Kelley Co. v. CENTRAL NAT. INS. CO. OF OMAHA

• Decision Date: 03 June 1987
• Docket Number: No. 84-C-664.,84-C-664.
• Citation: 662 F. Supp. 1284
• Parties: KELLEY COMPANY, INC., a Wisconsin corporation, Plaintiff, v. The CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, a Nebraska corporation, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

662 F. Supp. 1284

KELLEY COMPANY, INC., a Wisconsin corporation, Plaintiff, v. The CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, a Nebraska corporation, Defendant.

No. 84-C-664.

United States District Court, E.D. Wisconsin.

June 3, 1987.

Matthew J. Flynn, Quarles & Brady, Milwaukee, Wis., for plaintiff.

Ned J. Czajkowski, Kluwin, Dunphy & Hankin, Milwaukee, Wis., for defendant.

DECISION AND ORDER

WARREN, Chief Judge.

I. Background

The plaintiff, Kelley Company, Inc. is a Wisconsin corporation that manufactures mechanical and hydraulic dock boards, incinerators and other industrial products. The defendant, Central National Insurance Company of Omaha, is a Nebraska corporation. Defendant primarily provides excess insurance coverage.

In April of 1977, defendant issued to plaintiff an excess liability policy ("Central National Policy"). Pursuant to the policy, plaintiff was required to maintain primary insurance in the amount of $500,000. The Central National Policy was subject to a $250,000 deductible beyond the primary insurance level of $500,000.

On December 5, 1977, one Albert J. Bilotta, Jr. was injured in an industrial accident in Minnesota involving one of plaintiff's products. Mr. Bilotta brought an action against Kelley in Minnesota. The jury returned a verdict of 2.3 million dollars in favor of Bilotta of which it assigned Kelley 50% responsibility, or $1,150,000. Kelley appealed the judgment. The Minnesota Supreme Court reviewed the case and ordered a new trial only on the issue of liability.

Before the new trial, Kelley and its primary insurer entered into a settlement agreement with Bilotta whereby Kelley and its primary insurer would pay Bilotta $486,942, and Bilotta agreed to satisfy the first $750,000 of liability against Kelley. The primary carrier, Kelley, and Central National were all involved or at least aware of settlement discussions.

Central National then negotiated a second settlement agreement. Central National agreed to pay Bilotta $312,820 in a structured settlement. This satisfied Kelley's and Central National's exposure up to $1,550,000. Central then demanded that Kelley pay the $250,000 deductible. Kelley argued that the $250,000 "credit" obtained from Bilotta in the first partial settlement was full satisfaction of the deductible.

Subsequently, Kelley filed this action seeking declaratory relief. Kelley seeks a declaration from the Court that it is not liable to Central National for the $250,000 deductible. Central National has counterclaimed alleging:

1. that Kelley breached its contract by failing to "actually pay" the deductible,

2. that Kelley owes Central $250,000 because Central paid this amount in Kelley's behalf, and 3. that Kelley damaged Central by settling with Bilotta in bad faith.

Cross motions for summary judgment have been filed and fully briefed.

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R. Civ.P. 56(c). In this case, the facts of what occurred are not in dispute; rather, the controversy centers on the legal importance of what occurred.

II. Validity of the Release

Paragraphs one and two of the settlement agreement entered into between Bilotta, the primary carrier, and Kelley provided:

AGREEMENT

1. That the defendant Kelley, and its primary insurer, American Home hereby agree to make payment to the Plaintiff of $486,942.00 in consideration of Plaintiff agreeing not to execute on the first $750,000.00 of any future verdict against Kelley.

2. Upon payment of the $486,942.00 paid on behalf of Kelley and American Home, its primary carrier, said payment satisfies any liability of Kelley up to $750,000.00, and the plaintiff agrees to satisfy any judgment that he may obtain against Defendant Kelley, up to $750,000.00, and further agrees not to execute against the defendant Kelley, unless or until, as a result of a verdict, the liability of the Defendant Kelley exceeds $750,000.00; and the Plaintiff further agrees to execute only for the amount that exceeds $750,000.00.

(emphasis added). Central argues that the $250,000 contained in the partial settlement agreement is only effective in the event there was a future verdict against Kelley and does not apply here where there was no verdict. Although there is language in the agreement referring to any future verdict and judgment taken against Kelley, there is also language in the agreement which states that payment of the $486,942 "satisfies any liability of Kelley up to $750,000." The settlement agreement clearly provided that the first $750,000 of any claim that Bilotta had against Kelley was satisfied. Kelley faced potential liability in the amount of $2.3 million. Consequently, this Court is persuaded that the release is valid.

Central also argues that the release entered into between Bilotta, Kelley Co., and the primary carrier was a "Loy" type release and would not be recognized under Minnesota law. In Loy v. Bunderson, 107 Wis.2d 400, 320 N.W.2d 175 (1982), and Teigen v. Jelco, 124 Wis.2d 1, 367 N.W.2d 806 (1985), the Wisconsin Supreme Court held that an excess insurer has no claim against a primary insurer that settles a plaintiff's claim for less than the primary limits, while obtaining a satisfaction up to the primary carrier's policy limits.¹ Minnesota law on this issue is not as clearly stated. The Minnesota court has held that a primary carrier owes an excess carrier a duty of good faith in settlement negotiations to settle within policy limits. The court specifically stated:

When there is no excess insurer, the insured becomes his own excess insurer, and his single primary insurer owes him a duty of good faith in protecting him from excess judgment and personal liability. If the insured purchases excess coverage, he in effect substitutes an excess insurer for himself It follows that the excess insurer should assume the rights as well as the obligations of the insured in that position.

Continental Casualty Co. v. Reserve Insurance Co., 307 Minn. 5, 9, 238 N.W.2d 862, 864 (1976) (emphasis added). Additionally, the court listed the policy considerations underlying the insurance system:

First, when a primary insurer breaches its good faith duty to settle within policy limits, it imperils the public and judicial interests in fair and reasonable lawsuits.

Second, a contrary result in this case would permit an unfair distribution of losses among insurers. The insured has paid for two distinct types of coverage, undoubtedly at different rates because they involve different amounts and kinds of risks. Primary coverage is designed to cover liability from zero to certain policy limits (in this case $50,000); excess coverage is designed to cover liability only after those initial limits are exhausted. When a primary insurer refuses in bad faith to settle, it forces the excess insurer making a reasonable settlement to cover both primary and excess liability. Thus, the purposes of the different kinds of coverage and their rating structures are thwarted as the excess insurer bears the full loss and fulfills the primary insurer's duty to the insured, as well as its own. Whether on insurance— economics principles or general equitable principles, a party should not be made to bear a loss that rightfully belongs to another party.

Id. at 9-10, 238 N.W.2d at 864-65. Central argues, based on the above language, that Minnesota would not recognize the type of "Loy" release entered into by Kelley Company and the primary carrier.

The Minnesota Supreme Court, however, stated in a footnote in the Reserve case that the duty to pay a claim was distinguishable from duty to defend cases. Id. at 13-14 n. 9, 238 N.W.2d at 867 n. 9. Reserve involved the duty to pay a claim. The Court stated "that the insurer's duty to defend was an independent one that each insurer owed to its insured. The duty to pay a claim, however, is ... a joint duty owed by the insurers within their respective policy limits." Id.

Furthermore, in Iowa National Mut. Ins. Co. v. Universal Under. Ins. Co., 276 Minn. 362, 150 N.W.2d 233 (1967), the Minnesota Supreme Court, decided the issue of whether an excess carrier could recover the expenses it incurred between the time it tendered defense until the time the primary carrier accepted the defense when there is a dispute as to liability between the carriers. After reviewing prior case law, the Court stated that "the obligation to defend is a separate undertaking from the duty to provide coverage and pay a judgment." Id. at 367, 150 N.W.2d at 237. A primary insurer will not be held liable to the excess carrier for breach of its independent duty to defend. Kelley essentially became self-insured for the amount of the deductible, and thus, is in the analogous position of a primary insurer and should be able to enter into a settlement agreement.

Although Minnesota has not had the opportunity to review a "Loy" type release per se, based upon the distinction which Minnesota recognizes between the duty to pay and the duty to defend, this Court is persuaded that Minnesota would consider a "Loy" type release valid. As a result, this Court does not find it necessary to undertake a conflict of law analysis.

III. Exhaustion of Coverage

Central also argues that Kelley cannot unilaterally modify the insurance contract terms by entering into a settlement. Central states that the insurance contract requires Kelley to actually pay the deductible to Central before Central's liability attaches. The pertinent parts of the policy provide as follows:

INSURING AGREEMENTS

A. Bodily Injury Liability. The Company hereby agrees, subject to the terms and conditions hereinafter mentioned, to indemnify the Insured in respect to losses occurring during the policy period for any and all sums

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