Asher v. Unarco Material Handling, Inc.

• Decision Date: 28 July 2010
• Docket Number: Civil Action No. 06-548-ART
• Citation: 737 F.Supp.2d 662
• Parties: William H. ASHER, et al., Plaintiffs, v. UNARCO MATERIAL HANDLING, INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

737 F.Supp.2d 662

William H. ASHER, et al., Plaintiffs,

v.UNARCO MATERIAL HANDLING, INC., et al., Defendants.

Civil Action No. 06-548-ART.

United States District Court,

E.D. Kentucky,

Southern Division,

London.

July 28, 2010.

Charles C. Adams, Jr., Thomas K. Herren, Herren & Adams, Lexington, KY, Don Russo, Lynn L. Audie, Don Russo, PA, Elizabeth Russo, Russo Appellate Firm, Miami, FL, Bruce Clark Batten, II, Martin & Vincent, Ashland, KY, for Plaintiffs.

Carl Norman Frazier, David C. Schwetschenau, Eileen M. O'Brien, Perry M. Bentley, Todd S. Page, Stoll Keenon Ogden, PLLC, Lexington, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

AMUL R. THAPAR, District Judge.

This case presents an interesting choice of law question—whose law should the Court apply when the forum state (Kentucky) has minimal interests and the competing state (Illinois) does not have much of an interest either. While at first blush, this appears to be a difficult question, if Kentucky's presumption for its own law means anything, it means that a court must apply Kentucky's law when there are not overwhelming interests to the contrary.

Background

This story begins in 2005. At that time, Atlas, an Illinois corporation, sold wire deck and provided rack repair services. R. 794, Ex. A at 14. With the help of an Illinois brokerage firm and a Chicago wholesale broker, Atlas searched for general liability insurance coverage. Because it did business all over the United States, Atlas's insurance proposals listed dozens of insured premises and additional insureds in different states. Atlas executed a contract with Lexington Insurance Company ("Lexington") providing coverage from November 2005 to November 2006. R. 794, Ex. K ("Lexington Policy") at 2. It included fourteen additional named insureds and entities in thirty-nine different states. R. 794, Ex. R (Schedule of Additional Interests). The policy was paid for in Illinois and taxes were paid to the state of Illinois. R. 794, Ex. C ("Mesirow Dep.") at 23. Atlas and Lexington did not have any direct contact before this litigation began; they worked only through the brokers. R. 794, Ex. A at 11-12; R. 794, Ex. L ("Unarco Dep.") at 24.

In October 2005, Wal-Mart hired Unarco Material Handling, Inc. ("Unarco") to repair, replace, and install storage racks at its London, Kentucky Distribution Center. Unarco subcontracted the rack repair work to Atlas, with whom it had a long-standing business relationship. See R. 794, Ex. N; Unarco Dep. at 18. Like Atlas, Unarco completed this type of work throughout the country. Unarco Dep. at 18-19. Unarco faxed Atlas a "Proposal and Subcontract," as well as a "Purchase Order" dated October 31, 2005. R. 794, Ex. N at 6-7 (capitalization omitted). The letter sent with these materials stated that "[a]ll insurance coverage must be up to date, and a copy must be in the Unarco file before any work can begin. Please take time to verify that Unarco has the most recent insurance certificate." See id. at 2. The materials identified Unarco as a Tennessee corporation and dictated that the "contract shall be governed by and enforced in accordance with the laws of the State of Tennessee." See R. 794, Ex. N at 13 ¶ 19. Unarco did not request to see Atlas's actual insurance policy and had nofurther discussions with Atlas regarding its coverage requirements. Unarco Dep. at 26-27.

Lexington had no knowledge of Atlas's involvement with the Wal-Mart rack repair operations before the tort complaint was filed in this litigation. Atlas did not add Unarco as a named additional insured under the policy in 2005 or 2006. Mesirow Insurance, the brokerage firm, prepared certificates of insurance for Unarco as evidence of Atlas's coverage for each policy period from 2002 to 2008. See R. 794, Exs. T, U, V, W, and X. In Atlas's August 2005 Schedule of Certificate Holders under the policy, Unarco was not listed as an additional insured but as one of 342 certificate holders located across various states. R. 794, Ex. S at 18 ("This certificate is issued as evidence of coverage.").

Meanwhile, Atlas sub-contracted its installation work to Rack Conveyor Installations, Inc. ("RCI"). Work began on November 29, 2005. R. 1, Ex. A ¶¶ 32-33. The companies performed their work inside a refrigerator/freezer building at the Wal-Mart Distribution Center until December 12, 2005, when Wal-Mart realized that its employees, including the plaintiffs, were suffering symptoms due to dangerous and harmful conditions inside the building. Id. ¶ 34. In November 2006, the plaintiffs filed suit against Unarco and Atlas. See R. 1, Ex. A. Atlas filed a third-party complaint against RCI, R. 24, and Unarco filed cross-claims for contractual and common law indemnity against RCI, R. 67. The case eventually proceeded to trial in November 2008, and after six weeks of testimony, the parties all reached various agreements and settled the lawsuit.

In February 2009, Unarco filed an intervening complaint against Lexington for breach of contract, common law bad faith, and violation of the Unfair Claims Settlement Practices Act. R. 737. In October 2009, Unarco filed a motion for summary judgment on these claims, arguing that it was entitled to recovery as an additional insured under the Lexington/Atlas insurance contract. R. 767. Based on the policy, Unarco is only an additional insured if its liability is "arising out of" Atlas's work. Lexington Policy, Endorsement 11. It became clear that the choice of law issue was central to resolving the dispute. The Court dismissed the summary judgment motion without prejudice in order to consider the choice of law question. R. 777. Unarco argues that Kentucky law, the law of the place where the underlying tort occurred, should apply. R. 793, R. 800. Lexington argues that Illinois law, the state of the named insured and where the contract was negotiated, should apply. R. 794, R. 799.

Choice of Law Rules

When determining which state's substantive law to apply, federal courts sitting in diversity look to the conflict of laws rules in the forum state, in this case, Kentucky. Hayes v. Equitable Energy Res. Co., 266 F.3d 560, 566 (6th Cir.2001) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Macurdy v. Sikov & Love, P.A., 894 F.2d 818, 820 (6th Cir.1990)). At the outset, a strong preference exists in Kentucky for applying Kentucky law. "On at least two occasions, [the Sixth Circuit has] noted this provincial tendency in Kentucky choice-of-law rules." Wallace Hardware Co. Inc. v. Abrams, 223 F.3d 382, 391 (6th Cir.2000) (citing Adam v. J.B. Hunt Transp., Inc., 130 F.3d 219, 230-31 (6th Cir.1997); Harris Corp. v. Comair, Inc., 712 F.2d 1069, 1071 (6th Cir.1983)).

The Court only needs to go through the choice of law analysis when a conflict occurs between two states' laws. Cf. Williams v. Toys "R" Us, 138 Fed.Appx. 798, 803 (6th Cir.2005). If therewere no conflict, Kentucky law would apply.¹ Here, a conflict exists between Illinois and Kentucky principles of contract interpretation. The Lexington policy would be interpreted differently in each state. Kentucky approaches all contract disputes from the reasonable expectations of the parties and resolves ambiguities in favor of the insured; it does not have a particular stance on how to analyze "arising out of." ² Illinois, on the other hand, applies a fact-specific "but for" causation test to determine whether Unarco has additional insured rights under the Lexington policy.³ Therefore, the Court applies Kentucky choice of law principles to this dispute.

Most Significant Relationship Test

In Kentucky, the Restatement's "most significant contacts" test applies to contract disputes. Saleba v. Schrand, 300 S.W.3d 177, 180-81 (Ky.2009) (citing Restatement (Second) of Conflict of Laws (1971) [hereinafter RST] ). "The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6." RST § 188(1). "Kentucky law will apply to a contract issue if there are sufficient contacts and no overwhelming interests to the contrary...." Wallace Hardware, 223 F.3d at 391 (quoting Harris, 712 F.2d at 1071) (citing Breeding v. Mass. Indem. and Life Ins. Co., 633 S.W.2d 717 (Ky.1982)); cf. Weingartner Lumber & Supply Co., Inc. v. Kadant Composites, LLC, No. 08-181, 2010 WL 996473, at *3 (E.D.Ky. Mar. 16, 2010) (citations omitted);Dunn v. Cintas Corp. No. 2, No. 8-CV-00148, 2009 WL 4060481, at *2 (W.D.Ky. Nov. 20, 2009).⁴ Thus, there is a strong presumption in favor of applying Kentucky law unless Illinois has an overwhelming interest to the contrary.

When using the Restatement framework, a court must "balance principles, policies, factors, weights, and emphases to reach a result, the derivation of which, in all honesty, does not proceed with mathematical precision." Int'l Ins. Co. v. Stonewall Ins. Co., 86 F.3d 601, 606 (6th Cir.1996). The § 6(2) principles used to identify the state with the most significant relationship are:

(a) the needs of the interstate and international systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,

(d) the protection of justified expectations,

(e) the basic policies underlying the particular field of law,

(f) certainty, predictability and uniformity of result, and

(g) ease in the determination and application of the law to be applied.

RST § 6(2). When applying the § 6 principles, § 188(2) requires that courts consider the following contacts: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business...