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General Star National Insurance Co. v. Universal Fabricators

November 5, 2009

GENERAL STAR NATIONAL INSURANCE CO., DEFENDANT-CROSS-DEFENDANT-CROSS-CLAIMANT-APPELLANT,
v.
UNIVERSAL FABRICATORS, INC., MUTUAL MARINE OFFICE INC., NEW YORK MARINE AND GENERAL INSURANCE COMPANY, DEFENDANTS-CROSS-DEFENDANTS-CROSS-CLAIMANTS-APPELLEES,
AMERICAN ALTERNATIVE INSURANCE CORPORATION, DEFENDANT-CROSS-DEFENDANT-COUNTER-CLAIMANT,
NATIONAL UNION FIRE INSURANCE COMPANY OF LOUISIANA, A1 MARINE ADJUSTERS, INC., NAVIGATORS INSURANCE SERVICES OF TEXAS, INC., MARINE OFFICE OF AMERICA CORPORATION, PLAINTIFFS-COUNTER-DEFENDANTS.



SYLLABUS BY THE COURT

Appeal from a judgment of the United States District Court for the Southern District of New York (Shira A. Scheindlin, Judge). The district court granted summary judgment against the appellant, General Star National Insurance Co., ruling that it was bound by the terms of an excess insurance policy it had issued to contribute to the satisfaction of a state-court judgment of liability in a personal injury action against two entities for whom the insured had been a contractor at the time of the injury. We conclude that the district court erred in deciding that the state-court judgment established legal liability against the insured. We therefore vacate the judgment and remand for the district court to consider in the first instance whether liability was established in some other manner such that an "ultimate net loss" for which General Star was liable pursuant to General Star's insurance policy arose.

Vacated and remanded.

The opinion of the court was delivered by: Sack, Circuit Judge

Argued: September 3, 2008

Before: SACK and KATZMANN, Circuit Judges, and RAKOFF, District Judge.*fn1

Defendant-Cross-Defendant-Cross-Claimant-Appellant General Star National Insurance Co. ("General Star") appeals from a memorandum opinion and order dated September 14, 2007, by the United States District Court for the Southern District of New York (Shira A. Scheindlin, Judge) granting summary judgment for Defendants-Cross-Defendants-Cross-Claimants-Appellees, the New York Marine and General Insurance Company and Mutual Marine Office, Inc. (together, "Mutual Marine"). The question presented on appeal is whether General Star, an excess insurer, is required to reimburse Mutual Marine for the amount Mutual Marine paid above its policy limit to cover a portion of a state-court personal injury judgment.

In answering this question in the affirmative, the district court concluded that a state-court judgment against the owner of and stevedore at the ship terminal where the personal injury occurred -- the City of New York (the "City") and the International Terminal Operating Company ("ITO"), respectively --constituted an adjudication of liability against General Star's insured, Universal Fabricators, Inc. ("UFI"), a contractor doing work at the time and place of the injury. UFI was insured by both Mutual Marine for the first million dollars of loss, and General Star for four million dollars above that amount, under General Star National Insurance Company umbrella policy No. NUG-332963C ("GenStar Policy"). Because under the terms of the GenStar Policy, an "adjudication" that established an amount that the insured was legally obligated to pay constituted an "ultimate net loss," which required General Star to reimburse its insured, the district court decided that General Star was obligated to pay Mutual Marine for the amount it had paid above its primary insurance policy limit.

We conclude that the district court erred in deciding that General Star's insured was liable for the amount at issue as a result of the state court personal injury judgment. Because neither the district court nor the parties addressed in substance the issue of whether General Star's insured was legally liable for some other reason, we vacate the judgment of the district court and remand with instructions for the court to resolve this issue and decide whether a trial with respect thereto is warranted.

BACKGROUND

The New York City Passenger Ship Terminal (the "Terminal") is owned by the City and operated in part by ITO. In 1999, ITO retained UFI to perform repair work at the Terminal. The contract between ITO and UFI contained a rider which provided, among other things, that UFI would (a) procure general liability insurance coverage in the amount of five million dollars per occurrence, with the insurance policy naming ITO and the City as additional insureds, and (b) "indemnify, defend and hold harmless" ITO and the City from and against all claims arising from any negligent act or omission by UFI that was related to the repair work. As required by the rider, UFI purchased a primary general liability insurance policy in the amount of one million dollars from Mutual Marine and a secondary excess policy in the amount of four million dollars from General Star.

The GenStar Policy provided that General Star would pay for "ultimate net loss in excess of the retained limit because of bodily injury or property damage to which the policy applies."

It also stated that: "Ultimate net loss means the total amount of damages for which the Insured is legally liable. Ultimate net loss may be established by adjudication, arbitration or a compromise settlement to which [General Star] ha[s] previously agreed in writing."

On February 26, 1999, Ronald Ernish, a UFI employee performing repair work at the Terminal, was seriously injured when he fell from a makeshift scaffold or ladder that collapsed under his weight. Ernish and his wife brought suit in Supreme Court, New York County, not against UFI, Mr. Ernish's employer --perhaps because they would have been confined to a workers' compensation claim had they sought to recover from UFI*fn2 -- but against ITO and the City (the "Ernish lawsuit"). ITO and the City then filed a third-party complaint against UFI seeking indemnification (the "third-party action").

General Star was informed of the Ernish lawsuit and the third-party action against UFI. After concluding that it was unlikely UFI would be exposed beyond Mutual Marine's million-dollar policy limit, General Star decided to allow Mutual Marine, UFI's primary insurer, to defend UFI in the third-party action, and so informed Mutual Marine in two notes dated May 25 and June 1, 2000, respectively. With regard to its conclusion that UFI was unlikely to be exposed beyond Mutual Marine's million-dollar policy limit, General Star instructed Mutual Marine in the first note that "[s]hould future developments lead you to believe otherwise, please notify us immediately."

Before trial began in the Ernish lawsuit against ITO and the City, Mutual Marine's attorneys executed a settlement agreement (the "First Agreement") with both ITO and the City, purportedly on behalf of UFI, settling the third-party claim ITO and the City had asserted against UFI. The First Agreement provided that ITO and the City would discontinue their third-party claim against UFI, and that ITO and the City would pay twenty-five percent and UFI would pay seventy-five percent of whatever amount was ultimately awarded to Ernish against ITO and the City in the Ernish lawsuit.

It is not disputed that Mutual Marine knew of and participated in the First Agreement. General Star, however, neither knew of nor participated in it. And according to UFI and General Star, Mutual Marine's counsel entered into the First Agreement on UFI's behalf without UFI's consent.

The state trial court directed a verdict in the Ernish lawsuit in favor of the plaintiffs against ITO and the City on liability pursuant to N.Y. Labor Law § 240, which provides that "[a]ll contractors and owners and their agents . . . shall cause to be furnished or erected . . . scaffolding . . . which shall be so constructed, placed and operated as to give proper protection to a person so employed" in repairing a building or structure, among other things. N.Y. Labor Law § 240; see also Ernish v. City of N.Y., 2 A.D.3d 256, 257, 768 N.Y.S.2d 325 (1st Dep't 2003). A jury, left to decide the amount of damages, returned an award of three million dollars against ITO and the City. The amount apparently came as something of a surprise to the parties and their insurers. On appeal to the Appellate Division, the directed verdict was affirmed but the judgment was reduced to $2,175,000 plus interest -- still an amount substantially exceeding the parties' and insurers' initial expectations. Id.

ITO and the City were insured by the National Union Fire Insurance Company of Louisiana, A1 Marine Adjusters, Inc., the Marine Office of America Corporation, and Navigators Insurance Services of Texas, Inc. (collectively "National Union"). National Union initially paid Ernish twenty-five percent of the judgment to satisfy the obligation of ITO and the City -- the defendants in the Ernish lawsuit -- under the First Agreement. Mutual Marine, in turn, satisfied -- up to its policy limit of one million dollars plus interest -- part of UFI's three-quarters share of the judgment against ITO and the City under the First Agreement. $650,584.19 of UFI's three-quarters share under the First Agreement remained unpaid. The parties looked to General Star to pay that amount under its excess policy, but General Star declined, arguing that neither it nor UFI was bound by the First Agreement, and that it therefore had no liability for payment of any of UFI's 75% share of the judgment, which share had been decided upon in the First Agreement. See, e.g., Letter from General Star to Mutual Marine, at 1 (June 19, 2002) ("What remains clear and indisputable -- in fact Mutual Marine does not even argue to the contrary -- is that neither General Star nor Universal Fabricators ever authorized Mutual Marine to execute the so-called [First Agreement] on their behalf.").

Because the judgment was entered against ITO and the City, their insurer, National Union, then paid the remainder of the judgment. National Union thereupon commenced an action for a declaratory judgment against UFI, Mutual Marine, and General Star to the effect that National Union was due reimbursement for the money it paid in excess of the twenty-five percent share of the Ernish judgment that was apportioned to ITO and the City under the First Agreement. General Star removed the action, which was originally filed in New York County Supreme Court, to the United States District Court for the Southern District of New York on the basis of diversity of citizenship.

After the case was removed, Mutual Marine, UFI, and National Union, entered into two additional settlement agreements. Mutual Marine and UFI entered into a "Settlement and Cooperation Agreement" (the "Second Agreement"), under which Mutual Marine agreed to indemnify and defend UFI in National Union's declaratory judgment action. In exchange, UFI agreed that "to the extent [Mutual Marine] pays any judgment or verdict against UFI in the [National Union] Litigation, or pays any settlement of any claim against UFI in the Litigation or for any further liability under the [First Agreement], [Mutual Marine] shall be subrogated to any and all rights of UFI, and/or be assigned such rights by UFI, including any right to pursue claims against GenStar for amounts paid and for attorneys fees and costs . . . ." Second Agreement, ¶ 4.

Then Mutual Marine and National Union entered into a "Settlement and Cooperation Agreement" (the "Third Agreement"), under which Mutual Marine paid National Union $700,000 for the amount National Union had paid to satisfy UFI's obligation to ITO and the City under the First Agreement, and National Union dismissed its suit against UFI and Mutual Marine, assigning the rights it had asserted against General Star in that lawsuit to Mutual Marine.

Following the Second and Third Agreements, then, UFI has been indemnified and National Union has been paid in full. Neither of those parties has an interest in the present appeal. Mutual Marine maintains its suit against General Star for the excess over its one-million-dollar policy limit that it paid to National Union following the Third Agreement to cover UFI's alleged obligation under the First Agreement.

Mutual Marine, as directed by the district court, filed a motion for summary judgment against General Star on the limited issue of whether General Star was directly obligated under the First Agreement to pay the remainder of UFI's seventy-five percent share. In an opinion and order entered July 18, 2007, the district court denied summary judgment, finding that General Star was not obligated to contribute to UFI's three-fourths share directly pursuant to the First Agreement. Nat'l Union Fire Ins. Co. of La. v. Universal Fabricators, Inc., No. 05 Civ. 3418, 2007 WL 2059840, at *5, 2007 U.S. Dist. LEXIS 51925, at *22-23 (S.D.N.Y. July 18, 2007) ("Nat'l Union I"). The court concluded that because General Star was not aware of, did not take part in, and was not a party to the First Agreement, it was not directly bound by its terms. Id. The opinion explicitly refrained from addressing whether General Star was obligated under the terms of the GenStar Policy itself to pay the amount in dispute, and invited General Star to move for summary judgment on that issue. Nat'l Union I, 2007 WL 2059840 at *6, 2007 U.S. Dist. LEXIS 51925 at *26-27 ("The present motion for summary judgment was ...


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