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