Capital Environmental Services v. North River Ins.

• Decision Date: 28 February 2008
• Docket Number: Civil Action No. 1:07cv788.
• Citation: 536 F.Supp.2d 633
• Parties: CAPITOL ENVIRONMENTAL SERVICES, INC., Plaintiff, v. NORTH RIVER INSURANCE CO., Defendant.
• Court: U.S. District Court — Eastern District of Virginia

536 F.Supp.2d 633

CAPITOL ENVIRONMENTAL SERVICES, INC., Plaintiff, v. NORTH RIVER INSURANCE CO., Defendant.

Civil Action No. 1:07cv788.

United States District Court, E.D. Virginia, Alexandria Division.

February 28, 2008.

COPYRIGHT MATERIAL OMITTED

Stephen Anthony Horvath, Trichilo Bancroft Mcgavin Horvath & Judkins PC, Fairfax, VA, for Plaintiff.

Craig James Franco, Odin Feldman & Pittleman PC, Fairfax, VA, for Defendant.

MEMORANDUM OPINION

T.S. ELLIS, III, District Judge.

At issue on cross-motions for summary judgment in this insurance coverage dispute are the following questions:

1. Whether an insurer has a duty to defend its insured against a third party complaint where, as here, the third party complaint fits within the policy coverage, but the insurer contends that facts extrinsic to the third party complaint preclude coverage;

2. Whether a policy exclusion for "operations including ... transportation, treatment and disposal, documentation and management of waste handling" clearly and unambiguously applies to bar coverage for injuries sustained by third parties in a traffic accident involving an empty waste disposal truck operated by the insured's subcontractor; and

3. Whether the insurer acted in bad faith in denying its insured a defense.

For the reasons that follow, summary judgment on plaintiffs duty to defend claim must be granted in favor of plaintiff and denied as to defendant. A ruling on plaintiffs duty to indemnify claim must be deferred. Finally, summary judgment on plaintiffs bad faith claim must be granted in favor of defendant and denied as to plaintiff.

I.

The material facts are undisputed. The antagonists in this insurance coverage dispute are plaintiff Capitol Environmental Services ("Capitol"), a Virginia company in the business of waste material management, and defendant North River Insurance Company ("North River"), an insurance company licensed to do business in Virginia. To understand the antagonists' dispute, some additional entities and facts must be introduced and described.

Central to the coverage dispute at bar is a July 11, 2002 subcontract between Capitol and Earth Tech, Inc. ("Earth Tech"), in which Capitol agreed to provide hazardous material transportation and disposal services at St. Marks Refinery in St. Marks, Florida ("the subcontract"). According to this subcontract, Capitol was to transport 15,000 to 20,000 gallons of "benzene contaminated liquid" to an acceptable facility for disposal. To accomplish this task, Capitol hired Freehold Cartage, Inc. ("FCI") to pick up and transport the waste from the site to the disposal facility. In sum, Earth Tech, the general contractor at the refinery, contracted with Capitol to dispose of waste at the refinery. Capitol in turn contracted with FCI to provide the actual transportation and disposal services.

Just before dawn on September 25, 2002, FCI employee Peter Blash arrived at St. Marks refinery, the entrance to which was located on Florida Highway 363, to collect and transport waste from the site. Blash attempted to back his empty tractor-trailer from the highway into the refinery with the aid of two Earth Tech flag men, who directed traffic on the highway while Blash's tractor-trailer blocked both highway lanes. As general contractor of the St. Marks Refinery site, Earth Tech also posted warning signs to alert oncoming traffic of the obstruction. Notwithstanding these precautions, Annette Carey, driving a personal automobile, collided with Blash's trailer and was injured.

Carey and her husband filed suit against Blash, FCI, and Earth Tech for Carey's injuries and her husband's loss of consortium (the "Carey suit").¹ The Careys alleged that Earth Tech "negligently undertook to direct traffic on State Road 363" and failed to provide "adequate visual warning devices" to prevent the accident. Carey Complaint at ¶¶ 13, 17. The Carey complaint also stated that Blash was "an employee of Freehold Cartage, Inc. and/or Earth Tech, Inc." who was "acting within the scope of his employment with Freehold and/or Earth Tech at all times." Id. at ¶¶ 5, 21. Hence, the Careys sued Earth Tech both for its own negligence and for the negligent acts of Blash, believing, mistakenly as it turned out, that Blash may have been an Earth Tech employee. Capitol was not named in the Carey suit.

Earth Tech contacted Capitol seeking indemnification for the Carey suit on the ground that the subcontract between Capitol and Earth Tech required Capitol to (i) purchase insurance to protect both Capitol and Earth Tech² and (ii) defend and indemnify Earth Tech for all claims "arising out of the acts, errors, or omissions of the Subcontractor," i.e., Capitol or its subtier contractors, including FCI. Earth Tech, believing that it was covered under Capitol's automobile and excess insurance policies from United States Fire Insurance Company ("U.S.Fire"), tendered its defense of the Carey suit to U.S. Fire. Before U.S. Fire responded, Earth Tech filed a declaratory action in this district, which resulted in the grant of summary judgment in favor of U.S. Fire on the ground that the U.S. Fire policy did not provide coverage. Earth Tech, Inc. v. U.S. Fire Ins. Co., 407 F.Supp.2d 763 (E.D.Va.2006). No appeal was pursued.

Seeking indemnification for the Carey suit directly from Capitol, Earth Tech brought a third-party complaint against Capitol in August 2005, alleging breach of contract from Capitol's "failure to defend, indemnify, and hold harmless Earth Tech in the Carey Lawsuit." Its second amended complaint, filed on January 13, 2006, alleged (i) breach of contract, (ii) negligent misrepresentation, (iii) fraudulent misrepresentation, (iv) contractual indemnity, and (v) common law indemnity. In its breach of contract claim, Earth Tech specifically alleged that Capitol failed "to defend, indemnify, and hold harmless Earth Tech in the Carey Lawsuit, wherein [the Careys] allege Earth Tech is vicariously liable for the acts of Defendant Blash, an employee of Subtier Contractor Freehold Cartage." Third-party Complaint at ¶ 23.

After receiving Earth Tech's third party complaint, Capitol's attorneys sent a copy to Robert Kelso, the insurance agent who had procured Capitol's insurance policies with North River and U.S. Fire, both subsidiaries of Crum & Forster Insurance Company ("Crum & Forster"). In August 2005, Kelso sent the complaint to U.S. Fire, which denied coverage under Capitol's automobile and excess liability policies. In its letter denying coverage, U.S. Fire also noted that, while Capitol had not submitted a claim under the North River policy, that policy's terms would also preclude coverage for Capitol. On February 3, 2006, after Earth Tech had amended its third-party complaint,³ Kelso forwarded this complaint to Crum & Forster, requesting a response regarding Capitol's right to coverage of these new claims. He listed both the North River and U.S. Fire policy numbers in the reference line. Apparently believing a claim had been made only pursuant to the U.S. Fire policy, Crum & Forster, on March 28, 2006, again disclaimed liability under that policy, noting in a footnote that the North River policy would also bar coverage for Capitol.

On April 3, 2006, Kelso responded, clarifying that in light of the new claims in the amended Earth Tech complaint, Capitol also sought coverage determination under the North River policy, under which North River agreed to "pay those sums that [Capitol] becomes legally obligated to pay as damages because of `bodily injury'<sup>4</sup> or `property damage'"⁵ that were "caused by an `occurrence'<sup>6</sup> that takes place in the `coverage territory.'" On June 23, 2006, North River disclaimed any obligation to defend or indemnify Capitol on Earth Tech's third-party complaint, on the grounds that (i) the allegations in the underlying action did not constitute "bodily injury" or "property damage"; (ii) the allegations in the underlying action did not constitute an "occurrence";⁷ and (iii) the allegations in the underlying action were excluded from coverage under the "professional services" exclusion.⁸ Accordingly, North River declined to defend or indemnify Capitol with respect to the Earth Tech third-party complaint against Capitol.

On August 31, 2006, Kelso asked North River to reconsider its position, contending that Capitol's subcontract with Earth Tech was an insured contract.⁹ Receiving no response, Kelso sent a follow-up email to North River on September 6, 2006. On September 13, 2006, North River again disclaimed liability to Capitol under the policy, reiterating its positions that the underlying action had not alleged "bodily injury," "property damage," or an "occurrence" as required by the policy, and that the "professional services" exclusion barred coverage for Capitol in the circumstances. North River also stated that it was disclaiming liability because Earth Tech was seeking indemnification for its own negligence, rather than for the negligence of Capitol or its agents.

On December 8, 2006, Capitol's counsel requested clarification and reconsideration from North River, specifically concerning the insured contract and professional services provisions. By January 4, 2007, Capitol had not yet received a response to its December 8 letter, and once again Capitol wrote to North River, suggesting that North River's delay could subject it to liability for unfair claims settlement practices under Va.Code § 38.2-510.¹⁰ North River finally responded on February 16, 2007, denying coverage and specifically disclaiming liability, for the first time, under the insured contract exception. Capitol again requested that North River reconsider its position, but North River declined to do so.

Meanwhile, there was some progress in the Florida litigation, including two events particularly pertinent here. On March 29, 2007, the Second Judicial Circuit for Wakulla County, Florida, granted Earth Tech's motion for partial summary judgment in...