Transport Ins. Co. v. Michigan Mutual Liability Ins. Co.

• Decision Date: 21 March 1972
• Docket Number: Civ. No. 29503.
• Citation: 340 F. Supp. 670
• Parties: TRANSPORT INSURANCE COMPANY, a Texas Corporation, Plaintiff, v. MICHIGAN MUTUAL LIABILITY INSURANCE COMPANY, a Michigan Corporation, Defendant.
• Court: U.S. District Court — Western District of Michigan

340 F. Supp. 670

TRANSPORT INSURANCE COMPANY, a Texas Corporation, Plaintiff, v. MICHIGAN MUTUAL LIABILITY INSURANCE COMPANY, a Michigan Corporation, Defendant.

Civ. No. 29503.

United States District Court, E. D. Michigan, S. D.

March 21, 1972.

William P. Cooney, Detroit, Mich., for plaintiff.

Lawrence A. Bohall, Detroit, Mich., for defendant.

FINDINGS OF FACT CONCLUSIONS OF LAW

DeMASCIO, District Judge.

This dispute between two insurance companies spans more than a decade and finally culminated in one challenging the good faith of the other. The plaintiff Transport Insurance Company (Transport) is the insurer for Allied Van Lines, Inc. Transport also insured William Dolan Frost and Phyllis Frost, d/b/a Frost Moving and Storage Company, when and only when Frost was engaging in the business of Allied Van Lines, Inc., Allied Van Lines, Inc., of Indiana, and Allied Van Line Terminal Company. The defendant Michigan Mutual Liability Insurance Company (Michigan Mutual) insured William Dolan Frost and Phyllis Frost, d/b/a Frost Moving and Storage Company. Michigan Mutual also insured Allied Van Lines, Inc., against liability "as a result of an occurrence arising out of operations conducted by the named insured (Frost) while not engaging in the business of Allied. With this insurance setting, the inevitable occurred. Frost was involved in an accident resulting in the death of Emil Ketola. Transport and Michigan Mutual could not agree on whose business Frost was engaged in when the accident occurred. It was necessary to resolve this issue to determine whether Transport or Michigan Mutual was contractually obligated to investigate and defend, settle or pay any judgment rendered against Frost and Allied.

The facts surrounding Frost's accident cannot be seriously disputed:

"In late November 1959, defendant William Dolan Frost had hauled a shipment of freight for Allied Van Lines, Inc., to Florida and then returned to Buffalo, New York, with an Allied Van Lines, Inc., shipment. In Buffalo he was assigned another shipment from Allied Van Lines, Inc., to Minneapolis, Minnesota. He arrived at Minneapolis on Friday, December 4, 1959. He called the Chicago dispatcher of Allied Van Lines, Inc., and was told that there was a shipment going to Royal Oak, Michigan and that it would not be ready for shipment until the next Tuesday, December 8th. The practice of defendant Frost and Allied Van Lines, Inc., that had developed over the years was that defendant Frost could elect to take or refuse a shipment of freight. In the instant case if he wished to return to his home at Sault Ste. Marie, approximately 640 miles from Minneapolis, he could have done so and Allied Van Lines, Inc., would have to secure another vehicle to carry the shipment to Royal Oak. However, defendant Frost elected to take the shipment from Minneapolis to Royal Oak on Tuesday, December 8th. He also had the election of staying at Minneapolis or returning to his home at Sault Ste. Marie.

"Defendant Frost had business to take care of in Sault Ste. Marie where his family lived and which was the headquarters for his business and at Ishpeming, Michigan, where he had a branch office of his business.

"On Monday, December 7, 1959, defendant Frost had an appointment with Morris E. Woodbridge, a procurement officer at the K. I. Sawyer Air Force Base which is located about 15 miles south of Marquette, Michigan. On December 1st Mr. Woodbridge called the wife of William Dolan Frost at Sault Ste. Marie and arrangements were made for her husband to see Mr. Woodbridge at the K. I. Sawyer Air Force Base for purposes of entering into a new agreement for the storage of certain Air Force equipment. This business had nothing to do with the business of Allied Van Lines, Inc., and was entirely personal with William Dolan Frost.

"Defendant Frost elected to return to his home at Sault Ste. Marie and left Minneapolis on Saturday and arrived at Sault Ste. Marie on Sunday about noon. He attended to some of his business on Sunday and on Monday, December 7th, left to go to the K. I. Sawyer Air Force Base.

"When Frost returned to his home he drove his tractor, having stored his trailer in Minneapolis. He intended to return on December 8 to keep his commitment to the Allied dispatcher and deliver the shipment, after it was loaded, to Royal Oak. In order to keep his appointment at K. I. Sawyer Air Force Base to take care of his personal business he selected a route back to Minneapolis which was approximately ten miles further than the more direct route he would have otherwise taken. It was while he was en route to the K. I. Sawyer Air Force Base that the accident occurred."¹

At all pertinent times, Frost and Allied operated under a lease agreement. In addition, Frost had an agency contract with Allied under which he agreed to make equipment owned by him available to Allied for use in Allied's business at the sole discretion of Frost. The contract also made Frost an agent of Allied and required him to estimate weight, collect charges, pack, crate, load, unload and deliver shipments of household goods for Allied. Frost agreed to perform his employment under Allied's complete and exclusive control, direction and supervision. The lease permitted Allied, a common carrier, to acquire vehicles for transportation of household goods. Under the lease, Frost agreed to furnish drivers and helpers and maintain the vehicles in good repair in compliance with the Interstate Commerce Commission (ICC) requirements. Further, he had the duty to paint the vehicles to comply with ICC regulations. Frost was further obliged to bear the expense of fuel, oil, lubricant, tires and all other expenses including wages of drivers and helpers. The lease reserved to Allied the exclusive possession, supervision and control over the operation of the vehicles, drivers and helpers, including the time and place of arrival, departure and detention, routing and manner of operation during that period:

"Provided, however, that at such times during the term of this lease as the lessee Allied may not require the said vehicles to be used in the lessee's business, the lessor Frost may use the said vehicle or vehicles in its own business."

In addition, the lease further provided that the vehicles when used in the service of Allied would be operated by drivers under the direction and control of Allied, and further the drivers "shall conform to all rules and regulations of the Interstate Commerce Commission ...."

The administratrix of the estate of Emil Ketola instituted a state action and joined Frost and Allied as defendants. Transport, upon receiving notice of the suit, investigated the events leading to the accident. Thereafter, Transport tendered the defense of both Allied and Frost to the defendant. The defendant declined plaintiff's initial offer to defend, but eventually entered an appearance for Frost only. During the course of the Ketola trial, Allied requested the court to pose a special question to the jury for a determination of whether Frost was or was not engaged in the business of Allied at the time of the accident. The court refused the request. After due deliberation, the jury returned a verdict of $75,000.00 against both Frost and Allied. Thereafter, the parties moved for a Judgment N.O.V. The trial judge by written opinion held that Allied was liable to the estate under the Owner's Liability Statute,² and stated further that whether Frost was "in the scope of his employment returning to Minneapolis on a direct route at the time of the accident" was a jury question. On appeal, the Michigan Supreme Court affirmed the trial court, and held Allied liable as an owner, within the meaning of the Owner's Liability Statute. The Michigan Supreme Court ignored the question whether Frost was or was not acting in the scope of his employment.³ Therefore, at the conclusion of the state proceedings, a court had not yet ruled on the issue of whether Frost was engaged in the business of Allied when the accident occurred. If Frost were on Allied's business when the fatal accident occurred, Transport's policy would have indemnified both. However, if Frost were not on the business of Allied when the accident occurred, both Allied and Frost would be the insured of the defendant and the defendant's policy would have been primary.

Plaintiff's complaint here charges that Michigan Mutual knew or ought to have known that Frost was engaged in his own business and was not serving any interest of Allied when the accident occurred. Plaintiff further charges that defendant's failure to acknowledge this was an act of bad faith. The bad faith issue was tried to the court. The separate issue of whose business Frost was on when his accident occurred was tried to a jury. What seemed conspicuous to this court from the outset was finally put to rest by a jury. The jury found that Frost was not on the business of Allied when the accident occurred. Allied, as a matter of law, under this jury verdict is entitled to full indemnity from Frost. Plaintiff having paid the judgment is entitled to bring this bad faith action. National Farmers Union Property & Cas. Co. v. Farmers Ins. Group, 14 Utah 2d 89, 377 P.2d 786; Bennett v. Preferred Acc. Ins. Co. of N.Y., 192 F.2d 748 (10th Cir.). An excess insurer having paid the excess loss has been held to be subrogated to the insured's rights against the primary insurer for bad faith refusal to settle. Plaintiff here, having paid the entire judgment, is the real party in interest. American Fidelity & Cas. Co. v. All American Bus Lines, 179 F.2d 7 (4 Cir.).

We must now decide whether, in the period prior to and after the trial on the Ketola claim, Michigan Mutual acted in "bad faith." If Michigan Mutual knew or ought to have known that Frost was not on Allied's business, it should have accepted the tender of the defense as to both Frost and Allied because it was contractually obliged to do so.

After the...