Liberty Mut. Fire Ins. Co. v. Canal Ins. Co.

• Citation: 177 F.3d 326,1999 WL 332704
• Decision Date: 26 May 1999
• Docket Number: No. 98-60236,98-60236
• Parties: LIBERTY MUTUAL FIRE INSURANCE COMPANY, Plaintiff-Appellee, v. CANAL INSURANCE COMPANY, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 326

177 F.3d 326

LIBERTY MUTUAL FIRE INSURANCE COMPANY, Plaintiff-Appellee, v. CANAL INSURANCE COMPANY, Defendant-Appellant.

No. 98-60236.

United States Court of Appeals, Fifth Circuit.

May 26, 1999.

Lawrence D. Wade, Robert Brittain Virden, Campbell, DeLong, Hagwood & Wade, LLP, Greenville, MS, for Plaintiff-Appellee.

John B. MacNeill, Kenneth Charles Miller, MacNeill & Buffington, Flowood, MS, for Defendant-Appellant.

Appeal from the United States District Court for the Southern District of Mississippi.

Before KING, Chief Judge, and REAVLEY and BENAVIDES, Circuit Judges.

REAVLEY, Circuit Judge:

In this insurance coverage dispute, plaintiff-appellee Liberty Mutual Fire Insurance Company ("Liberty Mutual") sued defendant-appellant Canal Insurance Company ("Canal") seeking, inter alia, (1) a declaratory judgment that Canal breached its duty to defend Anderson-Tully Company ("ATCO") in an underlying lawsuit arising from an automobile accident, and (2) recovery of the reasonable attorneys' fees and expenses incurred in defending ATCO in the underlying litigation, the amount paid to settle the claims against ATCO before trial, and prejudgment interest. Canal responded by (1) asserting that ATCO was not an insured under the Canal policy, alternatively, that any coverage for ATCO was excess to the primary coverage provided by Liberty Mutual, and that the Liberty Mutual policy provided primary or co-primary coverage for J.W. McConnell ("McConnell") ¹ and Wilmer D. Wilson ("Wilson"), the two other defendants in the underlying lawsuit, and (2) seeking recovery of the attorneys' fees and expenses incurred in the defense of McConnell and Wilson in the underlying suit, the amount of the judgment paid by Canal on behalf of McConnell and Wilson, and prejudgment interest. Considering cross-motions for summary judgment, the district court granted summary judgment for Liberty Mutual and against Canal on all issues and awarded damages to Liberty Mutual, which included the attorneys' fees and expenses incurred to defend ATCO, the settlement amount paid on behalf of ATCO, and prejudgment interest thereon from the date of each payment. We agree with the holdings on the policy coverages and affirm Liberty Mutual's recovery of its fees and expenses paid to defend ATCO. We modify the judgment, however, to eliminate the recovery by Liberty Mutual of the amount it paid to settle the claims against ATCO, because that settlement was not causally connected to Canal's breach of its duty to defend ATCO.

I. FACTUAL & PROCEDURAL BACKGROUND

McConnell is a contract logger whose business entails cutting trees, converting them into forest products, and transporting logs to his customers' sawmills. ATCO is in the business of lumber production and operates several sawmills. In April 1993, McConnell and ATCO entered into a Cutting and Hauling Agreement (the "Agreement"), whereby McConnell agreed to "furnish and provide all labor, tools, materials and equipment for the cutting and converting in[to] sawtimber and other products, all trees that have been designated by Anderson-Tully for such purposes" and "to cut, process, load, transport and deliver" such products to ATCO sawmills or log dumps. Under the terms of the Agreement, ATCO had the right to inspect McConnell's operations to ensure compliance with the Agreement; but ATCO had no right to control the time, manner, or method by which McConnell fulfilled his obligations under the contract and had no right to select or control the activities of McConnell's employees. The Agreement did not require McConnell to use any particular vehicle to fulfill the contractual transportation and delivery obligations. Nor did it entitle ATCO to use or operate any vehicles owned by McConnell or to select the delivery routes taken by McConnell or his employees. During the relevant time period, Canal provided $300,000 of primary and excess automobile liability insurance to McConnell in connection with McConnell's logging business. Likewise, Liberty Mutual provided ATCO with $1,000,000 of business automobile liability coverage.

This dispute stems from an August 1993 accident in which Wilson, a McConnell employee, negligently collided with a vehicle driven by Jane Love ("Love"), killing Love and seriously injuring her husband Homer Love. At the time of the accident, Wilson was driving a McConnell truck hauling an empty trailer on his way to pick up a load of timber to deliver to ATCO's sawmill pursuant to the Agreement. Love's beneficiaries and Homer Love filed a wrongful death and negligence suit against Wilson, McConnell, and ATCO (the "Carlock litigation" or the "Carlock plaintiffs"). The Carlock plaintiffs alleged that both McConnell and ATCO had a master-servant relationship with Wilson and were therefore liable for Wilson's negligence. Liberty Mutual demanded that Canal defend and indemnify ATCO under the Canal policy asserting that the claim brought ATCO under the policy's definition of an "insured" because the Carlock complaint alleged that ATCO was vicariously liable for Wilson's negligence. Canal refused, asserting that ATCO was using the McConnell truck pursuant to a lease or contract of hire, and therefore the E-45 Truckman's Endorsement attached to the Canal policy excluded coverage for ATCO. Additionally, Canal asserted that the Liberty Mutual policy provided coverage for McConnell and Wilson and demanded that Liberty Mutual provide their defense. Liberty Mutual denied Canal's request.

Canal defended McConnell and Wilson in the Carlock litigation and attempted to settle the suit by offering its combined $300,000 policy limit. The Carlock plaintiffs, however, were unwilling to settle the suit for this amount. Liberty Mutual undertook ATCO's defense and moved for summary judgment, asserting that McConnell was an independent contractor and therefore ATCO was not liable for the negligence of Wilson, McConnell's employee, because there was no master-servant relationship. After the motion for summary judgment was denied, Liberty Mutual negotiated and settled the claims against ATCO for $112,500 in order to reduce its potential liability for a verdict in excess of Canal's $300,000 policy limit. The parties agree that, even assuming the Canal policy provided primary coverage for ATCO, the Liberty Mutual policy provided excess coverage and consequently, Liberty Mutual would be obligated to pay on behalf of ATCO any adverse judgment in excess of $300,000, up to the stated Liberty Mutual policy limit. McConnell and Wilson proceeded to trial and were found liable for damages in excess of $513,000, for which Canal paid its full policy limits, leaving those defendants liable for the excess.

Liberty Mutual, as equitable subrogee, filed the instant action against Canal for breach of its duty to defend ATCO, seeking, inter alia, the attorneys' fees and expenses incurred in the defense of ATCO the $112,500 it paid to settle the Carlock litigation, and prejudgment interest thereon from the date each payment was made. Canal counter-claimed, asserting that Liberty had breached its duty to defend McConnell and Wilson and sought to recover, inter alia, the attorneys' fees and expenses incurred in the defense of McConnell and Wilson, the amount paid as a result of the judgment against McConnell and Wilson, and prejudgment interest thereon. Considering cross-motions for summary judgment, the district court held that (1) ATCO was insured under the Canal policy and was not using the McConnell truck pursuant to a lease, contract of hire, or similar agreement; (2) Liberty Mutual had no duty to defend McConnell and Wilson under its policy; (3) as a result of its breach of the duty to defend ATCO, Canal was liable for the attorneys' fees and defense costs incurred by Liberty Mutual, as well as the $112,500 paid to settle the claims against ATCO; and (4) Liberty Mutual was entitled to prejudgment interest from the date each payment was made. Canal appeals each of these rulings. For the reasons discussed below, we reverse that portion of the judgment awarding the $112,500 to Liberty Mutual and affirm the judgment as modified.

II. ANALYSIS

A. Standard of Review

We review the district court's summary judgment ruling de novo, applying the same standard as the district court. ² Summary judgment is proper if, viewing the summary judgment record in the light most favorable to the nonmovant, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. ³ In this case, there are no disputed factual issues, only questions of law concerning the interpretation of the Canal and Liberty Mutual insurance contracts, which we review de novo. ⁴

In this diversity action, we look to Mississippi law for the legal standards governing insurance contract interpretation. The applicable principles are succinctly set forth in Canal Insurance Company v. T.L. James & Company, Inc. ⁵

Mississippi's law recognizes the general rule that provisions of an insurance cont[r]act are construed strongly against the drafter. Consistent with this principle, insuring clauses are construed broadly to effect coverage, and exclusionary clauses that restrict coverage are construed narrowly against the insurer. So, to benefit from an exclusionary provision in an insurance contract, the insurer must show that the exclusion applies and that it is not subject to any other reasonable interpretation that would afford coverage. Nationwide Mut. Ins. Co. v. Garriga, 636 So.2d 658 (Miss.1994). The court must strive to give effect to the parties' intention, as expressed by the plain language of the policy, but where the[re] are two or more reasonable interpretations of a clause, the court will adopt the interpretation that provides coverage. Nationwide Mut. Ins. Co. v. Garriga, 636 So.2d 658 (Miss.1994). Moreover, any doubt as to the existence of a defense obligation is likewise resolved in favor of the insured. Rhodes...