canadian's $ 2 million in coverage. And Employers, an Iowa corporation, provided the third layer of coverage, with per occurrence and aggregate limits of $ 2 million in excess of the $ 3 million provided by Canadian and Excess. The Employers policy was issued by plaintiff Mutual Marine Office, Inc. ("MMO"), a New York corporation that acts as the managing agent and attorney-in-fact for a pool of insurance companies to which Employers belonged during the period relevant to the Hyde lawsuit. See Affidavit of Felix Salgado, Jr., Vice President for Claims, MMO, PP 7-8 ("Salgado Aff."). The insurance policy identifies Employers as the insurer and provides that, by virtue of the policy, Key became a member of Employers, entitled to vote at company meetings and participate in the distribution of company dividends.
Shortly after being served in the Hyde lawsuit, Key put Employers and Excess on notice of the litigation through its insurance broker, Johnson and Higgins of Florida, Inc. ("J&H, Florida"), and tendered the defense of the suit to Canadian. Canadian agreed to defend Key, and retained Carol Moody of the Seattle law firm Karr, Tuttle & Campbell as lead counsel. On July 18, 1990, one of Hyde's attorneys, Daniel Sullivan, made the first overtures regarding a possible settlement of the case. The plaintiff's demand, Sullivan wrote, was for the "policy limits" of Key's insurance coverage, "to include any and all excess insurance available." Letter from Daniel Sullivan, Attorney for Michael Hyde, to Carol L. Moody, Attorney for Canadian on behalf of Schering/Key, July 18, 1990, at 1.
Sometime in the late fall of 1990, Key and Schering learned that Canadian was on the verge of insolvency and would probably be unable to contribute any portion of its policy limits to the satisfaction of Hyde's claims. The immediate practical consequence of Canadian's financial difficulties was that Key and Schering, in continuing coordination with Moody, assumed direct control of settlement negotiations and trial preparation, and direct responsibility for financing the cost of the litigation. The immediate conceptual quandary raised by Canadian's difficulties was: which party would bear the responsibility for paying the first $ 2 million in liability in the Hyde case?
On January 28, 1991, after several months of discussion (including two mediation sessions with Hyde's counsel), Key and Schering made a settlement offer having a present cash value of between $ 825,000 and $ 850,000. Hyde rejected the offer. Trial commenced on January 31, 1991. On March 4, 1991, approximately A five weeks into trial, Key and Schering tendered the amount of what was essentially Key's self-insured exposure -- $ 2 million.
Hyde rejected that offer, too, as well as a follow-up offer of $ 3 million. Finally, on March 7, 1991, Key and Schering settled the case with Hyde for $ 4.175 million. Key tendered the first $ 2 million, and Excess tendered its $ 1 million layer of excess coverage. Employers and MMO, however, refused to contribute any portion of Employer's layer of coverage to the settlement. They charged defendants with bad faith and negligence in failing to settle for an amount of $ 3 million or less, and they contended that defendants' misconduct relieved them of any contractual obligation to tender their layer of coverage.
Pared down to its essentials, the issues in this lawsuit are (1) whether plaintiffs are correct in believing that Key, their insured, owed them a duty to accept a settlement offer from Hyde below the level of plaintiffs' excess coverage, where a judgment of liability above that level was a possibility; and (2) whether defendants' handling of the Hyde litigation -- in particular, their handling of settlement possibilities -- amounted to breaches of various provisions of the Employers insurance policy.
In the 1992 opinion, we reserved decision on the choice-of-law issues presented by plaintiffs' claims because the record was not complete enough to allow us to resolve some factual disputes important to the choice-of-law calculus. The first order of business now is to revisit that question.
A. Plaintiffs' Tort Claims3
As noted in the 1992 opinion, New York choice-of-law rules, which we are bound to apply, see Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941), require courts to apply the law of the state that has "the most significant contacts with the matter in dispute." Auten v. Auten, 308 N.Y. 155, 124 N.E.2d 99, 102 (N.Y. 1954) (quoting Rubin v. Irving Trust Co., 305 N.Y. 288, 113 N.E.2d 424, 431 (N.Y. 1953)). In Babcock v. Jackson 12 N.Y.2d 473, 191 N.E.2d 279, 240 N.Y.S.2d 743 (N.Y. 1963), the New York Court of Appeals departed from the traditional conflicts rule in tort actions, which would automatically apply the law of the place of the wrong. Instead, the court held that "controlling effect" must be given "to the law of the jurisdiction which, because of its relationship or contact with the occurrence or the parties, has the greatest concern with the specific issue raised in the litigation." Babcock, 191 N.E. at 283. It was our judgment in 1992 that the principal tort-law issue raised in this litigation was whether an excess insurer might maintain a direct cause of action against an insured, once the primary insurer became insolvent. We further noted that the home states of the excess carrier and the insured, respectively, would have a substantial interest in regulating the remedial options available to excess insurers against their insureds.
Having reviewed all of the materials submitted by the parties on this issue, we find as follows:
New Jersey (the state favored by defendants) is the state in which the insured (Key) is now headquartered, and in which the insured's parent and co-defendant (Schering) is both headquartered and incorporated. Accordingly, New Jersey may well have an interest in protecting Key and Schering from the increased exposure to liability that would result from the availability of direct actions by excess insurers against their insureds.
New York (the state favored by plaintiffs) also has an interest in the allocation of loss between excess insurers and their insureds because MMO, a New York corporation, was effectively functioning as the excess insurer in this case.
In reaching this last conclusion (with which defendants disagree, claiming that Iowa-based Employers is the excess carrier here), we have looked closely at the nature of the insurance pooling system of which Employers was a member. The structure of that system is undoubtedly rather common: a number of insurance companies associate together for the purpose of underwriting a particular set of risks, with each member company sharing in the total premiums, losses, and expenses of the pool according to a predetermined participation percentage. Salgado Aff. PP 6-7. Each member of the pool, that is, shares, to differing degrees, in each and every risk written by the other members of the pool. Deposition of Mark Blackman, President of MMO, at 9-11, 104 ("Blackman Dep.").
What this means for choice-of-law analysis is that it is not at all clear, from the mere fact that Employers was listed as the insurer on the policy issued to defendants by MMO, that Employers functioned as the excess insurer in this case. As explained by Felix Salgado, any one of the pool members for the years 1979 and 1980 could have been named the insurer on Key's policy. Salgado Aff. P 9. While Employers was in fact the company named, Employers' exposure under Key's policy would depend on its particular participation percentage in the insurance pool. That percentage could have been as low as 5%, or as high as 75%; the record does not say.
Moreover, even if Employers' participation percentage was as high as 75%, it is not at all clear that the funds Employers contributed to the pool would ever be used to satisfy 75% of Key and Schering's insurance claim. This is so because of the twin facts that (1) MMO followed the business practice of "paying old losses with new premium," Blackman Dep. at 94, 104, and (2) Employers left the pool in 1985. Salgado Aff. P 10. It seems just as likely that the money for satisfaction of Key and Schering's claim would come out of funds contributed by Employers' replacement in the pool (a company by the name of Arkwright Mutual Insurance Company) as out of funds contributed by Employers. See Salgado Aff. P 10.
If the insurance pool, as a whole and over time, is ultimately the real insurer of the risks underwritten by the pool, and the participating members are only placeholders for specific risks, the question remains as to which entity should be deemed the insurer of Key and Schering's liabilities for choice-of-law purposes. Since the answer could not possibly be "all the companies that participate in the pool" (since that would aggravate the choice-of-law question, rather than resolve it), the obvious candidate for excess insurer is MMO, the entity that manages the pool. As manager, MMO writes and issues the insurance policies, receives the premiums, defends and prosecutes legal actions, makes the determinations relevant to coverage matters, pays out claims, and shares, in a somewhat indirect sense, in the risk of loss on the pool's policies. Blackman Dep. at 93-96, 98, 106.
What's more, MMO apparently does all of these things without input from, or even knowledge on the part of, the member insurance companies. Blackman Dep. at 94, 106.
MMO's central role in operating the insurance pool to which Employers belonged strongly suggests that MMO, rather than Employers, would be the entity that would react to a ruling by this Court concerning the remedies available to excess insurers.
And this fact, in turn, suggests that New York (MMO's home state), rather than Iowa (Employer's home state), has the greater interest in looking out for the excess insurer's welfare in this case.
In light of the foregoing, the choice as to which state's law governs plaintiffs' tort claims comes down to New York and New Jersey, the states in which the excess-insurer-in-fact and the insured reside, respectively. We hold that New Jersey law applies. As plaintiffs concede, many of the decisions regarding defense representation, settlement negotiations, and settlement recommendations in the Hyde case were made by Schering's in-house litigation department in New Jersey. Pls.' Mem. in Support at 8. New Jersey accordingly represents the state where the alleged torts principally took place. Given that loss-allocation as well as conduct-regulating concerns both weigh in on the side of New Jersey, we think it clear that New Jersey has the greater concern with the issues raised in this litigation. See Bader By Bader v. Purdom, 841 F.2d 38, 39 (2d Cir. 1988) (under New York law, "significant contacts" are almost exclusively the parties' domiciles and the locus of the tort); Babcock, 480 N.E.2d at 684-85. We therefore hold that New Jersey law governs plaintiffs' tort claims.
B. Plaintiffs' Contract Claims
The parties agree that Olin Corp. v. Insurance Co. of North America, 743 F. Supp. 1044 (S.D.N.Y. 1990), aff'd, 929 F.2d 62 (2d Cir. 1991), correctly states the factors that New York courts consider when deciding choice-of-law questions involving insurance contracts.
In cases involving insurance contracts, New York courts have looked principally to the following factors: the location of the insured risk; the insured's place of business; where the policy was issued and delivered; the location of the broker or agent placing the ...