Nat. Union Fire Ins. Co. v. Puget Plastics
| Decision Date | 12 August 2009 |
| Docket Number | Civil Action No. B-05-050. |
| Parties | NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff, v. PUGET PLASTICS CORPORATION; Arctic Slope Regional Corporation, et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Amy J. Collins, Jennifer R. Bergstrom, Robert S. Marshall, Bates & Carey, LLP, Chicago, IL, Eduardo Roberto Rodriguez, Rodriguez & Nicolas, L.L.P., Jaime Arturo Saenz, Colvin Chaney et al., Brownsville, TX, James B. Friderici, Delaney, Wiles, Hayes, Gerety, Ellis & Young, Inc., James N. Leik, Perkins Coie, LLP, Anchorage, AK, Alexander G. Calfo, Yukevich Calfo & Cavanaugh, Los Angeles, CA, Keith Herman Odenweller, Cooper Industries, Houston, TX, for Plaintiff.
Justin Ryan Goodman, Heard Robins et al., Steve A. Bryant, Steve A. Bryant & Associates, Houston, TX, for Defendants.
Wausau, Business Insurance Company, pro se.
Plaintiff National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union") filed the instant coverage action on February 11, 2005 seeking a declaration that it owed no defense or duty to indemnify to its insureds, Defendants Arctic Slope Regional Corporation ("Arctic Slope") and Puget Plastics Corporation ("Puget"), for claims and a judgment stemming from a Texas state case brought against them by Defendant-Intervenor Microtherm, Inc. ("Microtherm"). The Defendants counterclaimed seeking a declaration that National Union owed a defense and coverage related to the underlying judgment and also asserting claims for breach of contract and deceptive practices requiring National Union to pay the state judgment against Puget as well as additional statutory penalties and fees.
Microtherm manufactures and sells electronically controlled tankless water heaters under the brand name Seisco. These water heaters contain a number of components, including plastic water chambers ("chambers") molded out of Zytel 77G33, a glass fiber-reinforced nylon manufactured by E.I. DuPont de Nemours & Company ("DuPont"). The Seisco water heaters also contain thermistors manufactured by Dana Corporation ("Dana"), as well as circuit boards, heating elements, and various other components. Beginning in January of 2000, Puget, through its wholly owned Mexican subsidiary, Puget Plastics Corporation S.A. de C.V. ("Puget Mexico"), molded the chambers that Microtherm then incorporated into its Seisco water heaters. Puget is itself a subsidiary of Arctic Slope. After a falling out between Microtherm and Puget in late 2000 involving Puget's repeated delays in production and concerns over the processing parameters used by Puget to mold the chambers, Microtherm moved the molding of the chambers to United Plastics Group ("UPG").
Between 1999 and 2002, the thermistors, heating elements, circuit boards, and chambers began to malfunction, with the chambers beginning to fail in April of 2001. In 2002, Microtherm1 filed suit against Puget, Puget Mexico, Arctic Slope, UPG, Dana, and other component manufacturers in the 357th Judicial District Court of Cameron County, Texas in Cause No.2002-03-00993-E (the "Underlying Case"). Microtherm asserted claims against each defendant for breach of contract, breach of warranty, fraud and misrepresentation, negligence, and violations of the Texas Deceptive Trade Practices Act ("DTPA"). The trial of the Underlying Case began in November of 2004 and lasted four weeks.
On December 17, 2004, the jury reached a verdict in favor of Microtherm against Puget, UPG, and Dana. The jury awarded the following damages against Puget: (1) as a result of Puget engaging in false, misleading, or deceptive acts or practices, engaging in unconscionable action, and failing to comply with warranties: (a) $175,000 for costs to repair and replace parts provided by Puget; (b) $7,000,000 for past lost profits; (c) $340,000 for future lost profits; (d) $15,000,000 for damage to the value of Microtherm; and (e) $700,000 in additional damages for "knowing" conduct; (2) due to negligent misrepresentation by Puget, $0; (3) due to fraud committed by Puget, (a) $1,500,000 for costs to repair and replace parts by Puget; (b) $1,000,000 in past lost profits; (c) $500,000 in future lost profits; (d) $1,000,000 for damage to the value of Microtherm; and (e) $330,000 in exemplary damages due to finding fraud by clear and convincing evidence. The jury also found that Arctic Slope was not responsible for the acts of Puget.
Microtherm elected to forgo its right to recover damages for fraud, and the state court entered a final judgment against Puget based on the other causes of action on February 7, 2005, in the amount of $36,081,807, which included $10,308,088 in attorney's fees and $2,557,719 in prejudgment interest.2 The state court also entered a take-nothing judgment in favor of Arctic Slope.
National Union issued Commercial Umbrella Policy No. BE 932-96-67 (the "Policy") to Arctic Slope for the period from July 1, 1999 to July 1, 2002. Under the Policy, Arctic Slope had a self-insured retention of $1 million per occurrence. Puget, as an Arctic Slope subsidiary, was an additional insured under the Policy. During the policy year from July 1, 2000 to July 1, 2001, Puget had underlying primary insurance from Wausau Business Insurance Company ("Wausau") under Wausau Policy No. 2321-00-064183 (the "Wausau Policy"). The Wausau Policy had single-occurrence limits of $1 million.
Though the Underlying Case was filed in 2002, Arctic Slope and Puget did not tender the Underlying Case to National Union until July of 2004. Puget did not tender the Underlying Case to Wausau until November of 2004, but Wausau ultimately agreed to provide a defense to Puget for the Underlying Case under a reservation of rights. National Union never provided a defense to either Arctic Slope or Puget in the Underlying Case. On February 11, 2005, four days after the entry of judgment, National Union filed the present declaratory judgment action against Puget and Arctic Slope requesting a determination of the parties' respective rights and responsibilities under the Policy, including whether National Union must pay defense and indemnification in relation to the judgment rendered against Puget in the Underlying Case.
On April 1, 2005, the state trial court issued an order requiring Microtherm, Puget, UPG, and Dana, and each party's primary and excess insurers to attend a mediation in Houston, Texas on April 6 and 7, 2005. Although National Union had notice of the mediation and the court's order, and had been asked to attend by its insureds, National Union declined to attend the mediation after Puget and Arctic Slope failed to obtain a waiver from all of the other participants stating that by attending the mediation, National Union would not be subjecting itself to the jurisdiction of the state court.3 Further, National Union maintained that because Wausau, the primary insurer, indicated that it had no intention of tendering the limits of its insurance in settlement of the judgment, National Union's attendance as the excess carrier served no purpose. In contrast to National Union's explanation for why it did not attend the mediation, Puget and Arctic Slope assert that just prior to the mediation National Union unequivocally denied coverage, leaving the insureds to fend for themselves.
On the second day of the mediation, Puget and Arctic Slope reached an agreement with Microtherm under which Wausau would tender its $1 million single-occurrence limit to Microtherm, and Arctic Slope would pay an additional $2 million to Microtherm. In exchange, Microtherm agreed to provide a release of claims and a covenant not to execute against the assets of Puget and Arctic Slope. The parties further agreed that a credit in the amount of $3 million would be applied to the underlying judgment against Puget, and all parties entered into a covenant not to file a notice of appeal of the state judgment. Lastly, Puget and Arctic Slope agreed to assign their rights under the Policy to Microtherm. National Union maintains, for a number of reasons, that this settlement is contrary to the Policy and to public policy, and that it should therefore be relieved of any obligations to Puget or Arctic Slope.
Earlier in this coverage action, this Court issued a Memorandum Opinion and Order regarding cross-motions for summary judgment filed by the parties which was then the subject of an interlocutory appeal taken pursuant to 28 U.S.C. § 1292(b). (Docket No. 131). This Court stayed the coverage action pending resolution of the appeal. The United States Court of Appeals for the Fifth Circuit affirmed this Court's order. (Docket No. 154, 155). This Court then granted the parties additional time for new discovery related to the legal and factual issues raised by Fifth Circuit's opinion.
The parties elected for a bench trial. In addition to presenting testimony and accompanying exhibits at trial, the parties, by agreement, submitted into evidence certain state trial transcript designations from the Underlying Case and numerous designations of depositions taken during the pendency of the Underlying Case and this coverage action. After the bench trial, the parties submitted post-trial briefs complete with proposed findings of facts and conclusions of law. The primary issues presented during the bench trial and in the post-trial briefs were: (1) whether Puget's, Arctic Slope's, or National Union's actions leading up to the mediation and the resulting settlement agreement violated any provisions of the Policy or duties owed under the Policy, and if so, whether these actions relieved Puget, Arctic Slope, or National Union of any duties owed under the Policy; (2) whether Puget's improper...
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