Industrial Chemical & Fiberglass Corp., a Corporation, Plaintiff-Cross Claim-Plaintiff-Appellant, Hartford Accident & Indemnity Company, Plaintiff-Joinder-Counterclaim-Defendant-Appellant, Mission Insurance Company, Plaintiff-Intervenor & Cross Claim-Appellee v. The North River Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., Defendants-Counterclaim Plaintiffs-Cross-Claim Centennial Insurance Company, Counter Claim-Defendant-Appellee

Citations: 908 F.2d 825; 1990 U.S. App. LEXIS 13542Docket: 89-7158

Court: Court of Appeals for the Eleventh Circuit; August 9, 1990; Federal Appellate Court

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In 1980, two workers died in a fire while repairing a fiberglass storage tank due to the ignition of methyl ethyl ketone peroxide (MEKP). Their estates sued Reichhold Chemicals, the MEKP manufacturer, and Industrial Chemical. Fiberglass Corporation (Industrial Chemical), which distributed MEKP, among others. Reichhold settled for $2.25 million, but Industrial Chemical did not participate due to Centennial Insurance Company's (Centennial) refusal to fund a substantial settlement. The trial against Industrial Chemical resulted in a jury verdict of $7.25 million, which was reduced to $5 million after accounting for the settlement. 

After Centennial and Industrial Chemical's excess insurer, Mission Insurance Company, paid their respective policy limits of $500,000 and $1 million, Industrial Chemical faced a $3.5 million excess judgment. To seek indemnification, Industrial Chemical filed a federal action requesting a declaration that Hartford Accident and Indemnity Company (Hartford), as Reichhold’s primary insurer, was obligated to defend and indemnify it under a broad-form vendor's endorsement. The Alabama Supreme Court ruled in favor of Industrial Chemical regarding the coverage, leading the district court to hold Hartford liable for the full judgment amount and to find that Hartford acted in bad faith by denying coverage.

Hartford agreed to indemnify Industrial Chemical against state court judgments and assume its defense in exchange for Industrial Chemical assigning its rights against three insurers: Centennial, Mission, and North River. A federal court revised its prior order, recognizing Industrial Chemical as an additional insured under the Hartford policy but removing any findings of Hartford's bad faith. In a subsequent federal action, Industrial Chemical, Centennial, and Mission sued North River for breach of contract regarding excess coverage. The district judge ruled North River did not breach its contract, Centennial was negligent in failing to settle, Mission could recover $1 million plus interest it paid, and Industrial Chemical would not recover anything due to Hartford's indemnity. Industrial Chemical and Hartford appealed the first and fourth rulings.

The court erred in ruling that Industrial Chemical was not covered under the North River policy and misapplied Alabama law regarding the indemnity agreement's effect on damages. North River's policy provides coverage to additional insureds under underlying insurances, which includes Industrial Chemical as a vendor under the Hartford policy. North River's arguments against this coverage were rejected, affirming Industrial Chemical's status as an insured under both the Hartford and North River policies.

Under New York law, insurance coverage restrictions cannot be implied; exclusions must be explicitly stated to be enforceable. Exclusionary language must be "clear and unmistakable," and any ambiguity regarding who is covered should be interpreted in favor of the insured. North River's claim that excess coverage is solely for the manufacturer is unsupported by the policy language, which indicates coverage for additional insureds under the underlying insurances. Industrial Chemical, a long-time vendor of Reichhold products, qualifies as an insured under the North River policy.

When the language of an insurance contract is clear, there is no need to consider external evidence to ascertain the parties' intent. The parties' intentions must be determined from the policy's written terms. Condition B of the policy requires prompt notification to North River if additional insureds are added during the policy's term, but Industrial Chemical was already an additional insured when the North River policy began, having been a vendor since 1964.

The policy does not mandate that each additional insured be specifically identified by name; rather, it suffices if their identity can be determined from the policy's descriptions. Thus, a general description that includes vendors of Reichhold products satisfies the notice requirement, confirming that such vendors are additional insureds under the policy.

North River's conduct indicates that it understood Condition B of its agreement with Hartford, as it never requested a list of vendors under the Hartford policy, despite the requirement for North River to be notified rather than receiving notice from additional insureds. The district court determined that Centennial's negligence in failing to settle led to an excess verdict, which entitled Mission, as subrogee of Industrial Chemical, to recover $1 million from Centennial. However, the court ruled that Industrial Chemical could not recover due to its indemnity agreement with Hartford, which it believed eliminated any loss. This conclusion is contested, as it is argued that under Alabama law, Industrial Chemical did experience a compensable loss. The indemnity agreement established that Hartford would handle appeals and protect Industrial Chemical from judgments, while Industrial Chemical, with Hartford's support, would pursue claims against Centennial for its negligence and against North River for breach of contract. Prior to this agreement, Centennial and Mission had already reached their policy limits, leaving Industrial Chemical to cover a $3.5 million shortfall, pushing it toward potential bankruptcy. Centennial obtained a stay of execution but did not secure a supersedeas bond to protect Industrial Chemical's assets. Subsequently, Centennial withdrew from the case, transferring defense responsibilities to Hartford. The district court's assertion that an indemnification agreement negates a tort claim against another insurer for negligent failure to settle lacks legal support and misapplies precedents, which do not negate a corporation's claim for negligence despite subsequent indemnity agreements.

Industrial Chemical incurred a compensable loss under Alabama law when the jury's verdict exceeded the Centennial policy limit. The right to sue an insurer for failure to settle arises from liability on the judgment, not its payment. Industrial Chemical's overlapping coverage with Hartford and an indemnification agreement do not diminish its claim against Centennial for damages. Once Centennial and Mission paid their policy limits, thereby allowing Hartford to represent Industrial Chemical in the appeal, Industrial Chemical became liable for the full excess judgment. An insurer that withdraws from defending cannot claim that the appellate process at a third party's expense absolves it from liability. There is no requirement for an insured to exhaust appellate remedies before filing a claim against an insurer for failure to settle.

The indemnity agreement with Hartford, which aimed to protect Industrial Chemical, did not constitute a payment; at the time of the district court's decision, Hartford had not disbursed any funds. The indemnity agreement functioned similarly to a loan-receipt agreement, where the insurer loans the insured the amount of the loss, contingent upon the insured recovering damages from a third party. The insured must maintain the lawsuit at the insurer's direction and expense. Such agreements do not eliminate the insured's loss, allowing them to retain sufficient interest to remain the real party in interest when pursuing action against a nonpaying insurer. The existence of the Hartford indemnity agreement preserved Industrial Chemical's status as the real party in interest, countering arguments of 'no loss' presented by Centennial and accepted by the district court.

An indemnity agreement, if viewed as a payment, qualifies as a third-party payment under Alabama law, specifically the collateral source rule. This rule dictates that third-party payments to a plaintiff do not reduce the damages awarded, even if they cover the same losses at issue in the claim. Relevant case law supports this interpretation, including Carlisle v. Miller and Southeast Ala. Gas Dist. v. Taylor. Indemnification agreements are treated similarly to insurance agreements under this rule. 

Centennial argues that loan-receipt cases do not apply since Hartford caused the loss covered by the indemnity agreement. However, the origin of the indemnity agreement from a settlement concerning disputed insurance coverage does not alter its treatment under the collateral source rule. It is asserted that Centennial, as the original tortfeasor, is liable for excess judgments due to its negligence in settling, having had the right to select counsel and make settlement decisions.

Centennial also contends that the collateral source rule does not apply between joint tortfeasors, suggesting that it and Hartford are joint tortfeasors. This issue, however, was not addressed as it was raised for the first time on appeal, and previous case law indicates that such late claims are typically considered waived.

The court ultimately reverses and remands the case for damage assessment, affirming Centennial's liability to Industrial Chemical for its negligent failure to settle and ruling that North River is liable within its policy limits for failing to indemnify Industrial Chemical. Industrial Chemical, which distributes MEKP, was sued for failure to provide warnings regarding the product and was insured by Centennial and Mission but was excluded from pre-trial settlement negotiations. Industrial Chemical also sought a declaration against Hartford for defense and indemnification obligations under its policy.

Centennial Insurance Company served as the primary carrier for Industrial Chemical, holding a policy limit of $500,000. Following a trial in the Chandler/Ensley cases, Centennial lost and Industrial Chemical was held liable for $5 million of a $7.25 million verdict. Centennial subsequently paid its policy limit of $500,000. Mission Insurance Company, the excess carrier for Industrial Chemical with a $1 million limit, paid out its limit after the verdict and joined a lawsuit against Centennial for failing to settle. Reichhold Chemicals, Inc., which manufactured MEKP, was sued for product liability and insured by Hartford (primary) and North River (excess). Reichhold contributed $843,700 to a $2.25 million settlement with other parties, while Hartford did not engage in settlement talks. Hartford's policy included a vendor's endorsement that covered vendors of Reichhold products; it later agreed to indemnify Industrial Chemical against the Chandler/Ensley lawsuits. North River’s policy had a $5 million limit per incident and umbrella coverage up to $40 million and counterclaimed against Centennial for its failure to settle. A claim against Hartford for failure to defend was dismissed as untimely. The jury found in favor of Nova Industrial Group, exonerating it from liability. Centennial did not appeal the ruling that its negligence led to Industrial Chemical's judgment exceeding its policy limit. The applicable law for the North River policy was determined by Alabama’s choice of law rules, which indicated that New York law governed due to the policy's execution. The court rejected Centennial’s argument regarding the need for additional notice of insured vendors with each policy renewal, stating that the annual disclosure of the vendor's endorsement satisfied the requirement. The court also ruled against Centennial's assertion that a claim for negligent failure to settle only accrues after appellate review is complete. Loan-receipt agreements were affirmed as valid by the Supreme Court.