Oliver B. Cannon & Son, Inc. v. Fid. & Cas. Co.

• Decision Date: 16 January 1980
• Docket Number: Civ. A. No. 79-129.
• Parties: OLIVER B. CANNON AND SON, INC., a Pennsylvania Corporation, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, a New Hampshire Corporation, Defendant.
• Court: U.S. District Court — District of Delaware

484 F. Supp. 1375

OLIVER B. CANNON AND SON, INC., a Pennsylvania Corporation, Plaintiff, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, a New Hampshire Corporation, Defendant.

Civ. A. No. 79-129.

United States District Court, D. Delaware.

January 16, 1980.

As Amended on Denial of Motion for Reargument January 16, 1980.

COPYRIGHT MATERIAL OMITTED

Courtney H. Cummings, Jr., Wilmington, Del., for plaintiff.

B. Wilson Redfearn and Colin M. Shalk of Tybout, Redfearn, Casarino & Pell, Wilmington, Del., for defendant.

OPINION

LATCHUM, Chief Judge.

Plaintiff in this action, Oliver B. Cannon and Son, Inc. ("Cannon"), seeks to recover from its insurance carrier, defendant, Fidelity and Casualty Company of New York ("insurer"), sums of money which it allegedly became obligated to pay as damages as the result of a lengthy court battle in the Delaware state courts. Plaintiff also seeks compensation for the costs and expenses of defending those actions as well as exemplary damages. Currently before the Court are plaintiff's motion for summary judgment and defendant's motions for summary judgment and partial summary judgment.

I. The Facts

In order to understand the present action, it is necessary first to describe the events leading up to and involved in the State court litigation and the results of that litigation. Those events are described and reported in three opinions of the Delaware Supreme Court.¹ The following facts are taken from those opinions unless otherwise noted.

Cannon is a Pennsylvania corporation domiciled in Philadelphia, Pennsylvania. In 1969, Dorr-Oliver, Inc. ("Dorr"), a general contractor, engaged Cannon as a subcontractor to prepare and paint the interior linings of certain chemical process tanks. Those tanks were part of a plant for the production of magnesium hydroxide paste which Dorr was constructing for Barcroft Company ("Barcroft") at Lewes, Delaware. Cannon's task under its contract was both to prepare the surfaces of the tanks by removing all rust and foreign materials and to apply linings composed of a polyester resin. Cannon performed this task negligently. The Delaware Superior Court found that it had been guilty of a "multitude of sins" both in the preparation of the surfaces and the application of the lining materials. As a result of Cannon's poor workmanship, the tank linings began to deteriorate almost immediately. Within half a year, Barcroft was forced to close its plant because the linings of several tanks were peeling off in large sheets and the tanks, themselves, were rusting.

Upon requests from Barcroft and Dorr, Cannon performed repair work on all tanks and, in the course of that work, was paid $94,306.34 in inducement money by Barcroft through Dorr. Upon the failure of Dorr and Barcroft to pay an additional $113,914.23, Cannon, through its privately retained attorney, filed suit against them in Delaware Superior Court. The suit was filed in January, 1971.²

Barcroft and Dorr both responded to Cannon's suit by filing counterclaims against Cannon. Barcroft demanded the return of the $94,306.34 in inducement money and also compensation for lost profits. Dorr sought compensation for its own expenses incurred in connection with the repair operations.

The trial was bifurcated. In the first trial, the trial court found partially against Cannon on the issue of liability. On appeal of that decision, the Delaware Supreme Court held that Cannon was entirely at fault for all damages and returned the action to the trial court for a second trial on the issue of damages. Ultimately, after several rounds of appeals, Cannon was held liable to Dorr for $48,324.06 and to Barcroft in the amount of $131,344.94 for the inducement money and expenses. The total amount of liability for lost profits is apparently still being litigated in the state courts.

Defendant had issued two insurance policies to Cannon which are involved in this litigation. One provided comprehensive general liability insurance and included coverage for contractual liability and personal injury liability ("the general liability policy").³ The second was a broad form excess policy ("the excess policy") which provided insurance for any loss in excess of the underlying general liability or any loss not covered by that policy in excess of $10,000.⁴ Cannon had fulfilled all conditions precedent, insofar as all premiums had been paid on the policies and the contract with Dorr had been reported to the insurance company.⁵ Hence, the policies were in full effect and their coverage extended to liability arising out of the Dorr contract.

Cannon notified the defendant that it expected Dorr and Barcroft to file claims against it as early as December 1, 1970. This was before Cannon had even filed its own suit. Arthur P. McDonald, Cannon's Vice-President and Treasurer, kept the defendant apprised of all new developments in the litigation. In a letter dated June 15, 1971, he formally notified the defendant of the counterclaims and requested that it defend against them. This formal request followed numerous oral requests.⁶

The insurer's attitude regarding its obligation to defend against those claims can be described, at best, as one of ambivalence. Although the facts are not clear on the record, an inference could be drawn that the insurer did not make a good faith effort to meet its obligations under the contract, but, rather, in bad faith, tried to avoid them. At the very least, the record reveals a confusion on the part of the insurer so profound as to vitiate its ability to defend Cannon during the first several years of the underlying litigation. The defendant's posture certainly necessitated the hiring of a private attorney to represent Cannon, in, at the very least, the first several years of the litigation.

For purposes of discussing the claims regarding coverage, the claims in the underlying litigation can be put into two classes — the claims against Cannon for lost profits ("the lost profits claims") and the claims which related to costs incurred for the purpose of repairing the damaged tank linings ("the repair claims"). The insurer had a great deal of difficulty in resolving internally the question of whether either of those two categories of claims were covered. At an early point, the insurer consulted outside counsel, the firm of Wilson and Russell, and received an opinion from them indicating that the repair claims were covered but that the lost profits claims were excluded.⁷ The insurer's home office ultimately took the opposite point of view, and, in a letter dated July 18, 1972, informed Cannon that it would provide coverage for the lost profits claim but maintained that certain exclusions applied to the repair claims.⁸ Although the insurer adhered to the latter position from that point forward, the fact that it took over a year and a half to reach that decision raises an inference of a bad faith attempt to use dilatory tactics to avoid contractual obligations.

The July 18, 1972 letter itself contains another statement which could also be considered an indicia of bad faith. The insurer there reported that since its investigation had shown that the contract with Dorr had not been reported, and premium had not been paid, there could be no coverage under the general liability policy. That contention was totally unfounded in fact and the insurer has apparently abandoned that position.⁹

The nature of the insurer's investigation of Cannon's claims further indicates some lack of good faith. For nearly two years after being notified of the counterclaims,¹⁰ the insurer limited its investigation to a review of the contractual documents.¹¹ The insurer refused to investigate the claims of negligence by interviewing Cannon's employees or potential witnesses, or by investigating the site.¹²

The ambivalent attitude of the insurer is further evidenced by its attempts to secure a non-waiver agreement. Because of its own uncertainty regarding the scope of the coverage, the insurer was unwilling to undertake Cannon's defense of the counterclaims without some form of non-waiver agreement. Consequently, on July 20, 1971, such an agreement was submitted to Cannon. In fact, this agreement would have constituted a complete waiver on the part of Cannon of coverage for the repair claims.¹³ Cannon's attorney wisely advised his client not to sign that document.¹⁴ Consequently, the insurer's attorneys did not participate at all in the litigation until a suitable non-waiver form was executed on October 11, 1972.¹⁵

The consequence of that delay was that the insurer's attorneys were able to contribute but little to the preparation for the trial determining liability. By the time that the non-waiver form was executed, Cannon's motion for summary judgment was before the state courts and the insurer decided to forego an extensive investigation and review of the case until a decision came down on the summary judgment motion.¹⁶ That decision was rendered on September 18, 1973, just one month prior to the pre-trial conference.¹⁷ Thus, most of the work on the issue of liability by necessity was performed by Cannon's private attorney. The issues of liability involved in the repair claim were substantially the same as those involved in the lost profits claim.

There exists a dispute of facts as to the extent of the insurer's commitment to defend Cannon even after its attorneys began their participation. Cannon maintained, at oral argument, that it was not dissatisfied with the performance of the insurer's attorneys, the firm of Wilson and Russell. However, Cannon does contend that, throughout the litigation, the insurer was more interested in limiting its own liability than in defending Cannon on the counterclaims.

As mentioned earlier, the insurer entered into the defense immediately prior to the initial trial (the trial on liability). Because of the insurer's limited participation in the preparation of the trial, its participation in the...