AMERICAN F. & C. CO. v. Pennsylvania T. & FM Cas. Ins. Co.

• Decision Date: 06 July 1960
• Docket Number: No. 18074.,18074.
• Citation: 280 F.2d 453
• Parties: AMERICAN FIDELITY & CASUALTY COMPANY, Inc., Appellant, v. PENNSYLVANIA THRESHERMEN & FARMERS' MUTUAL CASUALTY INSURANCE COMPANY et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

280 F.2d 453 (1960)

AMERICAN FIDELITY & CASUALTY COMPANY, Inc., Appellant, v. PENNSYLVANIA THRESHERMEN & FARMERS' MUTUAL CASUALTY INSURANCE COMPANY et al., Appellees.

No. 18074.

United States Court of Appeals Fifth Circuit.

July 6, 1960.

S. F. Memory, Jr., Waycross, Ga., J. Mack Barnes, Waycross, Ga., S. F. Memory, Blackshear, Ga., for appellant; Memory, Barnes & Memory, Waycross, Ga., of counsel.

Larry E. Pedrick, Waycross, Ga., J. H. Highsmith, Baxley, Ga., Milton P. Fields, Rocky Mount, N. C., for Pennsylvania Threshermen & Farmers' Mut. Cas. Ins. Co. and Cargocare Transp. Co., Inc., appellees; Bennett, Pedrick & Bennett, Waycross, Ga., of counsel.

Before CAMERON, JONES and BROWN, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

This is another, and undoubtedly not the last, of those cases of which we have many,¹ in which one insurer having the good fortune to find some other insurer who has written a policy for someone else attempts to engraft itself upon the contract to which it was not a party in the hopes that what it bound itself to do, it need not perform. The result, if successful, is that its contractee, the assured, must look elsewhere for the promised protection.

Streamlining the facts greatly simplifies the problem.² Clay was a certificated motor carrier owning a fleet of tractor-trailer units. American was its insurer under a fleet policy. Britt was likewise a certificated motor carrier. Pennsylvania was insurer for Britt under a similar fleet policy. To accomplish an interstate carriage of tobacco for one of its shippers, Britt leased a unit complete with driver from Clay. While the Clay truck, driven by Clay's general employee, the Driver, was engaged on its interstate voyage, the truck developed mechanical trouble at nighttime. The Driver stopped the truck on a Georgia highway. As thus stopped, without placing out warning flares which were available but not used, the truck partially blocked the highway. A passenger car, whose operator was unaware of the presence of this unlighted truck, smashed into its rear end causing serious injuries to the occupants. Suits were filed by the Damage Plaintiffs against Clay, and later by amendment, against Britt as well. After removal from the state court these damage suits were pending in the Southern District of Georgia at the time the instant cause for declaratory relief was filed in that court.

Clay, at the instigation of American, made formal written demand on Britt and Pennsylvania that they assume the defense of the damage suits then pending against Clay only. Britt and Pennsylvania declined. To avoid defaults, American, for Clay, in Clay's name, thereupon filed answers in the suits of the Damage Plaintiffs.

But the parties had scarcely begun to litigate. Now to that relatively simple tort claim which long ago could have been tried, settled or disposed of, comes action which turned this into a many-sided Donnybrook. For American, defending Clay and supplying it legal counsel in resisting the suits by the Damage Plaintiffs, now turned on its assured and filed this action for declaratory judgment. In it American sued everybody. It sued its own assured Clay. Likewise it sued Britt and Pennsylvania and all of the Damage Plaintiffs.

The refrain of American's complaint was the familiar one: Clay does not have the protection which it thought it bought and paid for, but Clay need not worry since Britt was thoughtful enough to procure insurance and Pennsylvania would take care of Clay as well. The only thing wrong with this was that Pennsylvania agreed only part way — it agreed with Clay that American owed Clay a defense. But it disagreed that Pennsylvania ever would. Clay, the sole victim of these magnanimous assurances, stood alone and helpless in the middle, and had to retain counsel for the preservation of its rights. Catching the spirit of this Kilkenny Fair in which all lash out against one another, it is not surprising that Clay's private counsel, nominally an appellee, now takes on the role of partial ally of American to urge that coverage of Pennsylvania, as well as American, attaches to increase Clay's Coverage A protection limits from $50,000 to $150,000 as to any one person.³

American's objective was based upon the provisions found in both policies,⁴ the mutual reciprocal operation of which, so it contended, would make the Pennsylvania policy primary, and the American policy excess. The practical effect was that American would not be called on to pay claims until the dollar limits of the Pennsylvania policy were first exhausted. In brief the policy construction-application theory of American was this. Britt's Pennsylvania policy automatically insured the owner-lessor (Clay) of any truck leased to Britt just as Clay's American policy automatically extended to the lessee-user (Britt).⁵ The big difference came in the operation of the "other insurance" clause of the endorsement.⁶ The "other insurance" clause covers two situations apparently in recognition of the fact that the basic coverage as thus automatically extended is expected to cover trucks (a) leased to the named insured from others and (b) trucks leased by the named insured to others. As to trucks (a) leased to the named insured, the insurance is pro rata with all other available insurance. But as to trucks (b) leased by the named insured to others, the insurance is to be excess over valid and collectible insurance.

Reducing this to more tangible (and perhaps understandable) terms, this is the way American's analytical process works. Clay is an additional insured under the Pennsylvania policy (see note 5, supra) so that coverage extends to Clay. Ordinarily, this would be borne pro rata since "the insured Clay has other insurance," (see note 6, supra) i. e., with American. But American's hired vehicle coverage of Clay insofar as it relates "to any automobile of the commercial type while leased or loaned to any person or organization, other than the named insured," is only "excess insurance over any other valid and collectible insurance." Thus Clay has no "other insurance against a loss covered by this Pennsylvania policy." Consequently Pennsylvania is liable and there can be no pro rata apportionment.

The District Court never got to the point of determining whether this analysis by American was correct. On the motion of defendants Britt and Pennsylvania, it dismissed the complaint, but without prejudice, on two grounds. First, there was no real controversy between Clay and American, and on realignment of the parties this put Clay, a North Carolina citizen, suing Britt, also a North Carolina citizen. Second, the Court in its discretion considered declaratory relief not appropriate especially since many of the underlying questions would be litigated in the suits by the Damage Plaintiffs. We affirm.

We think it unsound to rest affirmance on lack of diversity jurisdiction. For reasons we later outline, we think that there can be no possible basis for American's denial of its contractual duty of defense. Consequently, it had no right to tell Clay that there was no duty to defend, or that Clay should go elsewhere for the time being. But the fact is that it did so. So much has it done so, that Clay has been required to incur the expense of counsel to secure what the contract plainly called for. There was a real, but legally baseless, controversy between American and Clay. It was not the case of the two joining up against Pennsylvania or Britt or both.⁷

But we think there was more than ample ground for the exercise of discretion in declining declaratory relief as sought, in the time and manner in which it was sought.

The damage suits had never been tried. No one had yet paid or become legally liable to pay. Whether anything will be paid or be legally payable, no one, on this record, yet knows. All that was presented was a question of the defense of these damage suits. American sought a declaration that since, under the unique cross-pollination of the reciprocal-exclusionary incidence of the "other insurance" clause, note 6, supra, it was merely an "excess" insurer, its duty to defend, like the obligation to pay, was excess also.

This is a complete misconception of the nature of the insurer's obligation. It is one the District Court rightly rejected. Once rejected, there was really nothing else presented requiring authoritative direction or resolution. American's policy is something much more than merely to pay.⁸ The obligations set forth in "Insuring Agreements" Part I to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of" injury to persons, are not all. In Part II "Defense, Settlement, Supplementary Payments," American, with respect to claims arising under coverage A, made the absolute undertaking to "(a) defend any suit against the insured alleging such injury * * * or destruction and seeking damages on account thereof, even if such suit is groundless, or false or fraudulent * * *." This part further expressly recognized that the obligation to furnish and pay for such defense is above and beyond the payment of the loss, whether by settlement or judgment. As to it the policy continues "the amounts incurred under this insuring agreement * * * are payable by the company in addition to the applicable limit of liability of this policy."

The obligation to defend is distinct and separate. It is not the less so merely because care is required in the interpretation and application of such an approach. The two are, of course, related in the sense that if the occurrence set forth in the plaintiff's claim is one for which, after a trial and judgment for the damage claimant against the assured, there would be no liability under the policy to pay the claim, no duty to defend ever arose. But they are separate and distinct in the sense that the duty to defend does not depend upon the payment to a damage claimant or the...