Liberty Mutual Fire Insurance v. Westchester Fire Insurance

Citations: 938 F. Supp. 2d 630; 2013 U.S. Dist. LEXIS 48914; 2013 WL 1395719Docket: Civil Action No. 08-5166

Court: District Court, E.D. Louisiana; April 4, 2013; Federal District Court

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A fire in a FEMA trailer on August 25, 2006, resulted in severe injuries to Jean Joseph and the death of her friend, Bernard Mabry II. Lawsuits were filed against Fluor Enterprises, Inc., Keith McLin (a Fluor employee), and MMR Constructors, Inc., alleging negligence related to gas stove operation and propane detector functionality prior to the trailer's lease to Ms. Joseph. The lawsuits settled outside of court, with the Joseph case totaling $10 million (split equally between Liberty Mutual and Fluor's insurers), and the Mabry lawsuits totaling $2.75 million (equally shared). Each settlement included a waiver of the first $2 million but reserved rights to recover the remaining amounts upon resolving a disputed coverage issue concerning Fluor's insurance claims against Liberty Mutual. 

Liberty Mutual initiated a suit for declaratory relief against Westchester and Great American, seeking reimbursement of $4.375 million paid in settlements. These insurers counterclaimed for their respective portions. A prior trial determined that Fluor's claims for indemnity from MMR under their contract and additional insured status under MMR's excess policy were incorrect. Liberty Mutual subsequently moved for summary judgment, asserting entitlement to recover the non-waived settlement amounts based on subrogation to Fluor and McLin's rights. The Court confirmed Liberty Mutual's right to recover from Great American and Westchester for payments made on behalf of Fluor and McLin. However, it found the Joseph settlement agreement ambiguous regarding Liberty Mutual's payment allocation, necessitating further trial to resolve factual disputes, while affirming clarity in the Mabry settlement concerning claims against Fluor and McLin.

On March 18, 2013, a bench trial was held regarding the allocation of the Joseph settlement. The Court reviewed witness testimony, evidence, and the case record, issuing Findings of Fact and Conclusions of Law under Rule 52(a) of the Federal Rules of Civil Procedure. The Court adopted prior findings from earlier rulings dated February 17, 2012, and September 13, 2012.

Key findings include:

1. **Parties Involved**: 
   - Liberty Mutual (citizenship in Wisconsin and Massachusetts).
   - Westchester (citizenship in New York and Pennsylvania).
   - Great American (citizenship in Ohio).
   - Fluor contracted with FEMA in July 2005 to manage the installation of FEMA trailers after Hurricanes Katrina and Rita, subcontracting this work to MMR.

2. **Insurance Policies**:
   - Liberty Mutual issued a $1 million commercial general liability (CGL) policy and a $20 million excess liability policy to MMR.
   - CNA provided Fluor with a $2 million CGL policy, while Westchester and Great American issued excess policies with limits of $5 million and $3 million, respectively.

3. **Incident Overview**:
   - On August 22, 2006, Fluor employee Keith McLin conducted a lease-in of a FEMA trailer leased to Jean Joseph, performing various tests.
   - A fire broke out in the trailer on August 25, resulting in severe injuries to Ms. Joseph and the death of Bernard Mabry II. The fire was caused by gas accumulation from an improperly turned-off stove knob and a malfunctioning LP gas detector.

4. **Legal Proceedings**:
   - Following the fire, multiple lawsuits were filed against Fluor, McLin, MMR, and others, with Ms. Joseph's economic damages claimed at nearly $10 million.
   - Fluor and McLin sought coverage from Liberty Mutual, claiming they were additional insureds under MMR's policies, leading Liberty Mutual to agree to defend them while reserving rights. 

The Court determined that MMR's actions were not a but-for cause of the injuries sustained by Ms. Joseph and Mr. Mabry.

The Joseph lawsuit settled for $10 million, with contributions from CNA ($2 million), Westchester ($3 million), and Liberty Mutual ($5 million). A Confidential Settlement Agreement, referred to as the 'Joseph 12/30/08 agreement,' was signed on December 30, 2008, by counsel for Fluor/McLin, their insurers, and Liberty Mutual. As part of this agreement, Westchester and Liberty Mutual reserved rights to recover $3 million from each other, while Liberty Mutual waived its right to recoup the remaining $2 million it paid. The Mabry lawsuits settled for $2.75 million, funded equally by Liberty Mutual and Westchester ($1.375 million each). Following this, a Receipt and Release Agreement, termed the 'Final Agreement,' was executed encompassing both settlements.

Liberty Mutual managed claims for the Joseph and Mabry lawsuits through several adjusters, assigning Joseph Covert and Sam Cooley for Fluor/McLin under excess and CGL policies, respectively, and Doug Dickus and Janeen Young for MMR under similar policies. To address potential conflicts of interest, Liberty Mutual established a 'Chinese wall' between the adjusters for Fluor/McLin and MMR, ensuring they had no contact. All experts, except for those representing Fluor and McLin, indicated that gas had been left on for three days, coinciding with McLin's lease, and Ms. Joseph identified a 'Fluor employee' as responsible. Covert assessed significant exposure for Fluor and McLin, while legal representatives Kevin Ainsworth and William Schuette noted a combined exposure of 25-50 for Fluor and McLin against MMR's 0-5.

Settlement negotiations were time-sensitive due to Christopher Bruno's election to the bench, requiring resolution by December 30, 2008. The Joseph plaintiffs proposed a $10 million settlement on December 5, 2008. Counsel for Fluor and McLin acknowledged this offer as reasonable and urged immediate settlement efforts. On December 17, 2008, Covert sought $4 million from Liberty Mutual to settle the claims against Fluor and McLin.

Mr. Covert's authority request indicated that Fluor's coverage primarily concerns its liability under contractual obligations with MMR, which Mr. Covert asserted had minimal or no liability. On December 19, 2008, Liberty Mutual approved the request. MMR's adjusters and counsel were not involved in settlement negotiations and lacked authority to settle. Fluor's counsel proposed that Liberty Mutual contribute to a $10 million settlement for the Joseph claims, specifically requesting $1 million from MMR and additional contributions from other insurers. Liberty Mutual rejected this contribution request, clarifying that any settlement payment would be solely on behalf of Fluor and McLin. From December 19 to 30, 2008, MMR's counsel and adjusters did not participate in negotiations. On December 22, Mr. Ainsworth suggested a 50/50 funding approach for the settlement. Subsequently, Mr. Schuette urged immediate acceptance of the demand, emphasizing the urgency due to the severity of the claims against Fluor. The Joseph plaintiffs set a deadline for the $10 million demand, which expired on December 30, 2008. On that date, multiple communications reiterated the need for a prompt settlement, with Mr. Covert acknowledging these were demands for Fluor and McLin only. The dispute over primary coverage was acknowledged to be reserved for later resolution. Ultimately, on December 30, Fluor and its insurers agreed to the settlement, and Mr. Ainsworth confirmed acceptance on their behalf, without involving MMR or its counsel, and he did not have authority to accept on MMR's behalf.

The Joseph 12/30/08 Agreement was initially drafted by Liberty Mutual and included provisions for settling claims on behalf of Fluor and MMR Group, Inc. Liberty Mutual committed to fund $5 million for the settlement, specifying its roles as the primary and excess carrier for MMR and as an additional insurer for Fluor. On December 30, 2008, Liberty Mutual shared the draft with Fluor and its insurers, who requested modifications, including the addition of a clause clarifying that the agreement would not create new rights beyond those specified, the inclusion of CNA as a signatory, and the addition of a specific case caption. Notably, MMR did not sign the agreement, and the parties intended to supplement it with a more detailed agreement later.

Liberty Mutual's contribution to the settlement totaled $5 million, comprising $1 million from its CGL policy and $4 million under its excess policy. The $1 million payment was authorized based on the initial allegations involving McLin and MMR but was not transferred to the Fluor/McLin claim file due to prior exhaustion of the policy limit. The $4 million was issued from Liberty Mutual’s Fluor/McLin excess claim file.

The Final Agreement elaborated on the Joseph 12/30/08 Agreement, confirming the settlement of the plaintiffs' claims against Fluor. It allowed Liberty Mutual to seek reimbursement of $3 million in indemnity payments from Westchester and Great American and reserved rights against Fluor for recovery from its insurers. The agreement included a waiver of defenses related to claims arising from assignments or subrogation from Fluor and mandated that any ambiguities should not be construed against the drafter. Fluor also agreed to assign its claim against Westchester and Great American for indemnification related to the payments made by Liberty Mutual in the Joseph Settlement.

The Final Agreement is deemed the complete and overriding document between the parties, nullifying all previous agreements and communications. Liberty Mutual issued two checks totaling $5 million solely on behalf of Fluor and McLin, not MMR. The Court possesses jurisdiction under 28 U.S.C. § 1332 and affirms Liberty Mutual's right to recover only the amounts it paid for Fluor and McLin. The Joseph 12/30/08 Agreement is found to be ambiguous regarding allocation; however, this ambiguity does not favor the drafter due to the sophistication and equal bargaining power of the parties involved. The Court determined that the Joseph Agreement was subject to negotiation and modifications, and Liberty Mutual is not at fault for the ambiguity. Extrinsic evidence is necessary for interpreting the Joseph Agreement, indicating that the Final Agreement was intended to clarify and amend the allocation of payments. It explicitly states that Liberty Mutual's payments were to resolve claims against Fluor and McLin. The Court concludes that Liberty Mutual is entitled to recover $3 million from insurers Westchester and Great American, allocating $625,000 from Westchester and $2,375,000 from Great American. Additionally, Liberty Mutual is entitled to recover $625,000 from Great American related to the Mabry lawsuits. Prejudgment interest is owed by Westchester and Great American on their respective amounts from the date of the Joseph Agreement and specific dates related to the Mabry settlements.