Liberty Mut. Ins. Co. v. Travelers Indem. Co., 95-7039

• Decision Date: 08 March 1996
• Docket Number: No. 95-7039,95-7039
• Citation: 78 F.3d 639
• Parties: , 64 USLW 2572 LIBERTY MUTUAL INSURANCE COMPANY, et al., Appellees v. TRAVELERS INDEMNITY COMPANY, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 639

78 F.3d 639

316 U.S.App.D.C. 278, 64 USLW 2572

LIBERTY MUTUAL INSURANCE COMPANY, et al., Appellees v.TRAVELERS INDEMNITY COMPANY, Appellant.

No. 95-7039.

United States Court of Appeals District of Columbia Circuit.

Argued Dec. 11, 1995.

Decided March 8, 1996.

Appeal from the United States District Court for the District of Columbia(No. 92cv02235).

Sidney G. Leech, Baltimore, MD, argued the cause and filed the briefs for appellant.

Denise R. Stanley, Baltimore, MD, with whom D'Ana E. Johnson, Washington, DC, was on the brief, argued the cause for appelleesLiberty Mutual Insurance Company and the First Church of Christ, Scientist.

Samuel J. Smith, Jr. and William J. Carter, Washington, DC, were on the brief for appelleeSmithy Braedon Property Company.

Before: EDWARDS, Chief Judge, BUCKLEY and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

If parties to a property management contract agree to take out insurance policies that name each other as additional insureds, and one party takes out a policy substantially inferior to what the contract requires, does that party's breach of the property management contract defeat its claim against the other's insurer as a named additional insured under that policy?To put it more generally, is a third-party beneficiary's breach of its contract with the promisee a defense to the third-party beneficiary's claim against the promisor?The law generally says that it is not a defense, and we see no reason to think Massachusetts, whose law we must apply, would decide differently.Accordingly we reverse the decision of the district court, which rested on a contrary assumption.

* * *

Smithy Braedon, a property management firm, agreed to take care of some property of First Church of Christ, Scientist in Washington, D.C.As part of the contract, each agreed to take out liability insurance (with some variations between the two), and to name the other as an additional insured.First Church carried out its end of the bargain, obtaining a policy with Liberty Mutual that is apparently in full compliance with the property management contract.Smithy Braedon did not.It obtained a policy with Travelers that fell short of its contractual obligation in a number of ways.The limits were lower than required by contract; the clause naming First Church as an additional insured limited its rights to liability arising out of the operations of Smithy Braedon; and, most important, the policy declared the insurance to be "excess over any other valid and collectible insurance available to you [Smithy Braedon and additional insureds]."Smithy Braedon sent First Church a Certificate of Insurance that revealed the lower policy limits but not the clause declaring the coverage to be "excess" only.

In January 1992LaDwayna Thomas sued First Church and Smithy Braedon's subcontractor (and by a later amendment Smithy Braedon itself), alleging a back injury suffered when she fell backward after pulling on a broken door handle on First Church's property, and seeking $1,000,000 in damages--just within the $1,000,000 per occurrence limit in each policy.Liberty defended First Church in the action but apparently refused to defend Smithy Braedon, despite demands that it do so.Travelers therefore provided Smithy Braedon with a defense, incurring attorneys' fees and other costs.

After the filing of the Thomas lawsuit, First Church and Liberty Mutual filed this action in the district court for declaratory relief against Smithy Braedon and Travelers.They sought a declaration that First Church was entitled to defense, liability coverage, and indemnity from Smithy Braedon or Travelers; that Liberty Mutual was not obligated to provide a defense, liability coverage, or indemnity to Smithy Braedon; and that First Church and Liberty Mutual were entitled to reimbursement and compensation for expenses incurred and payments made in connection with the Thomas lawsuit.Travelers filed a counterclaim seeking a declaration that it had no obligation to defend Smithy Braedon or First Church, or to indemnify them, unless a settlement or judgment exceeded the limits under the Liberty policy; that Liberty Mutual was obligated to defend and indemnify Smithy Braedon in the Thomas lawsuit; and that Travelers was entitled to reimbursement for expenses incurred and payments made in connection with the Thomas lawsuit.The parties filed cross motions for summary judgment.

The district court entered judgment in favor of First Church and Liberty Mutual, saying:

(1)defendant Smithy Braedon is declared to have breached the Property Management Contract by failing to obtain the required insurance; (2) Smithy Braedon is still under a duty to indemnify First Church consistent with the Property Management Contract; (3) neither side must provide a defense for the other; and (4)defendant Travelers Insurance is not entitled to compensation for the defense provided to Smithy Braedon to date.

Liberty Mut. Ins. Co. et al. v. Travelers Ins. Co. et al., Civ. No. 92-2235, Mem. Op.at 10(D.D.C.Oct. 27, 1994).The parties understand the opinion to find (and we agree) that because Smithy Braedon had breached its management contract with First Church, it could not look to First Church's Liberty policy for coverage.This finding was fatal to Travelers' claim.Because on this view Smithy Braedon had no other insurance that was "valid and collectible," the excess endorsement of the Travelers policy did not apply, and Travelers' coverage was primary.Mem. Op.at 6, 8.Travelers, but not Smithy Braedon, appealed.

While this appeal was pending, the Thomas lawsuit settled, with defendants agreeing to pay Thomas $105,000 plus attorneys' fees of $600.There was no adjudication or concession of negligence.

* * *

As we have seen, the district court's decision turned on the idea that Smithy Braedon's breach of its property management contract, by failing to secure fully complying insurance, deprived it of what otherwise would have been its rights as an additional insured under First Church's policy with Liberty Mutual.From that it followed that Smithy Braedon had no "valid and collectible" primary insurance and that the "excess" insurance clause in its policy was ineffective.Liberty Mutual and First Church make a threshold argument that because Smithy Braedon failed to appeal, Travelers cannot attack the first, critical step in this analysis--the decision absolving Liberty of its duty to Smithy Braedon as an additional insured.This is clearly not the case.A party has standing to appeal "if the appellant can show an adverse effect of the judgment,"15A C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure§ 3902, at 63(1992), so that, for example, a party who is secondarily liable may appeal a judgment even if the party primarily liable has not, United States ex rel. Celanese Coatings Co. v. Gullard, 504 F.2d 466, 469(9th Cir.1974).Because the decision against Smithy Braedon and in favor of Liberty was pivotal in the defeat of Travelers' claim, it was clearly injured by that aspect of the judgment.

A second preliminary issue is what law applies to the various contracts.A federal court sitting in diversity jurisdiction applies the choice of law rules of the forum state (or district or territory), Klaxon Co. v. Stentor Elect. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477(1941), in this case the District of Columbia.Under District law, insurance contracts are governed by the substantive law of the state in which the policy is delivered.Levin v. John Hancock Mut. Life Ins. Co., 41 A.2d 841, 843(D.C.App.1945);see alsoRaley v. Life & Casualty Ins. Co. of Tennessee, 117 A.2d 110, 111(D.C.App.1955)(citing Levin).The Liberty Mutual policy was delivered in Massachusetts, the Travelers policy in Virginia.We therefore apply the law of those states to the respective policies.

Apart from whatever defenses Liberty may have against Smithy Braedon, it is not disputed that Smithy Braedon qualifies as an additional insured under the policy that Liberty issued to First Church.As such, it has the same rights to a defense and indemnity as First Church (but no more).Massachusetts Turnpike Auth. v. Perini Corp., 349 Mass. 448, 208 N.E.2d 807, 813(1965)("The naming of additional insureds does not extend the nature of the substantive coverage originally given by the policy but merely gives to other persons the same protection afforded to the principal insured.").So long as Smithy Braedon's insurance under the Liberty policy was "valid and collectible," its insurance under the Travelers policy was excess only.Appellees point us to some standard examples of insurance that is not "valid and collectible," namely "invalid or illegal insurance, such as insurance which is voidable for misrepresentation, and uncollectible insurance, such as insurance of an insolvent company."16 Couch on Insurance2d § 62:117, at 592(1983).Neither of these situations--misrepresentation or insolvency--nor anything of their ilk is present regarding the Liberty policy.Even if Smithy Braedon's post-contract Certificate of Insurance qualifies as a misrepresentation to First Church, there is no suggestion that anyone misrepresented anything to Liberty.And Liberty has not said that it knew about or relied on the insurance provisions in the property management contract or Smithy Braedon's Certificate of Insurance.

This takes us, then, to the contention that because of Smithy Braedon's breach of the property management contract, Liberty has a defense against Smithy Braedon's otherwise legitimate claims against Liberty as a third-party beneficiary of Liberty's insurance contract with First Church.(The district court and the parties have not used the third-party beneficiary concept, but that appears to be the applicable category.)Neither Massachusetts, the most...