Merchants Ins. Co. of New Hampshire, Inc. v. U.S. Fidelity and Guar. Co.

• Decision Date: 06 January 1998
• Docket Number: No. 97-2056,97-2056
• Citation: 143 F.3d 5
• Parties: MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC., Plaintiff--Appellee, v. UNITED STATES FIDELITY AND GUARANTY CO., Defendant--Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 5

143 F.3d 5

MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC. Plaintiff--Appellee, v. UNITED STATES FIDELITY AND GUARANTY CO., Defendant--Appellant.

No. 97-2056.

United States Court of Appeals First Circuit.

Heard Jan. 6, 1998.

Decided May 1, 1998.

James R. Loughman, with whom Donovan & O'Connor was on brief for appellant.

Nina E. Kallen, with whom Neville & Kelley was on brief for appellee.

Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and SHADUR, ^* Senior District Judge.

SHADUR, Senior District Judge.

United States Fidelity and Guaranty Co. ("USF&G") appeals the order of the United States District Court for the District of Massachusetts granting a Fed.R.Civ.P. ("Rule") 56 summary judgment motion filed by Merchants Insurance Company of New Hampshire, Inc. ("Merchants") and denying the corresponding cross-motion filed by USF&G. Merchants had brought a diversity-of-citizenship action, pursuant to the Declaratory Judgment Act (28 U.S.C. § 2201), seeking a declaration that it was entitled to contribution from USF&G for the attorneys' fees and expenses incurred in defending and settling a personal injury action brought against Merchants' insured D'Agostino Associates, Inc. ("D'Agostino"). We affirm.

Facts ¹

In 1992, general contractor D'Agostino entered into a contract with two Massachusetts towns to remove and replace a bridge. In connection with that project D'Agostino hired subcontractor Great Eastern Marine Service, Inc. ("Great Eastern"). Although Merchants had already issued a commercial general liability policy to D'Agostino, the subcontract required Great Eastern to list the general contractor as an additional insured on its own commercial general liability insurance policy issued by USF&G. ²

Of particular importance here, the additional insured endorsement ("Endorsement") provided D'Agostino with coverage "but only with respect to liability arising out of 'your work' for that [added] insured by or for you." In part that language is clear indeed: "You" means Great Eastern, while D'Agostino is "that [added] insured." We will later address the meaning of the potentially more murky aspect of the Endorsement--what is intended by its "arising out of" phrase.

On October 28, 1992, Great Eastern's employee Daniel Woundy ("Woundy") sustained serious injuries while working at the job site when a D'Agostino employee accidentally caused Woundy's arm to become pinned between two pieces of demolition equipment. Almost a year later Woundy and his wife (collectively "Woundys") brought suit against D'Agostino, alleging that his physical injuries and her loss of consortium were "a direct and proximate result" of the general contractor's negligence. USF&G then refused Merchants' demand to defend that underlying action, explaining that the Endorsement did not afford D'Agostino coverage for its own negligence.

On March 25, 1995 Merchants settled Woundys' claims against D'Agostino for $250,000, an amount to which USF&G did not object. Merchants had also incurred attorneys' fees and expenses aggregating $28,297.21. Shortly thereafter Merchants brought this federal court action against USF&G to seek contribution for half of the total amount it had incurred in defending and settling Woundys' personal injury and loss of consortium claims. ³ After the district court ruled in Merchants' favor on the parties' cross-motions for summary judgment, this appeal followed.

Standard of Review

We review the district court's grant of summary judgment de novo (Vartanian v. Monsanto Co., 131 F.3d 264, 266 (1st Cir.1997)). Familiar Rule 56 principles impose on a party seeking summary judgment the burden of establishing the lack of a genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986)). As we stated in Woods-Leber v. Hyatt Hotels of P.R., Inc., 124 F.3d 47, 49 (1st Cir.1997) (citations and internal quotation marks omitted):

The genuineness requirement signifies that a factual controversy must be sufficiently open-ended to permit a rational factfinder to resolve the issue in favor of either side. The materiality requirement signifies that the factual controversy must pertain to an issue which might affect the outcome of the suit under the governing law.

For Rule 56 purposes we read the record in the light most favorable to the non-moving party, drawing all reasonable inferences in its favor (Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6 (1st Cir.1997)). In that regard "[a]n inference is reasonable only if it can be drawn from the evidence without resort to speculation" (Mulero-Rodriguez v. Ponte, Inc., 98 F.3d 670, 672 (1st Cir.1996), quoting Frieze v. Boatmen's Bank, 950 F.2d 538, 541 (8th Cir.1991)).

Where as here cross-motions for summary judgment are involved, "the court must consider each motion separately, drawing inferences against each movant in turn" (Reich, 126 F.3d at 6). Because here neither the facts nor any potential inferences are in dispute, that Janus-like dual perspective creates no risk that both motions might have to be denied. Instead the parties are at odds about whether as a matter of law the district court erred in holding that D'Agostino's liability arose out of Great Eastern's work performed on its behalf, thus entitling D'Agostino to coverage under the Endorsement.

Choice of Law ⁴

Before we turn to the merits of the parties' respective positions, we must first identify the applicable substantive law, a subject on which both policies are silent. For cases sounding in diversity, the Erie v. Tompkins mandate to look to state law for the substantive rules of decision includes the application of the forum's choice of law doctrines (Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941); New Ponce Shopping Ctr., S.E. v. Integrand Assurance Co., 86 F.3d 265, 267 (1st Cir.1996)). But here both Merchants and USF&G have eschewed any such inquiry, instead citing directly to Massachusetts' internal law. In that situation Bird v. Centennial Ins. Co., 11 F.3d 228, 231 n. 5 (1st Cir.1993) teaches:

Because the parties agree that Massachusetts law governs this dispute, and because there is at least a "reasonable relation" between the dispute and the forum whose law has been selected by the parties, we will forego an independent analysis of the choice-of-law issue and apply Massachusetts law.

We do the same here.

General Principles

Under Massachusetts law the interpretation of an insurance policy and the determination of the policy-dictated rights and obligations are questions of law, appropriate grist for the summary judgment mill (see Assetta v. Safety Ins. Co., 43 Mass.App.Ct. 317, 682 N.E.2d 931, 932 (1997)). Hence we review de novo the district court's determination that the Endorsement covers D'Agostino for its own negligence.

Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 675 N.E.2d 1161, 1164 (1997) confirms the applicability of general rules of contract construction in construing an insurance policy:

The interpretation of an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.

Where policy provisions are ambiguous--that is, "[w]here the language permits more than one rational interpretation" (Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass.7, 545 N.E.2d 1156, 1159 (1989)(internal quotation omitted))--the reading most favorable to the insured must prevail (Hazen Paper Co. v. USF & G, 407 Mass.689, 555 N.E.2d 576, 583 (1990)). ⁵ That contra proferentem principle applies with added rigor in determining the meaning of exclusionary provisions (id.).

Insurance Coverage: Duties To Defend and To Indemnify

Any liability insurer has a duty to defend an underlying third-party action against its putative insured if the allegations in the complaint are "reasonably susceptible of an interpretation that they state[ ] or adumbrate[ ] a claim covered by the policy issued to its insured" (New England Mut. Life Ins. Co. v. Liberty Mut. Ins. Co., 40 Mass.App.Ct.722, 667 N.E.2d 295, 297 (1996)(internal quotation omitted)). "This is true even if the claim is baseless, as it is the claim which determines the insurer's duty to defend" (Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir.1997)(internal quotation marks omitted)).

It is true "that an insurance company's duty to defend is broader than its duty to indemnify" (Boston Symphony, 545 N.E.2d at 1158). But USF&G's rejection of any participation in the underlying defense (as tendered to it by Merchants) also carries with it USF & G's liability for the cost of settlement in addition to the expenses of defending the lawsuit. As Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass.App.Ct. 318, 568 N.E.2d 631, 636 (1991) (numerous citations omitted) has held:

Our cases generally have recognized the peril implicit in unjustified disclaimer decisions, and held an insurer making such a decision liable for the reasonable costs of both defense and settlement.

And more recently Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 610 N.E.2d 912, 921 (1993) has confirmed that proposition.

We turn then to the Endorsement, which provides in its entirety:

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule [in this instance D'Agostino]. (sic) but only with respect to liability arising out of "your work" for that insured by or for you.

In turn the USF&G policy defines "your work" as:

a. Work or operations performed by you [Great Eastern] or on your behalf; and

b. Materials, parts or equipment furnished in connection with such work or operations.

USF&G urges that the district court erred in holding that D'Agostino's liability "arose out of" Great Eastern's work because Great Eastern did not proximately cause Woundy's...