Bartholomew v. Ins. Co. of North America, Civ. A. No. 76-0343.

• Decision Date: 04 November 1980
• Docket Number: Civ. A. No. 76-0343.
• Parties: George BARTHOLOMEW, Gregory Glynn v. INSURANCE COMPANY OF NORTH AMERICA, St. Paul Fire and Marine Insurance Company, Appalachian Insurance Company and Affiliated FM Insurance Company.
• Court: U.S. District Court — District of Rhode Island

502 F. Supp. 246

George BARTHOLOMEW, Gregory Glynn v. INSURANCE COMPANY OF NORTH AMERICA, St. Paul Fire and Marine Insurance Company, Appalachian Insurance Company and Affiliated FM Insurance Company.

Civ. A. No. 76-0343.

United States District Court, D. Rhode Island.

November 4, 1980.

Harry W. Asquith, Edward W. Moses, Providence, R. I., Francis J. O'Rourke, Boston, Mass., for plaintiffs.

Kenneth P. Borden, Providence, R. I., for defendants.

MEMORANDUM AND ORDER

PETTINE, Chief Judge.

This is a diversity action brought by plaintiffs, residents of Massachusetts and Connecticut, against four insurance companies, none of which are incorporated in or have their principal place of business in either of these two states.¹ The question presented is which of the defendant insurers (if any) is liable for a $300,000 judgment obtained by the plaintiffs against New England Robo-Wash, Inc. and Robo-Wash Inc. The latter are two related corporations, one or both of which were insured by each of the defendant companies at some point during the period from 1971 to 1975.

Insurance Company of North America ("INA") and St. Paul Fire and Marine Insurance Company ("St. Paul") have settled with plaintiffs, and the claims against them have been dismissed with prejudice. The claims against the remaining two insurers, Appalachian Insurance Company ("Appalachian") and Affiliated FM Insurance Company ("Affiliated") are before the Court on cross motions for summary judgment. An agreed statement of facts has been submitted by the parties. For the reasons given below, defendants' motions for summary judgment are hereby granted, and plaintiffs' motion is denied.

The Facts

In 1971, George Bartholomew and Gregory Glynn formed a partnership to open an automated carwash in Willamantic, Connecticut. Bartholomew, who had experience in the carwash business, proposed that they obtain the necessary equipment from New England Robo-Wash, Inc. ("New England Robo"). Accordingly, the partners contracted to purchase from New England Robo a new type of automatic carwasher called a "spyder", along with plans and specifications for a building to house it. The equipment and plans were to be supplied by Robo-Wash, Inc., ("Robo"), a company located in Kansas City, Missouri, and related in some way to New England Robo. Robo was to install the equipment in a building constructed by plaintiffs.

Trouble started from the moment the equipment arrived in the spring of 1972. The partners discovered that Robo had supplied the wrong plans, so that the "spyder" would not fit into the building they had provided. In order to install the unit, Robo employees made several crude and unsatisfactory modifications to the structure. These makeshift changes did not accommodate the unit with complete success, and they subsequently caused numerous problems. When the unit began functioning in April, 1972, other difficulties quickly appeared. The "spyder" broke off car antennas, side mirrors, and chrome; damaged windshields, roof racks, and grills; squirted oil on cars and scratched their finishes; and occasionally sent an unsuspecting auto careening into the sides of the building. Plaintiffs had difficulty getting parts for the temperamental unit, and it frequently was inoperative. Within a month of the opening, Glynn, in a letter to his lawyer, estimated that the partners had already lost over $7500 in repair expenses, lost business and loss of good will.

Understandably upset by the damage that the "spyder" was wreaking on their customers' cars, their reputation in the community and their hopes of a profitable enterprise, plaintiffs were in constant contact with Robo and New England Robo, asking advice and demanding assistance. The response was half-hearted from the outset, and, within a short time, it disappeared altogether. In April 1973, an exasperated Bartholomew wrote to Robo's president, "Having been in the carwash business for five years, I've seen a lot of various types of equipment, and this Spyder has got to be the most worthless piece of junk that I've ever seen." After detailing the high incidence of breakdowns and damage to customer cars, and the inability to find replacement parts or get prompt servicing, Bartholomew stated, "We are convinced that the Spyder is totally useless and can cause nothing but harm and loss to us to continue to use it under any circumstances." He demanded that Robo remove the unit and replace it with another, reputable brand of equipment; he warned that the partners would sue if not "immediately advised of your intent to make good".

Robo failed to propose a satisfactory solution and, on February 26, 1974, plaintiffs filed suit in this Court.² According to Glynn's deposition testimony, the partners had given up on the possibility of Robo's voluntary assistance and took this step to force the company to make good their losses. Their original complaint alleged Robo's repeated representations as to the suitability and fitness of the "spyder" unit and then charged:

The building and the "Spyder Unit" were in fact not suitable, but were unworkmanlike, faultily and poorly designed, manufactured, assembled, and installed, unfacile, and unsoundly built, and were not in accordance with the specifications and intentions agreed upon between the plaintiffs and the defendants.

In consequence thereof, the plaintiffs have been unable to properly function as a "Robo-Wash" licensee and franchisee, in that the "Spyder Unit" frequently is broken down and inoperative, inflicts property damage upon vehicles of customers being washed within the unit, and otherwise has never functioned in accordance with the intended purpose agreed upon between the plaintiffs and the defendants.

The plaintiffs have repeatedly requested the defendants to remedy the aforesaid defects; to remove the said unit; to rescind the agreements between the parties, or otherwise to make fair and equitable compensation to the plaintiffs for their expenditures of time, money and effort and their loss of good will and business reputation, but the defendants have continually and persistently failed and refuse to remedy the said defects and the damages of the plaintiffs.

Plaintiffs sought special damages of $35,000, for initial investment and ongoing out-of-pocket expenses, and compensatory damages of $250,000, for misrepresentation and breach of contract, expenditure of time and effort, value of services and material, loss of profits, and damage to good will and business reputation.

Three months after suit was filed, Appalachian and Affiliated entered the picture. Both companies issued to Robo a comprehensive insurance policy effective June 1, 1974. Affiliated provided the primary liability coverage, while Appalachian supplied excess liability, or "umbrella", coverage. Both policies expired June 1, 1975. Apparently neither insurer knew of the pending litigation at the time the policies were issued. Prior to June 1, 1974, Robo and/or New England Robo had been insured for various periods by INA, St. Paul and Continental Insurance Company.³

In September 1974, the carwash shut down completely. According to the agreed statement of facts, "The decision was made to close down the operation `when the thing just stopped running'. It was at that point that too many things went wrong all at once, and there was no way to get parts to put it back in operation.... Bartholomew and Glynn were getting no support from Robo (i. e., technical help and repair assistance) at the time of the closedown, and it became impossible to locate suppliers of components." The carwash sat idle for seven months; finally, in the spring of 1975, the "spyder" was removed and deposited in a cow pasture.

Meanwhile, discovery and trial preparation were proceeding. In February 1975, Robo's counsel notified Appalachian of plaintiffs' suit and forwarded a copy of the summons and complaint. Appalachian privately determined that, for several reasons, its policy did not provide coverage. In its response to Robo, however, Appalachian asserted only one reason for denying liability: "After a thorough review of the suit papers, it would appear that the matters in controversy occurred prior to Appalachian's coverage. It should further be noted that the suit papers are dated February 27, 1974." (emphasis added).⁴ Robo's attorney contested the "no coverage" determination, pointing out that plaintiffs' alleged damages were continuing in nature and would have occurred, at least in part, in the period after June 1, 1974. In the correspondence between Robo and Appalachian, no mention was made of the shutdown in September 1974.⁵

In April 1975, Robo's counsel notified Affiliated of the pending action. Like Appalachian, Affiliated made a private determination that there were several reasons why its policy did not provide coverage. However, it never notified Robo that it was denying coverage. Its response merely stated, "Inasmuch as we are receiving this report of loss quite some time after the accidents occurred, we are conducting our investigation under a full Reservation of Rights." Although Affiliated promised to advise Robo "as to our intentions on defending this matter" as soon as the investigation was completed, Affiliated never again contacted Robo about the case despite Robo's continued inquiries.⁶ Once again, it appears that the September 1974 shutdown was not mentioned in the interchange between Robo and its insurer.

Trial of the case began on July 21, 1975. Neither Affiliated nor Appalachian appeared to participate or defend.⁷ After seven days of testimony revealed considerable information about the September 1974 closing of the carwash, plaintiffs moved for leave to amend their complaint to conform to the evidence. Leave was granted, and plaintiffs filed an amended complaint whose allegations centered around the shutdown. The pertinent paragraphs asserted:

In the course of the operation of the car wash facility as a result of

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