Federal Home Loan Mortgage Corporation ("Freddie Mac") Federal Insurance Company v. Scottsdale Insurance Company

Citations: 316 F.3d 431; 55 Fed. R. Serv. 3d 74; 2003 U.S. App. LEXIS 1083Docket: 01-4271

Court: Court of Appeals for the Third Circuit; January 21, 2003; Federal Appellate Court

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The case centers on Scottsdale Insurance Company's obligations to the Federal Home Loan Mortgage Corporation (Freddie Mac) regarding costs associated with lawsuits stemming from a fire at a Freddie Mac-owned apartment building in East Orange, New Jersey, in February 1996. The fire was ignited accidentally by a minor, leading to lawsuits against Freddie Mac and its property manager, Sibley Real Property Services. Freddie Mac and Sibley subsequently filed a third-party complaint against T. R Alarm Systems, Inc., alleging deficiencies in the fire safety systems installed by T. R.

T. R. had an insurance policy with Scottsdale that listed Freddie Mac and Sibley as additional insureds. During discovery, Freddie Mac accused T. R. of failing to disclose the insurance policy until ordered by the magistrate judge. After the policy was produced, Freddie Mac claimed that they sought coverage from Scottsdale but received no response. Consequently, Freddie Mac initiated a third-party complaint against Scottsdale in 1999, which included three counts: 

1. A declaratory judgment that Scottsdale was obligated to defend and indemnify Freddie Mac and Sibley against the underlying claims and cover all related costs.
2. An allegation that Scottsdale breached an implied covenant of good faith and fair dealing by not properly handling Freddie Mac's claims, seeking both actual and punitive damages as well as attorney's fees.

The district court granted partial summary judgment in favor of Freddie Mac for $427,234.37, which included attorney's fees and prejudgment interest. The appellate court affirmed this judgment while addressing appellate jurisdiction issues.

In Count Three, Freddie Mac claimed Scottsdale breached its insurance contract by failing to defend and indemnify Freddie Mac against underlying claims, and violated the implied duty of good faith and fair dealing as outlined in Count Two. Freddie Mac sought partial summary judgment on Count One, while Scottsdale sought summary judgment on all counts. On March 20, 2001, the district court granted Freddie Mac's partial summary judgment on Count One and denied Scottsdale's motion. The court determined Scottsdale had a duty to defend Freddie Mac, as Freddie Mac was an additional insured and the underlying lawsuits were related to work performed under an alarm system. The court also found Scottsdale had a duty to indemnify Freddie Mac for settlement amounts, concluding that Scottsdale was equitably estopped from denying coverage due to its failure to meet the insured's reasonable expectations. Consequently, the court ordered Scottsdale to pay Freddie Mac $427,234.37, which included $101,113.87 for defense costs and $326,120.50 for settlement payments. Subsequently, the court awarded Freddie Mac $38,261.66 in attorney's fees and $32,612.05 in prejudgment interest. A Consent Judgment was entered on November 1, 2001, allowing Scottsdale to appeal the summary judgment on Count One, despite Counts Two and Three being dismissed without prejudice. Scottsdale filed an appeal on November 28, 2001, and Freddie Mac cross-appealed. The district court had federal subject matter jurisdiction under 12 U.S.C. 1452(f)(2), but the Consent Judgment did not provide appellate jurisdiction, prompting the court to seek additional briefing on this issue.

Counts Two and Three of the plaintiffs' Complaint are dismissed without prejudice, allowing plaintiffs to reinstate them if the March 19th Order is vacated and remanded for trial by the Third Circuit Court of Appeals upon the defendant's anticipated appeal. The entry of this Consent Judgment does not prevent the plaintiffs from seeking future counsel fees as per court rules and case law. Post-judgment interest will be added to the Consent Judgment, calculated from the time of its satisfaction. The Consent Judgment is considered final under Rule 54(b) for the defendant's intent to appeal the court's March 19, 2001, judgment in favor of the plaintiffs for $427,234.37. This judgment prompted an appeal from Scottsdale and a cross-appeal from Freddie Mac.

The finality requirement under 28 U.S.C. § 1291 aims to prevent piecemeal litigation, as established in case law. Courts have consistently ruled that they lack appellate jurisdiction over partial adjudications when claims are dismissed without prejudice, which influences decisions regarding appealability. In a relevant case, Verzilli v. Flexon, Inc., the court determined that a Consent Judgment was not an appealable final order because its resolution depended on the Court of Appeals' decision. The Consent Judgment in that case included a provision for the defendants to present a full defense if reversed on appeal, yet it also stipulated that proceedings would terminate if not reversed, reinforcing the non-finality of the order.

The Verzilli Court determined that the contingent nature of a Consent Judgment and stipulation undermined its finality, as it allowed for multiple potential outcomes—only one of which would conclude the District Court's involvement. Specifically, if the appellate court affirmed the District Court's ruling, the case would end; however, a reversal or dismissal would necessitate further proceedings. Consequently, the stipulation did not establish finality, resulting in a lack of appellate jurisdiction.

This analysis directly applies to the current case, where the Consent Judgment similarly allows for the reinstatement of Counts Two and Three upon reversal or remand, indicating it is contingent and lacks finality. The Consent Judgment's design appears to circumvent the requirements of finality under 28 U.S.C. § 1291.

The parties contended that the Consent Judgment had been certified for appeal under Rule 54(b) of the Federal Rules of Civil Procedure, which allows a district court to certify an order concerning fewer than all claims for appeal. However, the court found this argument unconvincing, emphasizing that a lack of finality under § 1291 cannot be overcome by a Rule 54(b) certification. The court reiterated that litigants should not be able to sidestep the final judgment rule without abandoning unresolved claims.

Rule 54(b) of the Federal Rules of Civil Procedure allows a district court to certify final decisions on one or more claims in multi-claim actions for immediate appeal. The court's decision on this certification is reviewed for abuse of discretion. The Supreme Court has emphasized that to grant such certification, the district court must provide an "express determination that there is no just reason for delay," along with reasons for this determination. In the current case, the district court's certification merely stated that a Consent Judgment was final under Rule 54(b) without articulating any supporting reasons, failing to meet the requirements outlined in precedent cases such as Allis-Chalmers Corp. v. Philadelphia Electric Co. 

Following oral arguments, it was determined that no appropriate factors justified the Rule 54(b) certification. Had Freddie Mac not dismissed remaining counts with prejudice post-argument, the court would have found the certification an abuse of discretion and dismissed the appeal due to a lack of finality. Furthermore, the presence of an open count for punitive damages, which was inextricably linked to a count for compensatory damages, further complicated appellate jurisdiction. Thus, the appeal and cross-appeal were deemed non-justiciable, leading to the conclusion that appellate jurisdiction was lacking.

Counsel play a crucial role in the Rule 54(b) certification process, and it is expected that they submit appropriate motions to the district court to justify such certifications. The district court must provide a rationale for its decisions, particularly when certifying appeals concerning only one count while leaving others unresolved. During oral arguments, counsel for both parties struggled to differentiate their case from a precedent decision, prompting Freddie Mac's counsel to request additional time to consult with clients regarding potential jurisdictional issues. Subsequently, Freddie Mac dismissed Counts II and III with prejudice, which allowed the previously non-final Consent Judgment to be treated as a final, appealable order. On appeal, Scottsdale contends that the district court wrongly granted summary judgment to Freddie Mac on Count One and improperly awarded attorney's fees and pre-judgment interest. Freddie Mac cross-appeals regarding the timing of the prejudgment interest. The court will review Scottsdale's arguments regarding the summary judgment, applying the appropriate legal standards without weighing evidence, focusing instead on whether a genuine issue for trial exists.

New Jersey law governs this case, and the court must apply state law as interpreted by the state's highest court. If there is no guidance from that court, the decisions of intermediate appellate courts will inform how the highest court would rule. The district court concluded that Freddie Mac qualifies as an 'additional insured' under T. R's policy with Scottsdale, which entails Scottsdale's duty to defend Freddie Mac against underlying claims related to fire injuries. Additionally, Scottsdale's delay in denying coverage estops it from refusing to indemnify Freddie Mac for settlement expenses.

The endorsement to T. R's policy explicitly lists Freddie Mac and Sibley as additional insureds, stating coverage is applicable for liability arising out of 'your work' performed for that insured. Scottsdale contends that this limitation excludes Freddie Mac since T. R could not have been held liable for the injuries claimed. However, the court rejects this argument, affirming that Freddie Mac is covered as an additional insured. New Jersey courts typically interpret insurance policy language broadly, supporting coverage for additional insured parties for injuries linked to the main policyholder's work, as illustrated by County of Hudson v. Selective Ins. Co., which recognized coverage under similar policy language.

The Appellate Division reversed a lower court's summary judgment favoring the insurance company, directing instead that summary judgment be entered for Hudson County. The court emphasized that New Jersey courts favor liberal construction of insurance policy language, recognizing that insurance policies are contracts of adhesion that require broad interpretation to benefit the insured. The court determined that the endorsement language extended to cover an injury to a subcontractor's employee on the general contractor's worksite, finding a "substantial nexus" between the contractor's work and the accident.

Citing relevant case law, the court noted that coverage applies where a strong connection exists between the insured's operations and the incident in question. In this instance, since complaints involved issues with fire and smoke alarm systems linked to work done by T. R, Freddie Mac fell under the Scottsdale policy's coverage. Scottsdale countered that New Jersey law requires a fact-sensitive approach to determine coverage and argued that liability should focus on T. R's work rather than Freddie Mac’s exposure to claims from fires. However, the court indicated that claims related to fire safety measures at the apartment complex would indeed trigger the policy, as they "arose out of" T. R’s work, establishing a closer connection than in prior cases that satisfied coverage requirements.

Scottsdale has a duty to reimburse Freddie Mac for defense costs, as determined by the district court, which correctly applied the New Jersey Supreme Court's test from Voorhees v. Preferred Mut. Ins. Co. The duty to defend arises when a complaint states a claim that corresponds with the insured risks outlined in the policy, regardless of the merit of the claims. The court found that the underlying complaints contained allegations that could impose liability for activities covered by the policy, specifically concerning the fire and smoke alarm systems provided by T. R. Scottsdale's arguments, which claimed a lack of negligent behavior or liability, were deemed irrelevant as the existence of allegations is sufficient to trigger the duty to defend.

Additionally, the district court ruled that Scottsdale is estopped from denying its duty to indemnify Freddie Mac for settlement expenses, as Freddie Mac was prejudiced by Scottsdale's refusal to defend. The court concluded that Scottsdale's actions precluded it from asserting it was not liable for the settlements, affirming that it must indemnify Freddie Mac for these costs.

In Griggs v. Bertram, the New Jersey Supreme Court established that an insurer can be estopped from denying coverage if it unreasonably delays in disclaiming coverage or notifying the insured of potential denial, even prior to taking control of a case. While insurers have the right to a reasonable investigation period, they also have a duty to promptly inform the insured once they learn of any grounds questioning coverage. This disclosure is crucial when an investigation uncovers a conflict between the insurer's and insured's interests, as failing to notify the insured undermines the insurer's fiduciary duty to act fairly.

The court held that if an insurer fails to inform the insured of a potential disclaimer after receiving timely notice and having adequate opportunity to investigate, it cannot later deny coverage when legal action arises. In the current case, the district court found Scottsdale's delay in notifying Freddie Mac of its intent to disclaim coverage was comparable to the eighteen-month delay deemed prejudicial in Griggs. The timeline showed that nearly eighteen months passed from Freddie Mac's initial demand for coverage on October 29, 1998, to Scottsdale's disclaimer on April 24, 2000. Additionally, T. R., the insured, was aware of discovery obligations regarding coverage as early as November 1997 but delayed providing necessary information until October 1998. The court noted that Scottsdale, which defended T. R. in the underlying matter, failed to fulfill its obligations to provide timely discovery and explanations for its disclaimer, thereby forcing Freddie Mac into litigation.

The district court correctly applied equitable estoppel to Scottsdale, as Scottsdale did not contest the court's findings regarding its conduct or provide relevant case law against the application of Griggs. Scottsdale's argument regarding a twenty-month delay in the litigation process and alleged non-compliance with discovery obligations does not undermine the court's conclusions. Notably, both T.R. and Scottsdale, represented by the same counsel, failed to promptly inform Freddie Mac about the Scottsdale policy and delayed in disclaiming coverage. Consequently, the district court's summary judgment in favor of Freddie Mac for defense costs and indemnification for settlement expenses was upheld.

Regarding attorney's fees, Scottsdale contended that it should not be liable for fees related to Sibley, who was not a party to the case, despite being listed as an additional insured. The court found this argument unconvincing, noting that Sibley and Freddie Mac would share similar claims against Scottsdale. Scottsdale did not provide evidence to suggest how legal fees should be apportioned or whether Freddie Mac independently covered certain expenses.

Scottsdale also claimed Freddie Mac failed to adhere to specific procedural rules when seeking attorney's fees. However, the district court dismissed this argument, stating that Scottsdale did not cite case law mandating compliance with the rules. Even if Freddie Mac's compliance was questionable, the local rule allows for flexibility in fee applications, and Scottsdale did not demonstrate any prejudice from the alleged non-compliance. As such, the court did not abuse its discretion in awarding attorney's fees to Freddie Mac.

Scottsdale contends that Freddie Mac's noncompliance with New Jersey's attorney fee rule warrants a reconsideration of the awarded fees, yet fails to cite any authority mandating strict adherence to the rule. A New Jersey court has previously affirmed that deficiencies in service affidavits may not invalidate fee awards when the record supports them. The district court thoroughly examined Scottsdale's objections to Freddie Mac’s claimed fees and found them unmeritorious, concluding that Scottsdale did not demonstrate any harm from the alleged noncompliance. 

Scottsdale's assertion regarding the unreasonableness of the fees, claiming over $38,000 in a nine-month period was excessive for minimal work, lacks substantial reasoning and is dismissed as unpersuasive. The court finds no abuse of discretion in the district court's attorney fee award. 

On the issue of prejudgment interest, Scottsdale argues against its award based on the absence of a demand for policy details prior to settlement. However, under New Jersey law, prejudgment interest may be awarded at the court's discretion, and Scottsdale does not allege a manifest denial of justice to challenge this decision. 

Freddie Mac's cross-appeal addresses the start date for prejudgment interest, contesting the October 25, 1999 date set by the district court. Freddie Mac argues that the court should have based this date on the timing of its settlement payments in 1998 instead. However, it fails to provide evidence that the district court’s discretionary decision represented a manifest denial of justice.

The district court's judgment against Freddie Mac in its cross-appeal is affirmed in all respects. The case involves Federal Insurance Company, which replaced Vigilant Insurance Company as Freddie Mac's insurer in the litigation against Scottsdale. Notably, Sibley is not a party to the current proceedings. Under 12 U.S.C. § 1452(f)(2), all civil actions involving the Federal Home Loan Mortgage Corporation fall under U.S. law, granting district courts original jurisdiction regardless of the case's value. The Consent Judgment was entered on November 1, 2001, though signed on October 25, 2001. The ruling on the Consent Judgment in the Verzilli case, while not a dismissal without prejudice, functionally resembled one due to its contingent nature. Past cases, such as Fassett v. Delta Kappa Epsilon, have established that appellate jurisdiction can exist even when claims are dismissed without prejudice if they cannot be refiled due to the statute of limitations. Currently, the Rule 54(b) certification is moot since Counts Two and Three have been dismissed with prejudice, leaving only a final claim from Freddie Mac's action. Counsel did not file a motion regarding this before the district court, and Freddie Mac appears to have prioritized appellate review over reinstating those counts. The definition of "your work" in the relevant policy aligns with that in the County of Hudson case, and Scottsdale's waiver of certain arguments on appeal could have allowed for a quicker resolution of the issues.

Scottsdale failed to object to the district court's application of estoppel in its initial brief, only mentioning it in the reply brief, which led to a waiver of the issue. The court referenced F.D.I.C. v. Deglau to support this waiver, concluding that Scottsdale's arguments, regardless of their waiver status, lacked merit. Additionally, the court noted that Freddie Mac asserted Scottsdale waived other arguments by not raising them at the district court level, but did not need to address those claims since Scottsdale's arguments were deemed without merit. The excerpt also discusses a precedent from Griggs, highlighting an insurer's failure to notify the insured about the potential lack of coverage for a claim shortly after an incident occurred. It mentions Rule 26 of the Federal Rules of Civil Procedure, which mandates disclosure of any insurance agreements that could be relevant to satisfying a judgment. Scottsdale requested a remand to examine specific bills related to fees paid on behalf of Sibley, but the court declined, stating that Scottsdale should have raised those arguments timely before the district court. Finally, it reiterates that counsel fees are permissible in actions involving liability or indemnity insurance policies according to N.J. CT. R. 4:42-9(a)(6).