Colonial Oil Industries, Inc. v. Underwriters Subscribing to Policy Numbers TO31504670 and TO31504671

• Decision Date: 27 February 1997
• Docket Number: No. 95-9603,95-9603
• Citation: 106 F.3d 960
• Parties: , 10 Fla. L. Weekly Fed. C 740 COLONIAL OIL INDUSTRIES, INC., Colonial Terminals, Incorporated, Plaintiffs - Counter-defendants - Appellees-Cross-Appellants, v. UNDERWRITERS SUBSCRIBING TO POLICY NOS. TO31504670 AND TO31504671, Defendants-Counter-claimants-Appellants- Cross-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 960

106 F.3d 960

97 FCDR 1212, 10 Fla. L. Weekly Fed. C 740

COLONIAL OIL INDUSTRIES, INC., Colonial Terminals Incorporated, Plaintiffs - Counter-defendants - Appellees-Cross-Appellants, v. UNDERWRITERS SUBSCRIBING TO POLICY NOS. TO31504670 AND TO31504671 Defendants-Counter-claimants-Appellants- Cross-Appellees.

No. 95-9603.

United States Court of Appeals Eleventh Circuit.

Feb. 27, 1997.

Edwin D. Robb, Jr., Bouhan Williams & Levy, Savannah, GA, Kevin G. O'Donovan, Alfred J. Kuffler, Palmer Biezup & Henderson, Philadelphia, PA, Walter C. Hartridge, Bouhan Williams & Levy, Savannah, GA, for Defendants-Counter-claimants-Appellants-Cross-Appellees.

Ronald C. Berry, Adams & Ellis, P.C., Savannah, GA, for Plaintiffs-Counter-defendants-Appellees-Cross-Appellants.

Appeal from the United States District Court for the Southern District of Georgia.

Before HATCHETT, Chief Judge, BIRCH, Circuit Judge, and CLARK, Senior Circuit Judge.

PER CURIAM:

CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT TO THE SUPREME COURT OF GEORGIA PURSUANT TO O.C.G.A. § 15-2-9.

TO THE SUPREME COURT OF GEORGIA AND ITS HONORABLE JUSTICES:

This panel of the United States Court of Appeals for the Eleventh Circuit believes that this case involves unanswered questions of state law that are determinative of this appeal, and we can find no clear, controlling precedents in the decisions of the Supreme Court of Georgia. Therefore, we certify the following questions of law, based on the facts and procedural history recited below, to the Supreme Court of Georgia for instructions.

FACTS

Colonial Terminals, Inc., a subsidiary of Colonial Oil Industries, Inc. (collectively, Colonial), operates several cargo terminals and storage facilities on the Savannah River. Colonial uses these facilities for the petroleum products operations of the parent company as well as for third-party shipping and In 1991, Colonial contracted to dredge part of the river in order to construct a new pier. Colonial contracted to deposit the dredged materials on a nearby island owned by Charles Gay. On April 17, 1991, Colonial and Gay signed a "Spoilage Disposal Easement" permitting Colonial to deposit "clean fill" on Gay's property. ¹ Palmer & Cay, acting on behalf of the Underwriters, issued a certificate of insurance on August 9, 1991, naming Gay as additional insured for all work performed by or on behalf of Colonial relating to the dredging and disposal operations.

storage. In 1990, Colonial purchased comprehensive general liability (CGL) and terminal liability insurance coverage from an insurance underwriters cooperative (the Underwriters) through a local insurance agent, Palmer & Cay/Carswell, Inc. (Palmer & Cay), and a broker in London, England, R.L. Harley Insurance Associates, Ltd. (Harley). The policy period covered the occurrence of the events at issue herein.

Colonial obtained the necessary permits from the United States Army Corps of Engineers (ACE) and the Georgia Department of Natural Resources, Environmental Protection Division, and initiated the dredging in early September 1991. The ACE's permit described the materials expected to be deposited as ranging from "firm silty sand to gray sandy clay." Gay inspected the disposal site and found that the dredge spoil contained bricks, wire cable and lumber materials. Gay had expected Colonial to deposit only "sandbox quality" sand. On September 12, 1991, Gay demanded that Colonial cease the disposal. Colonial inspected the site and determined that the spoil came within the terms of the agreement, deciding that those waste materials present could be separated and removed at a later date.

While Colonial declined to stop the disposal on Gay's property, it sent a letter to Palmer & Cay on September 19, 1991, informing them of Gay's objections. On October 7, 1991, Palmer & Cay forwarded the information to Harley. Harley misplaced the letter from Palmer & Cay and neglected to inform the Underwriters.

Gay filed an action against Colonial in the United States District Court for the Southern District of Georgia on April 17, 1992, demanding that Colonial remove the spoil. Gay asserted that Colonial breached the easement by (1) depositing material other than the "clean fill" specified in the agreement; (2) allowing liquid runoff to flood portions of the island; and (3) dumping hazardous materials onto his property. Gay also claimed damages for nuisance and trespass. ²

Colonial forwarded a copy of the Gay complaint to the Underwriters. The Underwriters argue that they had no notice of the dispute prior to receiving the complaint. ³ On June 16, 1992, the Underwriters informed Colonial that they would not defend against Gay's suit, "based on the pleadings in the case which have been furnished to us," pursuant to the CGL policy's coverage limitations. The Underwriters' letter denying coverage claimed that they had based their decision on the "facts as have been alleged and thus the facts that are known to us thus far." The Underwriters suggested that Colonial submit to a "standstill agreement" with them regarding the coverage issue until Colonial resolved the suit. The Underwriters also acknowledged that "black letter law dictates" that they obtain a declaratory judgment affirming their denial of coverage. Colonial neglected to respond to the letter, and the Underwriters did not seek a declaratory judgment. On September 18, 1992, Colonial settled with Gay, agreeing to purchase the property for $900,000 and to pay $850,000 as a settlement, $400,000 of which constituted reimbursement for attorney's fees.

PROCEDURAL HISTORY

On November 10, 1993, Colonial brought a subsequent defense and indemnity action against the Underwriters in the Superior Court of Chatham County, Georgia, seeking (1) reimbursement for the $850,000 settlement, (2) attorney's fees for the Gay defense, (3) prejudgment interest, and (4) a 25-percent statutory penalty under Georgia law. ⁴ The Underwriters removed the action to the United States District Court for the Southern District of Georgia on January 14, 1994. On August 9, 1994, the Underwriters moved for summary judgment asserting coverage defenses. ⁵ The district court denied the Underwriters' motion on January 18, 1995, and directed Colonial to file a summary judgment motion. On February 7, 1995, Colonial complied with the court's request and moved for partial summary judgment regarding the Underwriters' duties to defend and indemnify Colonial.

On August 15, 1995, the district court issued an order denying both parties' motions in limine regarding evidentiary materials. In its order, the court analyzed the CGL coverage. The court also discussed the Underwriters' duty to defend Colonial, and the potential waiver and estoppel ramifications arising from a breach thereof. The court suggested that the Underwriters' unjustifiable failure to defend Colonial or obtain a protective declaratory judgment constituted a waiver of the policy defenses, thus estopping the Underwriters from raising these defenses in the indemnification action. Acknowledging that Colonial framed the estoppel issue differently than the court discussed, however, the court provided the Underwriters with notice of the estoppel issue and directed the parties to brief the issue along with the question of the type and amount of damages. The parties thereafter complied with the court's directive.

On November 6, 1995, the court granted Colonial summary judgment and awarded Colonial $1,284,381.48. The court reiterated its finding in the August 15 order, holding that the Underwriters breached their duty to defend in (1) relying solely on the terms of the Gay complaint in declining to defend Colonial, and (2) failing to obtain a declaratory judgment affirming their decision. The court held, citing Loftin v. United States Fire Insurance Co., 106 Ga.App. 287, 127 S.E.2d 53 (1962), that Georgia law imposes a duty on an insurer to investigate and thus does not permit the insurer to rely solely on the terms of the complaint in determining its duty to defend. As a result of the Underwriters' unjustified breach, the court estopped them from raising policy defenses in the indemnification action. The court recognized that McCraney v. Fire & Casualty Insurance Co., 182 Ga.App. 895, 357 S.E.2d 327 (1987), and Eason v. Weaver, 557 F.2d 1202 (5th Cir.1977), reject the complete estoppel doctrine, but the court distinguished those cases on the ground that the plaintiffs therein were not in direct privity with the insurer. The court awarded Colonial settlement and defense costs, and prejudgment interest. The court denied, however, Colonial's request for the 25-percent statutory penalty. As to that issue, the court held that the Underwriters' actions did not warrant a penalty because they had not acted in bad faith. The court later granted the Underwriters' motion to amend the judgment and denied Colonial attorney's fees for the coverage suit, reducing the judgment to $1,148,052.90. The Underwriters appeal and Colonial cross-appeals the rulings of the district court.

DISCUSSION

It is well-settled under Georgia law that the insurance contract determines whether the insurer has a duty to defend its insured. See Great Am. Ins. Co. v. McKemie, 244 Ga. 84, 259 S.E.2d 39, 40 (1979). It is less clear, however, what duty Georgia law imposes on an insurer to investigate a third- party's claim against its insured in order to determine whether the insurer is required to defend the action. Georgia law also remains unclear on the issue of whether, and to what extent, an insurer should be estopped from raising coverage defenses following a breach of its duty to defend. We ask the Georgia Supreme Court to address these two issues.

The Underwriters contend that Georgia law does not impose a duty on an insurer to investigate--in order to determine whether the policy language imposes a duty to defend--a claim brought against its...