City of Burlington v. Arthur J. Gallagher & Co.

• Decision Date: 01 October 1996
• Docket Number: No. 2:94-CV-152.,2:94-CV-152.
• Citation: City of Burlington v. Arthur J. Gallagher & Co., 944 F.Supp. 333 (D. Vt. 1996)
• Court: U.S. District Court — District of Vermont
• Parties: BURLINGTON, VT, CITY OF; Lloyd's London Underwriters Similarly Situated Subscribing to Airport Owners' and Operators' Liability Insurance Policy No. ISL 3890 and Particularly Designated by Respective Syndicate Nos. 800, 960, 998, 53, 48, 117, 270, 97, 619, 814, 738, 1,054, 545, 295, 402, 312, 331, 310, 850, 256, 448, 925 and 581, Underwriters listed individually as Aviation and General Insurance Company Limited; Prudential Assurance Company Limited; Pearl Assurance Company Limited, per Aviation and General Insurance Group; Phoenix Assurance Company Limited; Guardian Royal Exchange Assurance Group; Norwich Union Fire Insurance Society Limited, per London Aviation Insurance Group; London Aviation Insurance Group Comprising 100% Phoenix Assurance Public Limited Company; Thread-needle Insurance Company Limited; Minster Insurance Company Limited; Marine Insurance Company Limited Aviation Account, The; Yorkshire "T" Insurance Company Limited; Commercial Union Assurance Company Limited; Nippon Fire and Marine Insurance Company (UK) Limited; Switzerland General Insurance Company (London), per English Aviation Group; Cigna Insurance Company Limited; Compagnie D'Assurances Maritimes Aeriennes Et Terrestres; Assurance Generales De France; Groupe Des Assurances Nationales Incendie Accidents, per Westminster Aviation Insurance Group; Aegon Insurance Company (UK) Limited; Assicurazioni Generali Di Trieste e Venezia SpA; Dominion Insurance Company Limited, The, Plaintiffs, v. ARTHUR J. GALLAGHER & CO.; Gallagher Bassett Service, Inc.; Gallagher Plumer Ltd.; International Special Risk Services, Inc., Defendants.

944 F.Supp. 333

BURLINGTON, VT, CITY OF; Lloyd's London Underwriters Similarly Situated Subscribing to Airport Owners' and Operators' Liability Insurance Policy No. ISL 3890 and Particularly Designated by Respective Syndicate Nos. 800, 960, 998, 53, 48, 117, 270, 97, 619, 814, 738, 1,054, 545, 295, 402, 312, 331, 310, 850, 256, 448, 925 and 581, Underwriters listed individually as Aviation and General Insurance Company Limited; Prudential Assurance Company Limited; Pearl Assurance Company Limited, per Aviation and General Insurance Group; Phoenix Assurance Company Limited; GuardianRoyal Exchange Assurance Group; Norwich Union Fire Insurance Society Limited, per London Aviation Insurance Group; London Aviation Insurance Group Comprising 100% Phoenix Assurance Public Limited Company; Thread-needle Insurance Company Limited; Minster Insurance Company Limited; Marine Insurance Company Limited Aviation Account, The; Yorkshire "T" Insurance Company Limited; Commercial Union Assurance Company Limited; Nippon Fire and Marine Insurance Company (UK) Limited; Switzerland General Insurance Company (London), per English Aviation Group; Cigna Insurance Company Limited; Compagnie D'Assurances Maritimes Aeriennes Et Terrestres; Assurance Generales De France; Groupe Des Assurances Nationales Incendie Accidents, per Westminster Aviation Insurance Group; Aegon Insurance Company (UK) Limited; Assicurazioni Generali Di Trieste e Venezia SpA; Dominion Insurance Company Limited, The, Plaintiffs, v.ARTHUR J. GALLAGHER & CO.; Gallagher Bassett Service, Inc.; Gallagher Plumer Ltd.; International Special Risk Services, Inc., Defendants.

No. 2:94-CV-152.

United States District Court, D. Vermont.

October 1, 1996.

Franklin F. Bass, Rosenman & Colin, New York, NY, John Lewis Franco, Jr., Burlington, VT, for plaintiffs.

Charles Norman Hurt, Jr., Downs, Rachlin & Martin, St. Johnsbury, VT, Michael W. Coffield, Stephen O'Donnell, Theodore E. Harman, Coffield, Ungaretti & Harris, Chicago, IL, for defendants.

OPINION AND ORDER

SESSIONS, District Judge.

This is an action for breach of contract and professional negligence in which an insurance broker (hereinafter "Defendants") allegedly failed to provide notice of a claim against the insured (hereinafter "Burlington") to the insurer (hereinafter "Underwriters").The matter was referred to the United States Magistrate Judge pursuant to 28 U.S.C. § 636(b)(1)(A) and (B).The Report and Recommendation of the Magistrate Judge denying the three summary judgment motions as well as Defendants' motion to disqualify Plaintiffs' counsel was filed October 27, 1995.Defendants filed objections to the Report and Recommendation on November 20, 1995 and Plaintiffs timely submitted opposition.Plaintiffs filed objections on November 21, 1995, which Defendants have opposed.

This Court must make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made.It may accept, reject, or modify, in whole or in part, the findings or recommendations made by the Magistrate Judge.28 U.S.C. § 636(b)(1);Fed.R.Civ.P. 72(b).After careful review of the file, the Magistrate Judge's Report and Recommendation, the objections, and response to objections, the Court modifies the proposed findings as follows.

Because the facts of this case have been thoroughly and accurately recounted in the Report and Recommendation, they need not be repeated here.Thus, the Court turns to a review of the merits.

I.Estoppel

Plaintiffs move for partial summary judgment to estop Defendants from litigating the reasonableness of Burlington's defense and settlement of the underlying Business Air action and Underwriter's subsequent settlement with Burlington for the insurance claim.(Paper #31).Plaintiffs contend that Defendants are estopped because Defendants failed to notify Underwriters of the Business Air action and, as a result, allegedly caused Underwriters 1) to breach a duty to defend Burlington, and 2) to fail to respond timely to Burlington's notice of claim, thereby prohibiting Underwriters from raising coverage defenses against Burlington's insurance claim.This Court adopts the recommendation of the Magistrate Judge that summary judgment be denied, but it does so for the reasons set forth below.

A.Duty to Defend

A fundamental premise of Plaintiffs' first and principal argument is that Underwriters had a duty to defend Burlington.Recognizing this, Plaintiffs begin their argument by stating "the AIRPORT OWNERS AND OPERATORS POLICY issued by Underwriters contained a duty to defend clause which `only confirms by contract what courts have held in countless cases.'"(citingCommercial Insurance Co. of New Jersey v. Papandrea,121 Vt. 386, 390, 159 A.2d 333, 335(1960)).Mem. Supp.Part.Summ.J.at 6(Paper # 32)<sup>1</sup>.In support of their contention that Underwriters had a duty to defend Burlington, Plaintiffs aver "[a] defense is owed `whenever it is clear that the claim against the insured might be of the type covered by the policy.'"(citingGarneau v. Curtis & Bedell,158 Vt. 363, 610 A.2d 132(1992)).Id. at 7.Although literally accurate, Plaintiffs' statements enmesh the distinct concepts of the existence of a duty to defend and the scope of a duty to defend.

The duty to defend is contractual.7C Appleman, Insurance Law and Practice, § 4682(1979& Supp.1995).Or, put another way, if there is no contract to defend, there is no duty to defend.Id.;see alsoAetna Casualty & Surety Co. v. Sullivan,33 Mass.App. Ct. 154, 597 N.E.2d 62, 63(1992)(the source of the duty to defend is the contractual agreement);Brown v. Lumbermens Mutual Casualty Co.,326 N.C. 387, 390 S.E.2d 150, 152(1990)(there is no requirement that an insurance company provide its insured with a defense, however "a company may provide by contract that it will defend its insured");Carrousel Concessions, Inc. v. Florida Ins. Guaranty Ass'n.,483 So.2d 513, 516(Fl.Dist. Ct.App.1986)("an insurer's duty to defend arises solely from the language of the insurance contract").

Thus, determining whether an insurer owes an insured a duty to defend for a particular claim requires a two part analysis: first, the language of the policy must be reviewed; second, assuming that the contract creates a duty, a comparison of the allegations in the complaint against the occurrences covered by the policy must be made.SeeSullivan,597 N.E.2d at 63(in deciding whether there is a duty to defend, the court first must consider the applicable provision of the insurance policy in effect at the time in question);Fitzpatrick v. American Honda Motor Co.,78 N.Y.2d 61, 571 N.Y.S.2d 672, 675, 575 N.E.2d 90, 93(1991)("the duty to defend derives, in the first instance, not from the complaint drafted by a third party, but rather from the insurer's own contract with the insured");Ritter v. United States Fidelity & Guaranty Co.,573 F.2d 539, 542(8th Cir.1978)("The nature of the insurer's duty to defend is purely contractual and depends, in the first instance, on the language of the particular policy involved.The scope of the insurer's obligation to defend is determined by the allegations of the complaint against the insured, regardless of the falsity of any of these allegations.").

The cases cited by Plaintiffs, including Papandrea and Garneau, are inapposite to the first part of the inquiry.²E.g., Papandrea,121 Vt. at 390, 159 A.2d 333(when placed in context, the section quoted by Plaintiffs means only that a duty to defend, once contracted for, requires an insurer to defend the insured against claims within policy coverage even if they are groundless, false or fraudulent (citingGoldberg v. Lumber Mutual Casualty Ins. Co.,297 N.Y. 148, 77 N.E.2d 131, 133(1948)));Garneau,158 Vt. at 365, 610 A.2d 132(insurer conceded that the policy provided a duty to defend; issue was whether certain policy exclusions applied such that there could be no duty to indemnify, and hence no duty to defend).Rather, they stand for the proposition that when a contract provides a duty to defend, the insurer will be required to defend any claim that potentially falls within policy coverage.

In deciding whether there is a duty to defend in the instant matter, the Court begins its analysis by referring to the Policy language.The relevant language in the Policy provides:

Payment of Costs: —

In addition to the limits set out in the Schedule, Underwriters will pay all legal and other costs incurred with their consent in the defence of any claim made against the Assured,

PROVIDED THAT

in the event of their requiring any claim to be contested

a) If the claim be successfully resisted by the Assured the Underwriters will pay all costs, charges and expenses incurred by the Assured in connection therewith up to but not exceeding the sum insured under this Policy.

Def.'s Ex.A att. to Paper # 48.In addition Paragraph 6(a) of the Policy's General Conditions reads:

No liability shall be admitted and no admission arrangement, offer, promise or payment shall be made by the Assured without the written consent of Underwriters, who shall be entitled, if they so desire, to take over and conduct in the name of the Assured the defence of any claim or to prosecute in the name of the Assured or for their own benefit any claim for indemnity or damages or otherwise against any third party, and shall have full discretion in the conduct of any negotiations or proceedings or the settlement of any claim, and the Assured shall give all such information and assistance as Underwriters may require.

Id.

In Vermont insurance policies are interpreted according to their terms and the evident intent of the parties as expressed in the policy language.City of Burlington v. National Fire Ins. Co.,163 Vt. 124, 655 A.2d 719, 721(1994).Courts across the country have construed policy language requiring the consent of the insurer as creating an option, but...