797 F.2d 1288 (5th Cir. 1986), 85-2228, Atlantic Mut. Ins. Co. v. Truck Ins. Exchange

Docket Nº:85-2228.
Citation:797 F.2d 1288
Party Name:ATLANTIC MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, Cross-Appellant, v. TRUCK INSURANCE EXCHANGE, Defendant-Appellant, Cross-Appellee.
Case Date:August 22, 1986
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 1288

797 F.2d 1288 (5th Cir. 1986)

ATLANTIC MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, Cross-Appellant,


TRUCK INSURANCE EXCHANGE, Defendant-Appellant, Cross-Appellee.

No. 85-2228.

United States Court of Appeals, Fifth Circuit

August 22, 1986

Page 1289

Charles W. Kelly, James E. Ross, John W. Stevenson, Jr., Houston, Tex., for defendant-appellant, cross-appellee.

John K. Meyer, Houston, Tex., for plaintiff-appellee, cross-appellant.

Appeals from the United States District Court for the Southern District of Texas.

Before WILLIAMS, GARWOOD and JONES, Circuit Judges.

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GARWOOD, Circuit Judge:

This is a suit by Atlantic Mutual Insurance Company (Atlantic) against Truck Insurance Exchange (Truck) arising from Atlantic's settlement of a claim brought against Santini Brothers, Inc. (Santini), which had property damage liability coverage from both insurance companies. Atlantic brought this diversity action seeking contribution from Truck for the settlement funds and defense costs that Atlantic expended on behalf of Santini in the underlying property damage suit against it. Following a bench trial, the district court granted Atlantic a portion of the relief it sought. Truck appeals the district court's determination that its policy covers the loss asserted in the underlying suit against Santini and that Truck shares that liability coverage with Atlantic. Truck also challenges the district court's finding that Atlantic's settlement was reasonable. Atlantic cross-appeals the district court's particular apportionment of the liability and the defense expenses, and the district court's denial of attorneys' fees incurred in the present suit. We affirm.

Facts and Proceedings Below

Prior to the events that resulted in the settlement of the underlying suit against it, Santini had obtained liability insurance coverage for various types of property damage. Atlantic issued a policy to Santini covering certain property damage up to $2,000,000. Santini obtained a similar policy from Truck for $1,000,000 coverage. Santini also procured excess coverage over Truck's primary policy, consisting of a $4,000,000 policy from Aetna Casualty & Surety Company (Aetna) and a $5,000,000 policy from Midland Insurance Company (Midland) for the excess above Aetna's excess coverage. The Aetna policy refers to the Truck policy as underlying insurance, and the Midland policy lists the Aetna policy as underlying insurance.

In 1975, Dresser Industries, Inc. (Dresser) negotiated two contracts with China National Technical Import Corporation (CNTIC), an arm of the government of the People's Republic of China, for the sale and transport of oilfield and related equipment. The contracts required Dresser as seller to arrange for packing of the equipment for transport with materials suitable to prevent damage caused by moisture, rain, rust, or corrosion. In addition, Dresser was obligated to repair, replace, or compensate CNTIC for any damage due to "unsatisfactory packing or defective preservation." Thereafter, Dresser contracted with Santini for export packaging of the materials. The contract contemplated that Santini would crate the materials at its Houston premises and store them until shipment. Santini agreed to use "moisture vapor proof packing." Santini also warranted that all the packing would be performed in a workmanlike manner and agreed to indemnify Dresser against any property damage claims resulting from the Santini work.

Dresser delivered the equipment to Santini's Houston premises from about November 1976 to April 1977. The first packages were completed about February 1977. The equipment was wrapped with moisture vapor proof material and then heat-sealed after desiccant had been placed inside to absorb moisture. In addition, a wooden crate was constructed outside the moisture proof material. As each piece was packed, it was placed in an open yard for storage at the Santini premises in accordance with the Dresser-Santini contract. After the packaging was completed in May 1977, the equipment was shipped from the Houston docks to a Chinese port, except for a small portion, primarily computer equipment, that was shipped by air. The equipment reached its destination by mid-September 1977. Upon arrival, much of the equipment, including that shipped by air, was found to have suffered considerable damage from moisture that had entered and had been trapped inside the packaging materials.

Although Dresser repaired or replaced much of the equipment, CNTIC asserted a claim against Dresser for the remaining moisture damage and the delay in starting operations. This suit ended in a settlement, in which Dresser agreed to deliver

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additional spare parts to CNTIC. Dresser then sued Santini for breach of express warranty and for negligence. Santini requested defense from Truck and Atlantic. Truck denied coverage and refused to provide a defense. Atlantic defended Santini and recommended settlement of the claim. Atlantic advised Truck of its recommendation and asked Truck to participate. After Truck refused, Atlantic paid Dresser $850,000 on behalf of Santini in settlement of the claim. The parties to this suit stipulated that Atlantic also incurred expenses of $46,649.38 in defending Santini and that this amount is fair and reasonable.

Atlantic then brought this suit against Truck, seeking contribution for the settlement funds and the cost of the defense. After a bench trial, the district court awarded Atlantic one-third of the settlement amount, one-half of the defense costs, and prejudgment interest. However, the court denied Atlantic's request for attorneys' fees incurred in the instant suit against Truck.


Choice of Law

Truck first challenges the district court's application of New York law to the case. A federal court must follow the choice-of-law rules of the state in which it sits. Stuart v. Spademan, 772 F.2d 1185, 1193 (5th Cir.1985). Texas has adopted the "most significant relationship" test of the Restatement (Second) of Conflicts Sec. 6 (1971) 1 for determining the applicable law in contracts cases, other than those in which the parties have agreed to a choice of law. Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex.1984). The law of the state with "the most significant relationship to the particular substantive issue" shall govern the dispute. Id. Applying Duncan, the district court concluded that "New York has the most significant contact and interest in this issue since New York is Santini's principal place of business and the bulk of Santini's operations and risks covered are in New York.... New York has a strong interest in seeing that Santini recovers under the policy with Truck."

The substantive issues in this dispute involve interpretation of both the Truck and the Atlantic insurance policies. The district court focused on the state contacts with the Truck-Santini insurance policy. 2 Because Truck argues that its policy does not cover the property damage and, alternatively, that Atlantic's policy is primarily liable, interpretation of the Truck policy is more significant to this dispute between the insurance companies than interpretation of the Atlantic policy. Nevertheless, an examination of the state contacts with reference to the Atlantic-Santini policy reinforces the district court's conclusion because Atlantic is incorporated and has its principal place of business in New York. New York has an interest not only in Santini's recovery, but also in the application

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of its insurance laws to Atlantic's claim against Truck.

Truck asserts that the district court erred in disregarding the state contacts with the Dresser-Santini contract and the injury underlying the Dresser-Santini lawsuit. Truck argues that Texas law should apply because this action is based on the settlement of the Dresser-Santini suit. Texas is the place of negotiation and of performance of the Dresser-Santini contract. Moreover, the settlement of the Dresser-Santini lawsuit was effected in Texas based on an injury that occurred in Texas. In addition, Dresser has its principal place of business in Texas.

Truck relies on Duncan in urging this Court to look to the state contacts with the underlying suit. In Duncan, the widow of a man killed in an airplane crash filed a wrongful death action in Texas against the manufacturer of the airplane. In construing a release agreement arising from the settlement of a prior suit against the airplane owner, the Duncan court considered the state contacts pertaining to the prior settlement and the underlying injury. Id. at 420-22. The expectations of the parties to the release agreement clearly were...

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