Ketona Chemical Corporation v. Globe Indemnity Company

• Decision Date: 07 March 1969
• Docket Number: No. 25183.,25183.
• Citation: 404 F.2d 181
• Parties: KETONA CHEMICAL CORPORATION, Appellant, v. GLOBE INDEMNITY COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

404 F.2d 181 (1968)

KETONA CHEMICAL CORPORATION, Appellant, v. GLOBE INDEMNITY COMPANY, Appellee.

No. 25183.

United States Court of Appeals Fifth Circuit.

November 25, 1968.

Rehearing Denied March 7, 1969.

Joseph S. Mead, Mead, Norman & Fitzpatrick, Birmingham, Ala., for appellant.

James E. Clark, London, Yancey, Clark & Allen, Birmingham, Ala., for appellee.

Before TUTTLE and SIMPSON, Circuit Judges, and BREWSTER, District Judge.

BREWSTER, District Judge:

This diversity suit is based upon a Comprehensive General Liability Policy issued by defendant, Globe Indemnity Company, to appellant, Ketona Chemical Corporation. The primary issue concerns whether liability of Ketona for the accident in question is excluded from coverage by the "Products Hazard" exclusionary endorsement to the policy. The district court so held, in directing a verdict for the insurer at the close of plaintiff's evidence. We are of the opinion that such action was correct.

Ketona is a Delaware corporation jointly owned by Alabama By-Products Corporation and Hercules Powder Company. At its plant located at Tarrant City, Alabama, Ketona manufactures agricultural chemicals which it ships to purchasers in railroad tank cars leased from Union Tank Car Company.

On January 1, 1961, employees at the Ketona premises loaded a tank car with a quantity of anhydrous ammonia solution for shipment to a purchaser, Home Guano Company, to be used in the manufacture of fertilizer. The tank car was sub-leased to Home Guano, and, upon arrival at its plant in Dothan, Alabama, the car was located on a sidetrack and used as a storage receptacle. The chemical was unloaded from it, as needed, by means of pipes attached to valves in the dome of the car. On January 26, 1961, after the chemical had been unloaded and the pipes removed, Raymond Strickland, an employee of Home Guano, climbed on top of the car to remove a bushing which remained in the valve outlet. In attempting to unscrew the bushing the employee's hand struck the valve handle, causing the valve to open. Pressurized residual fumes spewed out into his face, severely injuring him and causing permanent blindness.

Strickland later brought suit in an Alabama state court against Union Tank Car Company, Ketona and Alabama By-Products Company to recover damages for his personal injuries.¹ As summarized in appellant's brief, Strickland's allegations in his complaint in the personal injury action were as follows:

"(1) Union Tank Car was negligent in furnishing the valve and, with Ketona, was negligent as to its installation with the handle in an improper and dangerous position.

"(2) Union Tank Car was negligent in leasing the car to Ketona in its unsafe condition for use in the delivery of its products.

"(3) Ketona was negligent in allowing a car `that was not reasonably safe for reasonable use for the plaintiff\' to be loaded with chemicals and furnished to plaintiff\'s employer for use by the plaintiff `while in such unsafe condition for reasonable use\'.

"(4) Both Union Tank Car and Ketona breached the implied warranty as to the fitness of the car for the purpose for which it was to be used in the delivery of products of a nature potentially dangerous to the eyes and respiratory system of anyone coming in contact with it."

Specifically, Strickland contended that the valve lever should have lain flat against the top of the car when the valve was closed; but that, instead, it was in an upright position when closed, thereby creating a dangerous condition in that it indicated to a workman that the valve was then open, and the tank car empty and thus safe to work around.

Under the liability policy in force at the time of the accident, Globe denied liability and declined to defend Ketona, and Ketona hired lawyers to defend it. The suit was ultimately settled for $125,000. Half of that amount was paid by Ketona and half by Union Tank Car Company. Ketona now seeks recovery of the amounts expended by it in the defense and settlement of the claim.

A major portion of appellee's brief is devoted to the argument that Underwriters at Lloyds, London is the real party in interest in this suit, but, that under the Alabama Unauthorized Insurers' Act it cannot maintain this suit; and hence, error by the District Court, if any, was harmless.

The record shows that subsequent to purchasing the policy in question from Globe, Ketona obtained excess coverage from Lloyds, including products liability coverage, with limits up to $1,000,000.00. Ketona was self-insured for the first $10,000.00. Through a "loan receipt" transaction, Lloyds furnished the defense in the suit and paid Ketona's half of the settlement with Strickland, less Ketona's $10,000.00 self-insurance.

Globe objects to this arrangement on the ground that Lloyds is an unauthorized insurer under the Alabama Unauthorized Insurer's Act, Title 28, Alabama Code, Section 417(1) et seq., since it is not qualified to do business in Alabama under Section 417(6) of that Act; and, thus, that it may not file, institute or cause to be filed in Alabama courts any suit based upon an insurance transaction.² Globe claims that the loan receipt device has been condemned by Alabama courts and is being used here as a subterfuge to circumvent the Unauthorized Insurers' Act.

We hold that under Rule 17(a), F.R.Civ.P., Ketona is the real party in interest and the proper party plaintiff. Sanders v. Liberty Mutual Ins. Co., 5 Cir., 354 F.2d 777 (1965). See 18 Crouch on Ins., Section 61.72; 13 A.L.R.3d 42. The single Alabama case which has dealt with the question of the validity of a loan receipt transaction is McKenzie v. North River Ins. Co., 257 Ala. 265, 58 So.2d 581 (1951), and it is not in point. Nor is Lloyds circumventing the Unauthorized Insurer's Act in any way through its use of the loan receipt device. Since the protection it afforded to Ketona is excess coverage, it is exempted from the Act by Section 417(6) (2) (b) as Surplus Lines Coverage, as designated in Section 417 (7) of the Act.³

Under the policy on which this suit is based, coverage was provided for bodily injury and property damage liability. As pertinent here, Globe agreed as follows:

"1. Coverage A: — BODILY INJURY LIABILITY

"To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury, sickness or disease, including death at any time resulting therefrom, sustained by any person and caused by accident." ("Occurrence" was substituted for "accident" by endorsement).

Description of hazards listed (a) Premises Operations; (b) Elevators; (c) Independent Contractors; and (d) Contracts as listed in an extension schedule (not relevant here) and contractual liability coverage endorsements Nos. 1 and 2. "Products Hazard (Including Completed Operations)" was marked excluded and no premium was paid therefor. By Endorsement No. 5, it was agreed that:

"1. The policy does not apply to the Products Hazard as defined therein.

"2. The word `operations\' as used in the Products Hazard includes any act or omission in connection with operations performed by or on behalf of the named insured on the premises or elsewhere whether or not goods or products are involved in such operations."

Under Condition 3, Definitions, the "Products Hazard" was defined in these terms:

"(c) PRODUCTS HAZARD The term `products hazard\' means

"(1) goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name, if the accident occurs after possession of such goods or products has been relinquished to others by the named insured or by others trading under his name and if such accident occurs away from premises owned, rented or controlled by the named insured or on premises for which the classification stated in division (a) of the declarations excludes any part of the foregoing; provided, such goods or products shall be deemed to include any container thereof, other than a vehicle, but shall not include any vending machine or any property, other than such container, rented to or located for use of others but not sold;

"(2) operations, if the accident occurs after such operations have been completed or abandoned and occurs away from premises owned, rented or controlled by the named insured; provided operations shall not be deemed incomplete because improperly or defectively performed or because further operations may be required pursuant to an agreement; provided further, the following shall not be deemed to be `operations\' within the meaning of this paragraph: (a) pick-up or delivery, except from or onto a railroad car, (b) the maintenance of vehicles owned or used by or in behalf of the insured, (c) the existence of tools, uninstalled equipment and abandoned or unused materials and (d) operations for which the classification stated in division (a) of the declarations specifically includes completed operations."

Ketona contends that Strickland's accident arose out of ordinary business operations because of the use of a tank car in an unsafe condition for the delivery of its products, and that the product itself or any negligence connected with it was not the cause of the accident. It argues that the tank car was not a container but, rather, a "vehicle" and that it was "property rented to or located for use of others but not sold" and therefore excepted from the exclusion under paragraph (1) of the definition of the products hazard.

With respect to paragraph (2) of the definition, Ketona contends that the operation of delivery had not been completed or abandoned, and, further, that the...