Armstrong Cleaners, Inc. v. Erie Ins. Exchange

• Decision Date: 15 March 2005
• Docket Number: No. 1:03CV1721DFHTAB.,1:03CV1721DFHTAB.
• Citation: 364 F.Supp.2d 797
• Parties: ARMSTRONG CLEANERS, INC. and Forest Richard Armstrong and Betty L. Bell Armstrong d/b/a/ Armstrong Cleaners and Muncie One Hour Cleaners, Plaintiffs, v. ERIE INSURANCE EXCHANGE, a member of the Erie insurance Group, Defendant.
• Court: U.S. District Court — Southern District of Indiana

364 F.Supp.2d 797

ARMSTRONG CLEANERS, INC. and Forest Richard Armstrong and Betty L. Bell Armstrong d/b/a/ Armstrong Cleaners and Muncie One Hour Cleaners, Plaintiffs, v. ERIE INSURANCE EXCHANGE, a member of the Erie insurance Group, Defendant.

No. 1:03CV1721DFHTAB.

United States District Court, S.D. Indiana, Indianapolis Division.

March 15, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Thomas A. John, Michael Orville Nelson, Hunsucker & Goodstein, for plaintiffs.

Mark R. Smith, Smith Fisher Maas & Howard, for defendant.

ENTRY ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

HAMILTON, District Judge.

This case presents a recurring conflict of interest question within law's "eternal triangle" — the liability insurance company, the insured, and the insurance defense attorney. The question is whether an insurer's reservation of rights created a conflict of interest sufficient to entitle the policyholders to have their insurer pay attorneys of the policyholders' choice to defend them in the underlying litigation. As explained below, the court finds that the reservation of rights posed, in the terms of Rule 1.7(a)(2) of the Indiana Rules of Professional Conduct, "a significant risk" that representation of the policyholders by attorneys chosen by the insurer would be materially limited by the attorneys' responsibilities to the insurer. As a result, the policyholders are entitled to select their own counsel to defend the underlying claim, subject to reasonable approval by the insurer, with reasonable fees and expenses paid by the insurer.

Plaintiffs Armstrong Cleaners, Inc. and Forest and Betty Armstrong (collectively the "Armstrongs") operated a dry cleaning business in Muncie, Indiana from 1989 until 1996. The Armstrongs are now defendants in lawsuits seeking to hold them responsible for environmental contamination at the sites of two of their cleaning establishments. During the relevant period the Armstrongs were insured under a liability insurance policy issued by defendant Erie Insurance Exchange ("Erie"). The Armstrongs promptly tendered the defense of the case to Erie. Erie agreed to defend the Armstrongs but under a reservation of rights as to coverage and the duty to defend.

Erie insists on using counsel of its choice to defend the Armstrongs in the underlying lawsuits. The Armstrongs contend that counsel selected by Erie will have a conflict of interest because issues as to which Erie has reserved its rights are likely to be litigated and decided in the underlying lawsuits. The Armstrongs have filed suit to force Erie to pay for counsel of their choice. They also assert a claim for bad faith denial of coverage under Erie Insurance Co. v. Hickman by Smith, 622 N.E.2d 515 (Ind.1993). Erie has moved for summary judgment on both issues. The Armstrongs have moved for summary judgment on the issue of selection of counsel. This court has jurisdiction under 28 U.S.C. § 1332.¹

Summary Judgment Standard

The purpose of summary judgment is to "pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Summary judgment is appropriate where the pleadings, depositions, answers to interrogatories, affidavits, and other materials demonstrate that there exists "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). When deciding a motion for summary judgment, the court considers those facts that are undisputed and views additional evidence, and all reasonable inferences drawn therefrom, in the light reasonably most favorable to the non-moving party. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Baron v. City of Highland Park, 195 F.3d 333, 337-38 (7th Cir.1999).

Undisputed Facts

The parties have stipulated to essentially all material facts. Forest and Betty Armstrong operated a family dry cleaning business known at different times as Armstrong Cleaners, Muncie Dry Cleaners, and Muncie One Hour Cleaners in Muncie, Indiana from 1989 through 1996. Stipulated Facts ("SF") ¶¶ 4,5. One of the locations was on Tillotson Avenue in Muncie. SF ¶ 11. From March 27, 1989 through March 27, 1996, the Erie Insurance Company covered the Tillotson location with an Ultraflex Package Policy ("the Policy") issued to the Armstrongs. SF ¶¶ 10-11.²

Coverages "F" and "G" of the Policy protected the Armstrongs from liability arising from personal injury and property damage. These provisions state in relevant part:

We will pay for damages because of personal injury or property damage for which the law holds anyone we protect responsible and which are covered by your policy. We cover only personal injury and property damage which occurs during the policy period. The personal injury or property damage must be caused by an occurrence which takes place in the covered territory.

* * * * * *

We may investigate or settle any claim or suit for damages against anyone we protect, at our expense. If anyone we protect is sued for damages covered by this policy, we will defend with a lawyer we choose, even if the allegations are not true. Our obligation to pay any claim or judgment or defend any suit ends when we have used up our limit of protection by paying judgments or settlements under Coverages F, G, H or I.

Ex. A at 20; Ex. B at 17-18. The Policy defines the term "occurrence" as "an accident, including continuous or repeated exposure to the same general, harmful conditions." Ex. A at 6; Ex. B at 6.

The Policy also contains an exclusion for "expected or intended acts":

We do not cover under Personal Injury Liability (Coverage F), Property Damage Liability (Coverage G) and Medical Payments (Coverage I):

(1) injury or damage expected or intended from the standpoint of anyone we protect. This does not apply to personal liability or property damage resulting from your protecting persons or property.

Ex. A at 21; Ex. B at 18.

The Policy also contains "pollution" exclusions:

We do not cover under Personal Injury Liability (Coverage F) and Property Damage Liability (Coverage G):

* * * * * *

(2)(a) damages arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:

1. at or from premises you own, rent or occupy;

2. at or from any site or location used by or for you or others for the handling, storage, disposal, processing or treatment of waste;

3. which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for you or any person or organization for whom you may be legally responsible; or

4. at or from any site or location on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations:

a. if the pollutants are brought on or to the site or location in connection with such operations; or

b. if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

Ex. A at 22; Ex. B at 19. "Pollutants" are defined as "any solid, liquid, gaseous or thermal irritant or contaminant; including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned, or reclaimed." Ex. A at 6; Ex. B at 6.

The Armstrongs leased the Tillotson location from the property's owner, Mary Ivey. Before and after the lease with the Armstrongs, Ivey leased the property to Ronald and Carol Ray, who also operated a dry cleaning business at the site. Exs. C, D. In 2002, the Indiana Department of Environmental Management notified Ivey and the Rays that the Tillotson location was a potential source of soil and groundwater contamination and that they were "potentially responsible parties" ("PRPs") pursuant to Indiana law. Id. Ivey filed a complaint in the Southern District of Indiana on September 4, 2002 for damages and declaratory relief against her insurance carrier, State Farm Insurance, relating to the alleged contamination at the Tillotson location.³

State Farm then filed a third party complaint on May 22, 2003 for a declaratory judgment and damages against Muncie Dry Cleaners, the Rays, the Armstrongs, and their insurers. SF ¶¶ 15-18, Exs. C, D. State Farm claims that the Armstrongs and other defendants are "responsible for the investigation and environmental cleanup, and all other costs relating to the existence of contamination at or from the Property arising from dry cleaning chemicals" at the Tillotson location, and that State Farm is entitled to contribution "from other insurance carriers and/or other responsible parties, including but not limited to, Ray and/or Armstrong." SF ¶ 18, Ex. D. State Farm brought its third-party complaint against the Armstrongs pursuant to Ind.Code §§ 13-30-9-2, 13-30-9-3, and 13-30-9-5, discussed in detail below. Ex. D, ¶¶ 33-35.

The Armstrongs notified Erie of the third party complaint by letter dated June 4, 2003, and asked Erie to defend them. SF ¶ 19, Ex. E. On June 18, 2003, Erie responded in two ways. First, at Erie's request, attorney John Trimble of the firm of Lewis & Wagner entered an appearance for the Armstrongs in the State Farm matter. Second, Erie sent a letter to the Armstrongs stating that it would defend them in the State Farm litigation, but under a reservation of rights. The letter stated that Erie reserved all rights to deny "liability and coverage" for the Tillotson location, pending investigation of grounds for potential denial of coverage. As grounds for potential denial of coverage, the letter identified: (a) the Policy's definition of a covered "occurrence," (b) the Policy's "expected or intended acts" exclusion, and (c) the Policy's "pollution" exclusion. Erie also included a "blanket"...