Formerly Known As Travel Indem. Co. Of Ill. v. Nat'l Union Ins. Co. Of Pittsburgh

Citation621 F.3d 697
Decision Date15 October 2010
Docket NumberNo. 09-1569.,09-1569.
PartiesTRAVELERS PROPERTY CASUALTY INSURANCE COMPANY OF AMERICA, formerly known as Travel Indemnity Company of Illinois, Plaintiff-Appellant, v. NATIONAL UNION INSURANCE COMPANY OF PITTSBURGH, Pennsylvania; Kansas City Power & Light, Defendants-Appellees, Reliance National Insurance Company, Defendant.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

621 F.3d 697

TRAVELERS PROPERTY CASUALTY INSURANCE COMPANY OF AMERICA, formerly known as Travel Indemnity Company of Illinois, Plaintiff-Appellant,
v.
NATIONAL UNION INSURANCE COMPANY OF PITTSBURGH, Pennsylvania; Kansas City Power & Light, Defendants-Appellees,
Reliance National Insurance Company, Defendant.

No. 09-1569.

United States Court of Appeals,Eighth Circuit.

Submitted: Nov. 17, 2009.
Filed: Sept. 2, 2010.

Rehearing Denied Oct. 15, 2010.


621 F.3d 698

COPYRIGHT MATERIAL OMITTED.

621 F.3d 699

COPYRIGHT MATERIAL OMITTED.

621 F.3d 700
621 F.3d 701

Robert W. Cockerham, argued, Corey L. Kraushaar, Samuel John Vincent, III, on the brief, St. Louis, MO, for appellant.

Melinda S. Kollross, argued, Chicago, IL, Charles J. Rocco, Malcom J. Reilly, on the brief, New York, NY, for National Union Insurance Company.

Brian K. O'Bleness, argued, Robin K. Carlson, on the brief, Kansas City, MO, for Kansas City Power & Light.

Before MELLOY, BEAM, and GRUENDER, Circuit Judges.

MELLOY, Circuit Judge.

Travelers Property Casualty Insurance Company of America (“Travelers”) appeals the district court's adverse grant of summary judgment on its claims against Kansas City Power & Light (“KCPL”) and

621 F.3d 702

National Union Insurance Company of Pittsburgh, Pennsylvania (“National Union”) for $10 million in subrogation proceeds. We affirm in part and reverse in part, holding Travelers, as the excess insurer, is entitled to a priority interest in the subrogation proceeds representing insured losses.

I. Background

KCPL is a public utility company located in Kansas City, Missouri. In February 1999, an explosion occurred at a KCPL generating station, the Hawthorne Generating Station (“Station”). A jury later determined the explosion caused approximately $452 million in total losses. This total loss amount included such items as physical damage to the Station, cleanup and demolition expenses, lost fuel, replacement energy costs, lost profits, and various other expenses. The total loss took into consideration offsets due to decreased operating expenses that normally would have been associated with the Station.

It is undisputed that some of these broad categories of loss were insured and some were not. In fact, the claims KCPL submitted to its insurers totaled only $285 million. Relevant to the present appeal, National Union insured the Station as the primary insurer, providing $200 million in coverage. 1 Travelers served as the excess insurer, providing $100 million in excess coverage. The Travelers policy was a true excess policy providing that coverage did not begin until KCPL's “ultimate net loss,” i.e., KCPL's insured loss, exceeded $200 million. Consistent with this fact, KCPL paid roughly $850,000 to National Union as the premium for the primary policy's first $200 million in coverage and roughly $25,000 to Travelers for the $100 million of excess coverage. Both policies contained subrogation provisions, and, subject to a limited exception, the Travelers policy adopted the form of the National Union policy.

After the explosion, KCPL invited National Union and Travelers to participate in talks regarding potential litigation against third parties and the allocation of litigation expenses and recoveries. KCPL indicated to the insurers that, because it had suffered uninsured and insured losses, it likely had an independent interest in claims against potentially responsible third-parties separate from the insurers' subrogation interests.

An adjuster scheduled a meeting for November 15, 1999, to discuss these issues and notified Travelers of the meeting. Internal communications at Travelers indicate personnel from Travelers received the notice, were aware of the preliminary meeting, and understood subrogation would be a topic of discussion at the meeting. Prior to this time, an adjuster's report had indicated the total insured loss might exceed the first $200 million of coverage provided by National Union and reach into Travelers's coverage. It was not certain, however, that the total insured loss would exceed $200 million, and National Union had not yet paid its policy limits. Travelers took the position that the total insured loss likely would not reach into the excess coverage. According to the appellees, and according to Travelers's own internal written communications, Travelers elected not to participate in the November 15, 1999 subrogation discussions because Travelers did not want to “send the wrong message” by suggesting a belief that the insured loss-the ultimate net loss-would reach into the excess coverage.

621 F.3d 703

In June 2000, National Union and KCPL entered into an allocation agreement (“Allocation Agreement”) regarding subrogation expenses and recoveries. Subject to minor exceptions, National Union and KCPL agreed to apportion subrogation expenses and recoveries between themselves 55% and 45% respectively. The Allocation Agreement contained recitals memorializing KCPL's and National Union's reasons for entering into the agreement. These recitals noted some of the losses were insured, some were uninsured, and KCPL and National Union viewed cooperation in the prosecution of claims against third parties as being in their mutual best interests.

In a September 19, 2000 meeting, KCPL invited Travelers to enter into the Allocation Agreement. Travelers expressly declined in writing in an October 13, 2000 letter stating Travelers did not believe the insured loss would exceed $200 million and did not anticipate making a payment that would give rise to a subrogation interest. Travelers, however, expressly reserved any subrogation right that it may have held, stating, “While the adjustment to date indicates the loss is not likely to exceed $200 million, Travelers reserves its right to participate in the subrogation agreement if the situation changes.” As of that time, KCPL and National Union had not yet filed any actions against potentially responsible third parties, and National Union had not paid KCPL its policy limits.

Litigation then moved forward on two fronts: KCPL and National Union sought recoveries from potentially responsible third parties pursuant to the Allocation Agreement (“Subrogation Litigation”), and KCPL brought suit against National Union and Travelers seeking insurance coverage (“Coverage Litigation”).

In the Subrogation Litigation, National Union and KCPL filed suit against several third parties, all but one of which settled prior to trial. This settlement resulted in the recovery of approximately $126 million. KCPL and National Union divided this settlement amount between themselves according to the Allocation Agreement.

KCPL and National Union proceeded to trial in Missouri state court against the sole remaining tortfeasor, Rockwell Automation. In an August 26, 2002 letter, before the trial against Rockwell Automation, an attorney for Travelers notified KCPL's holding company parent that “Travelers intends to take the position that these recoveries will be netted against any payments that Travelers may ultimately be responsible for on this claim.” The trial resulted in the jury determination, referenced above, that the total loss from the explosion was $452 million. The jury also found KCPL was partially at fault and Rockwell Automation was liable for approximately $97 million. The Missouri trial court reduced that amount to approximately $190,000 based on an interpretation of a contract between KCPL and Rockwell Automation. The Missouri Court of Appeals subsequently reversed the trial court and entered judgment reinstating the jury's $97 million award.

Regarding coverage disputes, KCPL submitted insurance claims to National Union and Travelers for $200 million and $85 million, respectively. KCPL submitted these claims before the Rockwell Automation trial. National Union paid a portion of its policy limits, but contested the balance of the claim. As the excess insurer whose coverage was secondary and supplemental to National Union's unexhausted coverage, Travelers contested KCPL's claim on the excess policy. The insurers disagreed with KCPL's assertions regarding the quantity of loss and the character of certain losses as insured or uninsured.

KCPL then initiated the Coverage Litigation against National Union and Travelers

621 F.3d 704

in state court to resolve the disputed coverage issues. In addition, KCPL asserted a claim against National Union for vexatious refusal to pay. The insurers removed the Coverage Litigation to the United States District Court for the Western District of Missouri.

In the Coverage Litigation, Travelers identified National Union's and KCPL's settlements with responsible third parties as evidence that KCPL's insured loss was less than $200 million. Travelers argued that recoveries from third parties effectively reduced KCPL's “ultimate net loss.”

The district court issued two rulings in the Coverage Litigation addressing the question of whether recoveries from third parties reduced KCPL's “ultimate net loss.” The court framed the core issues as (1) whether KCPL was entitled to declare the nature of recoveries from third parties as representing insured or uninsured losses, and (2) whether the recoveries from third parties represented insured or uninsured losses. The district court determined that KCPL, which undisputedly suffered a total loss in excess of any insurance coverage, had the authority to determine the nature of recovered proceeds as representing payments for insured or uninsured losses. The district court further determined that KCPL exercised this authority when entering into the Allocation Agreement and that the money KCPL received as its share in the $126 million subrogation settlement represented uninsured rather than insured losses. The court stated:

The Allocation Agreement entered into by KCPL and National Union contemplates a recovery of both the insured and uninsured losses suffered by the plaintiffs. Because the suit prosecuted by KCPL and National Union
...

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