U.S. Fidelity & Guar. v. Federated Rural Elec., Civ.A. 98-1124-WEB.

• Decision Date: 21 December 1999
• Docket Number: No. Civ.A. 98-1124-WEB.,Civ.A. 98-1124-WEB.
• Citation: 78 F.Supp.2d 1176
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff, v. FEDERATED RURAL ELECTRIC INSURANCE CORPORATION, Defendant.
• Court: U.S. District Court — District of Kansas

78 F.Supp.2d 1176

UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff, v. FEDERATED RURAL ELECTRIC INSURANCE CORPORATION, Defendant.

No. Civ.A. 98-1124-WEB.

United States District Court, D. Kansas.

December 21, 1999.

Marc A. Powell, Powell & Brewer, LLP, Wichita, KS, for plaintiff.

Larry B. Spikes, Martin, Pringle, Oliver, Wallace & Swartz, L.L.P., Wichita, KS, Michael C. Stewart, Jeff C. Grotta, Stewart & Elder, P.C., Oklahoma City, OK, for defendant.

Memorandum and Order

WESLEY E. BROWN, Senior District Judge.

This is a declaratory judgment action involving two insurance companies and their respective obligations to defend an Oklahoma electrical company, Alfalfa Electric Cooperative. Plaintiff USF & G seeks reimbursement from defendant Federated for costs USF & G paid defending Alfalfa Electric against a lawsuit in Oklahoma state court. This court previously denied Federated's motion for summary judgment, finding that Oklahoma law would recognize a claim for equitable subrogation to permit one insurer to recover defense costs from another insurer where each had a duty to defend the insured. The matter was scheduled for trial to the court on November 16, 1999, at which time the parties submitted exhibits and argued their positions. Both sides agreed that the matter could be decided by the court on the materials submitted. According to the pretrial order, there are no material facts in dispute.

I. Facts.

Plaintiff USF & G is a Maryland corporation with its home office in Baltimore, Maryland. Defendant Federated is a Kansas corporation with its principal place of business in Lenexa, Kansas. The amount in controversy exceeds $75,000.

USF & G and Federated both issued insurance policies to their named insureds which were in effect at the time of the fire loss on February 22, 1996.

USF & G issued a commercial general liability and business policy to O & M Powerline Construction, Inc., in Lahoma, Oklahoma. Under USF & G's policy, O & M was the named insured and was responsible for premiums. Under an endorsement to the policy, Alfalfa Electric Cooperative, Inc., was added as an "additional insured."

Federated issued an "All Risk Blanket Policy" to its named insured, Alfalfa Electric, in Cherokee, Oklahoma. Under Federated's policy, Alfalfa was responsible for paying premiums. In exchange, Alfalfa Electric received $1 million in liability coverage. Federated also issued an umbrella policy to Alfalfa Electric, adding $6 million in liability coverage.

On February 22, 1996, a grass fire started in Woods County, Oklahoma, causing property losses in three counties including portions of Kansas. The fire started when O & M Powerline's truck was being operated at a rural location in Woods County. The vegetation underneath the truck was dry due to a lack of rainfall and the operator of the truck was in the process of installing a pole for a power line. O & M was performing this installation under a contract for Alfalfa Electric. It is believed that heat from the underside of the O & M truck ignited the vegetation in the area, causing a fire to develop which subsequently spread to surrounding acreage. Spurred on by the wind, the fire burned for several days and spread over more than 80,000 acres of rangeland in Oklahoma and Kansas.

Within a few days after the fire was extinguished, a lawsuit was filed in Woods County, Oklahoma, by landowners suffering fire damages. Included as defendants were Alfalfa Electric and O & M Powerline. The complaint in the Woods County case, Bouziden, et al. v. Alfalfa Electric, et al., No. CJ 96 19, alleged that both defendants acted negligently and that Alfalfa Electric was responsible for the property damages due to a non-delegable duty.

When Alfalfa Electric was served with the summons and petition in the Woods County case, the suit papers were forwarded to their insurance carrier, Federated Rural Electric Insurance. Federated did not hire counsel for Alfalfa Electric at the time. Instead, Federated declined to defend Alfalfa Electric and requested that USF & G provide a defense. USF & G hired a law firm in Oklahoma City, Oklahoma, to defend O & M in the Woods County case. Furthermore, USF & G hired a separate law firm in Tulsa, Oklahoma, to defend Alfalfa Electric after Federated declined to provide a defense.

In April, 1996, the Tulsa law firm defending Alfalfa Electric began working on their defense. In October, 1996, USF & G began to pay attorney fees and defense costs in connection with the defense of Alfalfa Electric. Between October 25, 1996, and November 5, 1997, USF & G paid $197,051.00 to the Tulsa law firm for the defense of Alfalfa Electric. USF & G also paid separate defense costs for the defense of their own named insured, O & M Powerline, being defended by another firm.

In early 1997, USF & G decided to pay its $1 million limits into court for the benefit of the damaged landowners. An interpleader action was filed in the U.S. District Court for the District of Kansas, styled USF & G v. Red Hill Ranch, et al., No. 97-1075-MLB. USF & G's interpleader action subsequently resulted in an order discharging USF & G's obligations to the damaged landowners. Furthermore, the $1 million was subsequently disbursed by the U.S. District Court to all of the claimants participating in the case, including a class of damaged landowners. Alfalfa Electric and Federated were not parties to the interpleader action. After a journal entry was entered by the court in the interpleader action finding that USF & G had exhausted its policy limits, USF & G notified Alfalfa Electric that it was withdrawing its defense of Alfalfa Electric in the Woods County case. USF & G withdrew its defense of Alfalfa Electric prior to the trial in the Woods County case. Federated thereafter provided a defense to Alfalfa Electric, using the same defense attorney previously engaged by USF & G.

The Woods County case went to trial in November, 1997. A Woods County jury found in favor of Alfalfa Electric and no liability was assessed against them at that time. However, the verdict was appealed and, on May 28, 1999, the Oklahoma Court of Civil Appeals entered an order reversing the trial court's judgment in favor of Alfalfa Electric. The court found that Alfalfa Electric owed a non-delegable duty to the landowners and that the trial court had failed to properly instruct the jury on this issue. The case was remanded to the district court for a new trial. In the Woods County case, the trial court had awarded attorney fees to Alfalfa Electric following the jury verdict in its favor. However, due to the opinion by the Oklahoma Court of Appeals, that order has been vacated, and attorney fees may not be recoverable by Alfalfa Electric for reimbursement of USF & G and Federated.

Since USF & G withdrew its defense of Alfalfa Electric in November of 1997, Federated has paid all of Alfalfa Electric's defense costs and continues to provide a defense for Alfalfa Electric.

USF & G's policy insuring O & M Powerline contains a "Commercial General Liability" portion and a "Business Auto" portion. The policy limit for liability from any occurrence is $1,000,000. The Commercial General Liability portion provides that USF & G will pay sums that the insured becomes obligated to pay as damages because of property damage to which the insurance applies. An endorsement names Alfalfa Electric as an additional insured with respect to liability arising out of O & M's operations performed for Alfalfa Electric. The Commercial General Liability portion provides that USF & G has a duty to defend against any suit seeking those damages. It further provides that USF & G's duty to defend ends when it has paid the applicable limit of insurance. The Commercial General Liability portion contains an exclusion for property damage arising out of the use of any auto owned or operated by any insured. The Business Auto portion of the policy obligates USF & G to pay sums an insured is obligated to pay as damages because of property damage caused by an accident resulting from use of a covered auto. It provides that USF & G has a duty to defend any insured against a suit seeking such damages, and that the duty to defend ends when the liability limit has been exhausted. It provides that an insured is "[a]nyone liable for the conduct of an `insured' described above but only to the extent of that liability." The Business Auto policy also contains a provision stating that "[i]f any person or organization to or for whom we make payment under this coverage form has rights to recover damages from another, those rights are transferred to us."

Federated's underlying policy to Alfalfa Electric is an "All-Risk Blanket Policy for Rural Electric and Rural Telephone Systems." Section II of the policy, entitled "Automobile and General Liability Insurance," provides that Federated will pay on behalf of the policyholder all sums up to the limits of liability which the policyholder becomes obligated to pay as damages because of an occurrence causing property damage. The policy has a property damage liability limit of $1,000,000. It further provides that Federated has the duty to defend any suit against the policyholder to which the policy applies. It contains a provision entitled "Excess Insurance — Hired and Non-Owned Automobiles," which provides, "[w]ith respect to a hired or a non-owned automobile, this insurance shall be excess insurance over any other valid and collectible insurance." It also contains a section entitled "General Conditions Applying To This Policy," Subsection "H" on page 13 of the policy, which provides in part:

H. OTHER INSURANCE — This insurance is primary insurance, except when stated to apply in excess of, or to be contingent upon, the absence of other insurance. When both this insurance and the other insurance apply to the loss on the same basis, whether primary, excess or contingent Federated shall not be liable under this policy for a...