Rocky Mountain Helicopters, Inc. v. Bell Helicopters Textron, a Div. of Textron, Inc., s. 84-2442

• Decision Date: 19 November 1986
• Docket Number: 84-2623,Nos. 84-2442,s. 84-2442
• Parties: 22 Fed. R. Evid. Serv. 86 ROCKY MOUNTAIN HELICOPTERS, INC., Southeastern Aviation (California), Inc., as agent for Underwriters at Lloyds, London and Certain Insurance Companies, Plaintiffs-Appellees, v. BELL HELICOPTERS TEXTRON, A DIVISION OF TEXTRON, INC. Defendant-Appellant. ROCKY MOUNTAIN HELICOPTERS, INC., and Southeastern Aviation (California), Inc., Agent for Underwriters at Lloyds, London, Plaintiffs-Appellants, Certain Insurance Companies, Plaintiffs, v. BELL HELICOPTERS TEXTRON, A DIVISION OF TEXTRON, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 907

805 F.2d 907

22 Fed. R. Evid. Serv. 86

ROCKY MOUNTAIN HELICOPTERS, INC., Southeastern Aviation

(California), Inc., as agent for Underwriters at

Lloyds, London and Certain Insurance

Companies, Plaintiffs-Appellees, v. BELL HELICOPTERS TEXTRON, A DIVISION OF TEXTRON, INC.

Defendant-Appellant.

ROCKY MOUNTAIN HELICOPTERS, INC., and Southeastern Aviation

(California), Inc., Agent for Underwriters at

Lloyds, London, Plaintiffs-Appellants, Certain Insurance Companies, Plaintiffs, v. BELL HELICOPTERS TEXTRON, A DIVISION OF TEXTRON, INC.,

Defendant-Appellee.

Nos. 84-2442, 84-2623.

United States Court of Appeals, Tenth Circuit.

Nov. 19, 1986.

Ralph S. LaMontagne, Jr. and Lawrence O. deCoster (Richard B. Johnson, Howard, Lewis & Peterson, Provo, Utah, with them on the brief), of Kern & Wooley, Los Angeles, Cal., for plaintiff-appellee-cross-appellants.

H. Wayne Wadsworth (Steven C. Magleby, with him on the brief), of Watkiss & Campbell, Salt Lake City, Utah, for defendant-appellant-cross-appellee.

Before BARRETT and TACHA, Circuit Judges, and BOHANON, ^* United States District Judge.

BARRETT, Circuit Judge.

This appeal from an Order on Contract Issues and from a Judgment on a Special Verdict entered by the District Court is brought by Bell Helicopter Textron, Inc. (Bell), the defendant below. Rocky Mountain Helicopters, Inc. (Rocky Mountain) and Southeastern Aviation, Inc. (Southeastern), plaintiffs below, cross appeal. This is a diversity action and Texas law, where applicable, controls.

In 1977, Rocky Mountain purchased a helicopter from Bell for use in its logging operations. Rocky Mountain had initially leased the helicopter from Bell, then entered into a conditional sale contract. Provisions in both the sale contract and the lease agreement provided that, as purchaser, Rocky Mountain would obtain insurance for the helicopter. According to the sale contract, the insurance would be "for the benefit of the Purchaser and Seller as their interests may appear...." In accordance with this requirement, Rocky Mountain added the helicopter to an existing blanket policy that provided hull loss insurance for Rocky Mountain's fleet of nearly fifty helicopters. Southeastern, agent for Lloyd's of London, and certain other insurance companies were the carriers for this insurance policy.

On April 19, 1979, Rocky Mountain was using the subject helicopter in a logging operation near Darby, Montana, when it crashed killing both the pilot and copilot. At the time of the accident, the helicopter was being used to transport logs felled by sawers on the ground. The logs were attached by a choker to a long, retractable cable that hung from the belly of the helicopter, then lifted and carried to a landing area. It was at the landing area that the accident occurred.

Rocky Mountain and Southeastern brought suit against Bell, the manufacturer, for damages. They alleged that the accident was caused by fatigue failure of the "trunnion," a part of the helicopter that connected the mast with the rotor blades. In response, Bell argued that the accident occurred because a reckless and inexperienced pilot, employed by Rocky Mountain, picked up a log that exceeded the external load weight limitation of the helicopter by 1660 pounds and then overreacted and lost control of the helicopter when he was forced to make an emergency release of the log near the landing site. The jury returned a special verdict finding that Rocky Mountain was forty-five percent negligent and Bell was fifty-five percent negligent.

The numerous issues Bell raises in this appeal fall into three general areas of dispute. First, and foremost, Bell argues that the district court erred in finding that Bell was not immune from suit. Bell maintains that it was an insured party under the policy and hence was immune from suit by its insurer, Southeastern, and by its coinsured, Rocky Mountain. Second, Bell appeals several evidentiary rulings made by the district court. In particular, Bell objects to the exclusion of evidence that Rocky Mountain allowed an untrained and reckless pilot to command the helicopter after it had received notice of such facts. Finally, both Bell and Rocky Mountain dispute the district court's award of prejudgment interest.

I.

Before addressing the insurance issues raised by Bell, it is necessary to examine the background and nature of the insurance policy in question. As noted above, Rocky Mountain acted in accordance with the conditional sale contract and the lease agreement by arranging to have the helicopter insured under a hull loss policy written by Southeastern. The policy named Rocky Mountain as the insured and contained over one hundred endorsements, two of which are important in this case. Endorsement 13 extended breach of warranty coverage to Bell by providing that "[t]he insurance afforded by the Policy shall not be invalidated as regards the interest of the Lienholder by any act or neglect of the Insured...." To receive this protection, the endorsement required that the lienholders pay premiums and tender proof of any loss if the insured failed to do so.

Another endorsement, Endorsement 30, was added to the policy in October, 1976. Endorsement 30 reserved for Southeastern a right of subrogation against the lienholder-manufacturer, Bell, for such action for recovery as the mortgagor, Rocky Mountain, might be able to maintain. A certificate of insurance confirming that coverage for the helicopter was in effect was sent to Bell in December, 1977.

In August, 1977, Rocky Mountain executed a promissory note in the amount of $1,752,490 to Bell for the purchase of the helicopter. Bell assigned its rights under this promissory note to Textron Financial Corporation, Inc. (Textron), a related corporation and apparently the financing arm of Bell. Following this assignment, Bell's name was dropped from the breach of warranty endorsement and Textron's name was substituted. Though the issue was disputed at trial, Bell maintained and the district court found that Textron was an agent of Bell's and that Bell was the lienholder covered by Endorsement 13, the breach of warranty endorsement.

On the basis of these facts, Bell argued that under Endorsement 13 it was an "insured party" and thus, by operation of the time honored rule that an insurance company cannot sue its own insured, was immune from suit. 16 Rhodes, Couch On Insurance 2d, Sec. 61:136-137 (rev. ed. 1983).

The district court agreed that Bell was an insured party but ruled that Bell's immunity was waived by Endorsement 30 which reserved for Southeastern the right of subrogation. Bell appeals this finding. Rocky Mountain and Southeastern cross appeal the trial court's ruling that Bell was an "insured party" arguing, first, that Textron rather than Bell was named in Endorsement 13 and, second, that even if Bell were covered by Endorsement 13, it would not be immune from suit under Texas law. We need not reach Bell's argument that it did not waive its immunity because, while we agree with the trial court that Bell was covered by Endorsement 13, we agree with Rocky Mountain and Southeastern that Bell was not an immune insured party under Texas law.

The insurance policy in effect at the time of the accident was issued to Rocky Mountain and names Rocky Mountain, not Bell, as the insured party. The only references to Bell (or its associated corporation, Textron) in the entire policy occur in Endorsements 13 and 30 which describe Textron as a "lienholder" or "loss payee" and refer to Rocky Mountain as the "insured." Thus, the question arises whether a lienholder-payee under a breach of warranty clause in an insurance contract is an insured party for the purpose of immunity from subrogation.

In support of its position that a lienholder is immune from subrogation, Bell refers to 10A Rhodes, supra, Sec. 42:728 at 761-63 (footnotes omitted) for the proposition that the standard or union mortgage clause in an insurance contract, such as Endorsement 13, creates an "independent or separate contract" between the mortgagee and the insurer:

There are accordingly in substance two contracts of insurance, one with the mortgagee and the other with the mortgagor. The mortgagee does not have the status of a beneficiary, and the effect is the same as though the mortgagee had procured a separate policy naming himself as the insured.

Accord 5A J. Appleman and J. Appleman, Insurance Law and Practice Sec. 3401 at 286-292 (rev. ed. 1970). By this analysis, Bell argues, a contract for insurance existed between Southeastern and Bell and hence Bell is immune from suit.

Yet there are limits to this fiction that a mortgage clause operates as an independent contract. According to Couch on Insurance, it exists "only for the limited purpose of preventing the defeating of the insurance by the act of the insured [i.e., Rocky Mountain] alone...." 10A Rhodes, supra Sec. 42:731 at 766. It is nowhere clearly established and we find no examples in the cases cited by Bell that this fiction of an independent contract has been applied to facilitate or frustrate a right of subrogation. At least one court has found that this fiction does not make the loss payee "an insured for all purposes" and has specifically declined to apply it to immunize the mortgagee from a subrogation action. Dalrymple v. Royal-Globe Ins. Co., 280 Ark. 514, 659 S.W.2d 938, 940 (1983). For the reasons noted below involving Texas law, we are reluctant to rely on this fiction in the present context.

Bell also cites several cases in which the basic rule immunizing the insured from suit by its insurance company has been extended to protect a co-insured party in various situations. See, e.g., Royal Exchange Assur. of America, Inc. v. S.S. President Adams, 510 F.Supp. 581 (W.D.Wash.1981) (insurer that paid an insured shipper for cargo damage may not subrogate against carrier, whose stevedoring operations insurer covers under unrelated liability policy,...