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SUPERIOR STEEL STUDS, INC. v. ZURICH NORTH AMERICA

May 10, 2005.

SUPERIOR STEEL STUDS, INC. and ACTION STEEL CORP., Plaintiffs,
v.
ZURICH NORTH AMERICA, INC. and MARYLAND CASUALTY COMPANY, Defendants.



The opinion of the court was delivered by: I. LEO GLASSER, Senior District Judge

MEMORANDUM AND ORDER

This action involves the application of an exclusion clause in the insurance contract (the "Policy") between the parties. Plaintiffs Superior Steel Studs, Inc. ("Superior Steel") and Action Steel Corp. ("Action Steel") (collectively, "plaintiffs") assert a cause of action for breach of the Policy against Zurich North America, Inc. and Maryland Casualty Company (collectively, "defendants"). Pending before the Court is defendants' motion for summary judgment.

FACTS

  The following facts are undisputed unless otherwise noted. Plaintiffs are engaged in the business of distributing steel to end users and other distributors. See Affirmation of Lewis Tesser ("Tesser Aff.") ¶ 3. In connection with that activity, plaintiffs do business with steel processing companies. Those companies store plaintiffs' steel, maintain inventories of the stored steel and, upon receiving instructions from plaintiffs, process orders from those inventories. Compl. ¶¶ 11-12. Plaintiffs used R&R Metals, Inc. ("R&R"), a Florida steel processing company, to maintain an inventory of steel plaintiffs owned for processing orders and to occasionally ship steel to plaintiffs' customers. Tesser Aff. ¶ 5. In or about June 2002, plaintiffs requested that R&R process certain steel coils it was storing for them and were told by R&R that those steel coils were missing from the R&R site. Id.; Compl. ¶ 18. Plaintiffs then hired an investigative firm, Decision Strategies, to conduct an investigation into the disappearance of the steel. The Investigation Report containing the investigator's findings indicated, among other things, that Robert O'Neil ("O'Neil") and Henry Valdivia ("Valdivia"), the President and sole shareholder and Chief Operating Manager of R&R, respectively, acknowledged responsibility for the loss of the steel. See Affidavit of Gil M. Coogler ("Coogler Aff.") Ex. I. Despite plaintiffs' demands, R&R refused to return the steel coils or pay them the fair market value of the coils, $454,738.89. Compl. ¶ 24; Tesser Aff. ¶ 5.

  Thereafter, plaintiffs submitted to defendant insurance companies*fn1 a claim for their loss under the all-risk policy number CMM 40123430, which was in effect at the time of the loss. Compl. ¶ 6. That policy excluded from coverage loss caused by a "[d]ishonest or criminal act by you . . . or anyone to whom you entrust the property for any purpose." On or about November 7, 2003, defendants denied plaintiffs' claim citing that entrustment exclusion. See Coogler Aff. Ex. B; Tesser Aff. ¶ 6; Def. 56.1 Statement ¶ 5. On May 28, 2004, plaintiffs*fn2 brought an action against R&R in the federal court in Florida alleging fraud, "misplacement of goods" and negligence. See Coogler Aff. Ex. H (attaching complaint). That action resulted in a stipulation of settlement between the parties and the Florida district court entered a final judgment in favor of plaintiff. The judgment remains unsatisfied due to R&R's subsequent dissolution.

  Procedural Background

  On May 27, 2004, plaintiffs filed a complaint against defendants in New York state court asserting two causes of action for breach of contract and bad faith denial of insurance coverage.*fn3 Defendants removed the action to this Court pursuant to 28 U.S.C. § 1441(b) based on diversity of citizenship under 28 U.S.C. § 1332.*fn4 See Coogler Aff. Ex. D (attaching Notice of Removal dated June 30, 2004). By stipulation dated July 14, 2004, plaintiffs consented to removal. See id. Defendants now move for summary judgment.

  DISCUSSION

  Federal Rules of Civil Procedure 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Summary judgment is precluded only where the factual issue is genuine, which means that "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In order to survive a motion for summary judgment, "the opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). To that end, the non-moving party "may not rest upon the mere allegations or denials" in its pleadings; rather, it "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). When evaluating a motion for summary judgment, "the inferences to be drawn from the underlying facts . . . must be viewed in the light most favorable to the party opposing the motion." Matsushita, 475 U.S. at 587. Guided by these principals, the Court turns to the parties' arguments in this case.

  I. Whether plaintiffs entrusted the goods to R&R

  This dispute centers on whether the defendants wrongfully denied coverage of plaintiffs' loss under the Policy's entrustment exclusion. The Policy insures plaintiffs for the loss of personal property, including that which is located at sites other than plaintiffs' primary place of business. Coogler Aff. Ex. F at Section I.E. Additionally, the policy excludes certain causes of loss from coverage:
We will not pay for loss or damage caused by or resulting from any of the following:. . . . Dishonest or criminal act by you . . . or anyone to whom you entrust the property for any purpose (a) Acting alone or in collusion with others; or (b) Whether or not occurring during the hours of employment. (2) This exclusion does not apply to: (a) Acts by "employees" that are covered in Employment Dishonesty Additional Coverage section. . . .
See Coogler Aff. ¶ 8; Ex. F (attaching copy of insurance policy) at Section III.A.2.e. In a case such as this one, "[o]nce the insured shows that a loss occurred, the insurer shoulders the burden of demonstrating that the loss claimed is excluded expressly from coverage under the policy terms." M.H. Lipiner & Son, Inc. v. Hanover Ins. Co., 869 F.2d 685, 687 (2d Cir. 1989). Here, it is undisputed that plaintiffs' steel coils were missing. With respect to the exclusionary clause, as an initial matter, it applies to goods that are "entrusted" to a third party. Plaintiffs do not dispute that their delivery of the steel to R&R constituted entrustment. See generally Pl. 56.1 Statement. Accordingly, that requirement for the application of the exclusion clause is satisfied.

  II. "Dishonest or Criminal Act"

  A. Florida Action and Judicial Estoppel

  In view of the fact that plaintiffs entrusted the steel to R&R, the Court turns to whether the causes of excludable loss bar plaintiffs from recovering under the Policy. Defendants contend that plaintiffs' loss is excluded from coverage because it resulted from R&R's commission of a criminal or dishonest act. Def. Mem. at 5. In opposition, plaintiffs argue that there is a question of fact as to whether the loss of the steel coils was occasioned by negligence and therefore the exclusion does not apply as a matter of law. See Pl. 56.1 Statement ¶ 1. Defendants contend that the doctrine of judicial estoppel precludes plaintiffs from asserting a position that is inconsistent with the ...


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