Norfolk & W. Ry. Co. v. Hartford Acc. & Indem. Co.

• Decision Date: 29 July 1976
• Docket Number: Civ. No. F 75-95.
• Citation: 420 F. Supp. 92
• Parties: NORFOLK & WESTERN RAILWAY CO., Plaintiff, v. HARTFORD ACCIDENT & INDEMNITY CO., Defendant.
• Court: U.S. District Court — Northern District of Indiana

420 F. Supp. 92

NORFOLK & WESTERN RAILWAY CO., Plaintiff, v. HARTFORD ACCIDENT & INDEMNITY CO., Defendant.

Civ. No. F 75-95.

United States District Court, N. D. Indiana, Fort Wayne Division.

July 29, 1976.

Larry R. Fisher and Russell H. Hart, Lafayette, Ind., Edward L. Murphy, Jr. and Norman E. Baker, Fort Wayne, Ind., for plaintiff.

P. Michael Miller, Fort Wayne, Ind., for defendant.

MEMORANDUM OF DECISION AND ORDER

ESCHBACH, Chief Judge.

This cause is now before the court on plaintiff's motion for summary judgment filed November 10, 1975 seeking judgment on its complaint, and on defendant's motion for summary judgment filed May 27, 1976 seeking judgment on its counterclaim. Because judgment on plaintiff's claim would necessarily be a judgment against defendant on its counterclaim, and vice versa, the respective motions for summary judgment will be treated as cross-motions for summary judgment as to both plaintiff's claim and defendant's counterclaim. As such, for reasons given below, plaintiff's motion will be granted and defendant's motion will be denied.

The facts are not in dispute. Plaintiff is a railroad corporation organized under the laws of Virginia with its principal place of business in that state. Defendant is an insurance company organized as a corporation under the laws of Connecticut with its principal place of business in that state. Both corporations are authorized to do business in Indiana.

On or about January 1, 1971, defendant (hereinafter referred to as the insurer) issued a policy of multiple liability insurance to plaintiff. The policy was issued by one of the insurer's agents in Saint Louis, Missouri. The scope of insurance included "all sums which the insured shall become legally obligated to pay as damages because of . . . bodily injury or . . . property damage to which this insurance applies, caused by an occurrence and arising out of the ownership, maintenance or use . . . of any automobile . . .." Persons insured under this contract included not only plaintiff itself but also "employees of the named insured." As elsewhere explained in the policy, the term "`damages' includes damages for death and for care and loss of services resulting from bodily injury and damages for loss of use of property resulting from property damage."

During the life of the policy, a truck owned by plaintiff and being operated by one of plaintiff's employees was involved in a collision with an automobile operated by Norbert Herman. The collision occurred near Fort Wayne, Indiana. Suit was thereafter filed in an Indiana court by Mr. and Mrs. Herman against the insured (Norfolk & Western) and its employee. Trial was had before the Kosciusko Circuit Court, Civil No. C 73-8, and on June 5, 1975, the jury returned verdicts in favor of the Hermans totaling $67,000 in compensatory damages and $200,000 in punitive damages. Judgment was against both the insured and its employee. The insurer paid in full the compensatory damage award but refused to pay any part of the punitive damages. Ultimately, the insurer and the insured agreed to each pay one-half of the punitive damages, with a reservation of rights to determine coverage in court. The $200,000 amount was subsequently negotiated down to $187,500, with the insurer and the insured each paying $93,750. Plaintiff, the insured, now seeks payment of the $93,750 it paid; the insurer counterclaims for the $93,750 it paid. Jurisdiction under 28 U.S.C. § 1332 (diversity of citizenship) is properly shown.

I

In the exercise of its diversity jurisdiction, a federal court must apply the substantive law of the state in which it sits. Erie R. R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The state's choice of laws rules are among the substantive laws to be thus applied. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

As a general statement, Indiana courts look to the law of the state with the most "intimate contact" with the transaction, although the validity of a contract will generally be determined by the lex loci contractus. W. H. Barber & Co. v. Hughes, 223 Ind. 570, 63 N.E.2d 417, 423 (1945); Prudence Life Insurance Co. v. Morgan, 138 Ind.App. 287, 213 N.E.2d 900, 904 (1966). Here, the validity and nature of the insurance contract are clear. The sole question is whether the insurer may be liable for an award of punitive damages against its insured arising out of an occurrence admittedly within the scope of the policy.

It is important to note that, to an extent, the policy incorporates the substantive law of every state in which the insured's activities may take place. Within the category of compensatory damages, which the contract concededly covers, it would not be argued that only such forms of recovery as may be had in Missouri (the state in which the contract was made) are recoverable under the policy. The policy anticipates that the insurer will respond to whatever damages are made available by the applicable law of the state in which the insured's tort liability arises. In this context, it is important to observe that the insurance contract here has nationwide effect and that it is a standard contract issued by Hartford through diverse insurance agents across the country. Cf. Price v. Hartford Accident & Indemnity Co., 108 Ariz. 485, 502 P.2d 522 (1972) (identical policy).

Whether resolved by application of the older conflicts concepts or by application of Barber's "intimate contact" approach, the applicable law is that of Indiana. Under the older rules, the question is one of illegality of performance: may the contract be applied to an award of punitive damages. Under the Restatement of Conflict of Laws (1934), the relevant question is whether the performance would be legal according to the laws of the state in which the contract is to be performed. Section 347, Illustration 1, of the Restatement gives an example: "The purchase of grain futures is forbidden by the law of X but is legal by the law of Y. A agrees with B in X to purchase grain futures in Y. The bargain is legal." Cf. Vandalia R. Co. v. Kelley, 187 Ind. 323, 119 N.E. 257 (1917). Under the more modern approach, the relevant inquiry involves the relative interests of the various states in regard to the factual contacts involved. Especially in matters such as the insurability against a punitive damage award, the public policy of the state whose tort law imposes the punitive damage liability is most intimately involved. The extent to which a punitive damage award may be shifted away from the wrongdoer by means of insurance may undermine or frustrate the express purposes of allowing punitive damages in the first place. Cf. Restatement (Second) of Conflict of Laws § 6 (1971).

II

The principal question, and the only question seriously in dispute,¹ is whether under the law of Indiana it contravenes public policy for an insured to avoid liability for a punitive damage award by means of insurance. Although the question has arisen with increasing frequency in other states, no Indiana cases directly address the point. Determination of Indiana's public policy by reference to court decisions from other states would be highly inappropriate. There are sufficient guideposts among the reported Indiana cases, however, to allow a likely prediction as to an Indiana court's resolution of the question.

The nature of punitive damages in Indiana has been long established: "Whenever the elements of fraud, malice, gross negligence or oppression mingle in the controversy, the law, instead of adhering to the system or even the language of compensation, adopts a wholly different rule. It permits the jury to give what it terms punitory, vindictive, or exemplary damages; in other words, it blends together the interest of society and of the aggrieved individual, and gives damages not only to recompense the sufferer, but to punish the offender." Taber v. Hutson, 5 Ind. 322, 324 (1854). The purpose of such a rule is to deter such oppressive conduct. See Vernon Fire & Cas. Ins. Co. v. Sharp, 53 Ind.Dec. 44, 52-53, 349 N.E.2d 173 (Ind.1976). Consistent with this view of punitive damages, Indiana courts do not allow recovery of punitive damages where the wrongdoer might be criminally liable for the same act, for to allow double punishment would violate the Indiana Constitution. See Taber, supra; Nicholson's Mobile Home Sales, Inc. v. Schramm, 330 N.E.2d 785 (Ind.App.1975).

Since the strong underlying purpose of the punitive damage award is to deter, the availability of insurance may totally undo the public policy of the state. Thus, "a person should not be permitted to insure against harms he may intentionally and unlawfully cause others, and thereby acquire a license to engage in such activity." Home Insurance Co. v. Neilsen, 332 N.E.2d 240, 244 (Ind.App.1975). So, also, on a guardian's bond, the surety is not obligated to pay a punitive damage award, although compensatory damages must be paid. Peelle v. State ex rel. Hipes, 118 Ind. 512, 21 N.E. 288, 290 (1889) ("It is not the object of the law to punish sureties, but to fairly compensate beneficiaries. A surety does not occupy the position of a guardian who has committed a wrong, although he is responsible for the loss occasioned by that wrong.")

These cases reflect the concern that a punitive damage award may be shifted by insurance or surety, such that the deterrent effect of the award will be lost. To the extent, then, that the law imposes punitive damages upon an insured in order to shape or deter the insured's conduct, the insured may not avoid the penalty by means of insurance.

The rule against shifting the impact of a punitive damage award has an exception, however. An employer may be held liable for a punitive damage award against his agent when the agent acted within the scope of his employment. The exception was developed in terms of a corporation's freedom from criminal prosecution...