Heubel Materials Handling Co. v. Universal Underwriters Insurance ( 2013 )

United States Court of Appeals
For the Eighth Circuit
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No. 12-1777
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Heubel Materials Handling Company, Inc., a Missouri corporation
lllllllllllllllllllll Plaintiff - Appellant
v.
Universal Underwriters Insurance Company, a Kansas corporation
lllllllllllllllllllll Defendant - Appellee
Universal Underwriters Insurance Company, a Kansas corporation
lllllllllllllllllllllThird Party Plaintiff - Appellee
v.
The Raymond Corporation, a New York corporation; Liberty Mutual Insurance Company
lllllllllllllllllllllThird Party Defendants
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No. 12-1951
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Heubel Materials Handling Company, Inc., a Missouri corporation
lllllllllllllllllllll Plaintiff
v.
Universal Underwriters Insurance Company, a Kansas corporation
lllllllllllllllllllll Defendant
Universal Underwriters Insurance Company, a Kansas corporation
lllllllllllllllllllllThird Party Plaintiff - Appellee
Liberty Mutual Insurance Company
lllllllllllllllllllllThird Party Defendant
v.
The Raymond Corporation, a New York corporation
lllllllllllllllllllllThird Party Defendant - Appellant
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Appeals from United States District Court
for the Western District of Missouri - Kansas City
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Submitted: November 14, 2012
Filed: January 30, 2013
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Before SMITH, BEAM, and GRUENDER, Circuit Judges.
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GRUENDER, Circuit Judge.
Heubel Materials Handling Company, Inc. (“Heubel”) and the Raymond
Corporation (“Raymond”) appeal the order of the district court1 granting summary
judgment in favor of Universal Underwriters Insurance Company (“Universal”) on
1
The Honorable David Gregory Kays, United States District Judge for the
Western District of Missouri.
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Heubel’s claim for coverage under a Universal insurance policy. The district court
held that Heubel’s breach of a cooperation clause in the Universal policy absolved
Universal of the duty to defend or provide coverage for a products liability lawsuit
against Heubel. For the reasons discussed below, we affirm.
I. Background
Heubel is an authorized dealer of Raymond materials handling equipment (such
as forklifts). Heubel participates in the Raymond Dealer Defense and Indemnification
Program, which is mandatory for all Raymond dealers. The purpose of the program
is to “maintain a product liability and loss prevention defense and indemnification
program” and to “provide for a uniform defense” of product liability lawsuits. The
program provides:
In the event a personal injury suit is filed against a Raymond Dealership
arising from an alleged Raymond product failure . . . Raymond or its
insurance carrier will pay legal costs incurred in the defense of such suit
and, except for property damages, will indemnify the Dealership, to the
fullest extent allowed by law, in the event of a settlement or adverse
judgment, up to the limit of existing coverage.
The dealers contribute to the funding of the program by paying a two-percent
surcharge on Raymond parts. This money is not held separately, but goes directly
into Raymond’s general funds, out of which general funds Raymond pays for an
insurance policy from Liberty Mutual to cover its obligations under the Raymond
indemnification program. The program requires dealers to “[f]ully cooperate with
Raymond and its Defense Counsel with investigations and defense of claims.” It also
states that dealers “should maintain business insurance coverage as deemed
appropriate.”
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Heubel later obtained a separate general liability insurance policy from
Universal. The Universal policy gives Universal the right and duty to defend any suit
for covered damages and requires the insured to “cooperate and assist [Universal] in
the investigation, settlement, defense, enforcement of contribution or
indemnification.”
In August 2007, William Harris was severely injured while operating a
Raymond “walkie-rider” forklift that had been serviced by Heubel. Harris filed a
personal injury suit in the District of Kansas alleging that Heubel failed to properly
service the forklift. See Harris v. Heubel Material Handling, Inc., No. 6:09-cv-01136
(D. Kan.). He did not name Raymond as a defendant. Heubel gave immediate notice
to Raymond after the accident, and Raymond paid for and controlled the defense of
the underlying suit from the outset.2
In contrast, Heubel did not give notice to Universal until more than six months
after the underlying lawsuit was filed. Universal initially agreed to defend Heubel,
subject to a full reservation of rights based on Heubel’s late notice, and asked Heubel
to identify any other relevant insurance policies. In response to the reservation of
rights, Heubel sued in Missouri state court for a declaratory judgment that, under
Missouri law, the insurer’s reservation of rights entitled Heubel to choose its own
counsel and control the defense of the underlying suit.
Universal removed the declaratory judgment action to federal court, withdrew
its reservation of rights, and offered to retain counsel to defend Heubel going forward
and to reimburse Heubel for interim defense costs incurred after the notice date.
However, Universal also informed Heubel that Universal would require Heubel to
2
At the time Heubel and Raymond entered into the Raymond indemnification
program, Raymond owned a minority interest in Heubel, but shortly after the accident
that led to the Harris suit, Raymond obtained an 83.3 percent ownership interest in
Heubel through an intermediate subsidiary.
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cooperate in pursuing indemnification from Raymond. Heubel responded by
amending its complaint to seek a declaratory judgment that “Universal’s requirement
that Heubel pursue and enforce indemnity [against Raymond] creates a potential or
actual conflict of interest between Universal and Heubel,” which again would entitle
Heubel to select its own counsel and control the defense of the underlying suit.
Heubel also added claims for breach of the insurance contract.
Universal counterclaimed for a declaratory judgment that Heubel’s lack of
cooperation absolved Universal of any duty to provide coverage. Universal also filed
third-party complaints against Raymond and Liberty Mutual, seeking a declaratory
judgment that, to the extent Universal was still bound to honor its policy, any
coverage would apply only after all coverage from the Raymond indemnification
program was exhausted. On cross motions for summary judgment, the district court
held that Heubel had breached the cooperation clause of the Universal policy; that the
breach was not excused by a conflict of interest or reservation of rights; and that the
lack of cooperation substantially prejudiced Universal, absolving it of the duty to
defend or provide coverage for the underlying suit. Based on the holding of no
coverage, the district court did not reach the issue of whether Universal’s coverage
would be secondary to the Raymond indemnification program.
Heubel and Raymond now appeal the grant of summary judgment, arguing that
(1) Heubel was absolved from performing under the cooperation clause due to a
reservation of rights by Universal or, alternatively, a conflict of interest between
Universal and Heubel, and (2) even if there was a breach of the cooperation clause,
any prejudice to Universal from Heubel’s control of the defense in the underlying suit
was negated by Universal’s contractual inability to pursue an indemnification claim
against Raymond.
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II. Discussion
“We review the grant of summary judgment de novo.” Discovery Grp. LLC v.
Chapel Dev., LLC, 574 F.3d 986, 988 (8th Cir. 2009). Where, as here, there are no
material facts in dispute, the only question is whether Universal is entitled to
judgment as a matter of law. Id. The parties agree that Missouri law governs the
interpretation of the insurance policies in this diversity action. See Interstate
Bakeries Corp. v. OneBeacon Ins. Co., 686 F.3d 539, 542 (8th Cir. 2012). “If the
Supreme Court of Missouri has not addressed an issue, we must predict how the court
would rule, and we follow decisions from the intermediate state courts when they are
the best evidence of Missouri law.” Id. (quoting Eubank v. Kan. City Power & Light
Co., 626 F.3d 424, 427 (8th Cir. 2010)).
“Cooperation clauses such as the one at issue here are valid and enforceable
under Missouri law.” Med. Protective Co. v. Bubenik, 594 F.3d 1047, 1051 (8th Cir.
2010). “To deny liability coverage under such a provision, an insurer must prove: (1)
a material breach of the cooperation clause; (2) the existence of substantial prejudice
as a result of the breach; and (3) the exercise of reasonable diligence to secure the
insured’s cooperation.” Id. Heubel challenges the first two elements.
A. Was Heubel absolved from performing under the cooperation clause
due to a reservation of rights by, or a conflict of interest with, Universal?
Under Missouri law, a “reservation of rights” refers to an insurer’s offer “to
defend its insured but reserve the right to later disclaim coverage.” Truck Ins. Exch.
v. Prairie Framing, LLC, 162 S.W.3d 64, 88 (Mo. Ct. App. 2005) (per curiam). The
insured may reject an insurer’s offer to defend with a reservation of rights, and if the
insurer refuses to withdraw the reservation of rights, the insured is then free to hire
independent counsel to defend the underlying suit and obtain compensation from the
insurer if the underlying suit later is held to be covered by the policy. Id. While
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Universal withdrew its initial, express reservation of rights based on late notice,
Heubel nevertheless asserts that Universal again reserved its rights when it refused
Heubel’s demand to stipulate that Universal would “satisfy any judgment . . . [in the
underlying suit] on a primary, non-contributing basis,” see Heubel’s Proposed
Stipulation and Order forwarded Feb. 26, 2010, that is, when it refused Heubel’s
demand to forgo any indemnification claim against Raymond.
Heubel’s proposed stipulation asked Universal to disclaim a right expressly
recognized in the Universal policy, the right to ask the insured to cooperate in
pursuing indemnification from another party. Rather than reserving “the right to later
disclaim coverage,” Truck Ins. Exch., 162 S.W.3d at 88, Universal offered complete
coverage but refused to concede its indemnification claim against Raymond. Because
Universal did not reserve the right to disclaim coverage of any damages that might
be awarded or legal fees that might be incurred in the underlying suit, its action does
not qualify as a reservation of rights.
Heubel and Raymond also argue that a conflict of interest precludes Universal
from controlling the defense of the Harris suit. In this context, a conflict of interest
exists if there is a “substantial risk that [Universal’s] lawyer’s representation of
[Heubel] would be materially and adversely affected because of the lawyer’s
countervailing interests or duties.” State ex rel. Union Planters Bank, N.A. v.
Kendrick, 142 S.W.3d 729, 736 (Mo. 2004) (quoting Geoffrey C. Hazard, Jr. & W.
William Hodes, The Law of Lawyering § 10.7 (3d ed. Supp. 2004)). Thus, where an
underlying suit presents some circumstance that potentially could reward the insurer
for failing to provide a full and vigorous defense to its insured, the insurer cannot be
permitted to exercise its right to control the defense in the underlying suit. For
example, in Howard v. Russell Stover Candies, Inc., 649 F.2d 620 (8th Cir. 1981), an
underlying suit alleged two alternative theories of recovery, only one of which would
be covered by the insurance policy at issue. We held that the insurer could not
exercise its right to control the defense because its “counsel . . . would be inclined,
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albeit acting in good faith, to bend his efforts, however unconsciously, toward
establishing that any recovery [in the underlying suit] would be grounded on the
theory . . . which was not covered by the policy.” Id. at 625 (quoting U.S. Fid. &
Guar. Co. v. Louis A. Roser Co., 585 F.2d 932, 938 (8th Cir. 1978)).
Here, Heubel makes no claim that the underlying suit presents any
circumstance that would reward Universal for failing to provide a full and vigorous
defense to Heubel. In addition, there would be no benefit to Universal from a defense
strategy of shifting the blame to a product defect attributable to Raymond because the
underlying suit alleges precisely that Heubel failed to diagnose or correct such a
defect. Heubel and Raymond fail to explain how the defense of the underlying suit
could be managed in a way that unfairly minimizes the risk exposure faced by
Universal at the expense of increasing the risk exposure faced by Heubel and
Raymond.
Instead, the sole conflict of interest asserted by Heubel is that Universal’s
enforcement of the cooperation clause in the Universal policy would force Heubel to
breach the competing cooperation clause in the Raymond indemnification agreement,
depriving Raymond of its competing right to control the defense.3 Thus, Heubel and
3
In their reply brief, Heubel and Raymond also argue for the first time that they,
as affiliated companies, should be treated as a single client of any counsel who
controls the defense of the Harris suit. We generally do not consider arguments not
raised in a party’s opening brief, and we correspondingly grant Universal’s motion
to strike the relevant portion of the reply brief. See Bearden v. Lemon, 475 F.3d 926,
930 (8th Cir. 2007). Even if we were to consider this argument, we think it is likely
that the Supreme Court of Missouri would reject Heubel and Raymond’s invitation
to ignore their separate corporate forms in these circumstances. Missouri follows the
general rule that, while the separate corporate forms of a subsidiary and parent may
be disregarded (or “pierced”) in appropriate circumstances for the benefit of a third
party, those separate corporate forms never should be disregarded for the benefit of
the related corporations as against a third party. See In re Mar-Kay Plastics, Inc., 234
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Raymond take the position that the Universal policy provides primary coverage for
the Harris suit and yet, at the same time, the Raymond indemnification program
provides primary control of the defense to Raymond. This is antithetical to the
traditional principle that conflicting right-to-control clauses should be resolved in
favor of the insurer with primary coverage. See, e.g., Dodge v. Firemen’s Fund Ins.
Co., 362 S.W.2d 767, 769 (Mo. Ct. App. 1962) (“It would be unjust to [the insurer]
to declare it has the duty to defend and the obligation to pay the judgments, if
obtained, and still to permit [another insurer] to participate in the control of the
defense.”). Nothing in the plain language of the Universal policy suggests that the
parties intended such a non-traditional arrangement. If Heubel and Raymond wished
to obtain outside primary products liability insurance coverage while preserving the
right of Raymond to control the defense of such a suit, Heubel should have bargained
for (and Raymond’s indemnification program should have required) an insurance
policy that did not give the insurer the right to control the defense.
Because no reservation of rights or conflict of interest entitled Heubel to select
its own counsel while continuing to enjoy the coverage benefits of the Universal
policy, Heubel breached the policy by refusing to allow Universal to control the
defense.
B.R. 473, 481 (Bankr. W.D. Mo. 1999); Cent. Cooling & Supply Co. v. Dir. of
Revenue, State of Missouri, 648 S.W.2d 546, 547 (Mo. 1982) (“[T]he court [has]
ignored separate corporate entities . . . to impose liability on the corporation, not to
bestow an advantage [on the corporation] . . . .”).
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B. Was any prejudice to Universal from Heubel’s control of the defense
in the underlying suit negated by Universal’s contractual inability to pursue an
indemnification claim against Raymond?
The district court held that the denial of Universal’s right to control the defense
caused substantial prejudice to Universal, justifying a denial of coverage based on
Heubel’s breach of the cooperation clause, because it prevented Universal from
pursuing a third-party indemnification claim against Raymond in conjunction with
the underlying suit. As a result of Universal’s inability to control the defense, it has
been deprived of its ability under Federal Rule of Civil Procedure 14 “to implead
another party ‘who is or may be liable’ to the defendant for all or part of the
plaintiff’s claim.” Discovery Grp., 574 F.3d at 989 n.* (quoting Fed. R. Civ. P. 14).
Other courts have recognized that third-party practice under Rule 14 enables a party
to avoid “[t]he costs and pitfalls associated with litigating multiple suits on the same
subject matter, and the attendant possibility of inconsistent verdicts,” which “are not
insubstantial or abstract.” Hecht v. Summerlin Life & Health Ins. Co., 536 F. Supp.
2d 1236, 1241 (D. Nev. 2008). If Universal were allowed to control the defense and
implead Raymond, it could “avoid[] having to re-litigate in another court the issues
heard and adjudged in the action between itself and” the plaintiff and “protect itself
from potentially inconsistent verdicts.” Id.
Heubel and Raymond counter that these harms are too speculative to constitute
“substantial prejudice” under Missouri law. They cite Anderson v. Slayton, 662
S.W.2d 575 (Mo. Ct. App. 1983), for the proposition that Universal must demonstrate
the breach of the cooperation clause “actually was prejudicial to the interests of the
insurer” during the underlying litigation. Id. at 577. Tellingly, however, the court in
Anderson itself rejected “actual prejudice” as a general rule, holding instead that
“prejudice automatically follows from the denial to the insurer of any opportunity to
defend against the claim.” Id. at 577-78. Although the prejudice here is not as
extreme as that in Anderson, which involved liability for a default judgment entered
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against the insured after it failed to provide notice of suit to the insurer, Universal
similarly was denied an opportunity to control the defense of a claim. As a result, we
predict that, under these circumstances, the Supreme Court of Missouri would not
require Universal to present evidence to show that its interests were “actually”
prejudiced during the underlying litigation.
Heubel and Raymond also contend that, even if Universal had been allowed to
control the defense of the Harris suit, Universal would have been precluded from
pursuing an indemnification claim against Raymond because (1) a subrogation waiver
clause in the Universal policy allows Heubel to veto any indemnification claim by
Universal, and (2) the Raymond indemnification program is not an enforceable
indemnity agreement.
1. Subrogation waiver
The Universal policy clause entitled “Subrogation” states, “Once WE have
made a payment under this policy, . . . [your] rights to recover from others become
OUR rights. However, WE will not exercise OUR right of subrogation if YOU ask
US not to.” According to Heubel and Raymond, even if Universal controlled the
defense, Universal would not be allowed to pursue its desired third-party claim
against Raymond because Heubel has the right to instruct Universal not to exercise
its right of subrogation against Raymond.
The flaw in this argument is that Universal’s third-party claim against
Raymond would not necessarily arise under the policy’s subrogation provision.
“Subrogation arises generally when a first party insurer pays its insured’s property
loss and, thereby, acquires its insured’s right to pursue any third party who may have
occasioned loss.” Benton House, LLC v. Cook & Younts Ins., Inc., 249 S.W.3d 878,
882 (Mo. Ct. App. 2008). On the other hand, “[i]ndemnity is a right which inures to
a person who has discharged a duty which is owed by him, but which, as between
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himself and another, should have been discharged by the other.” State ex rel.
Manchester Ins. & Indem. Co. v. Moss, 522 S.W.2d 772, 774 (Mo. 1975). Here,
Universal premises its claim against Raymond not on a subrogation-type theory that
a Raymond manufacturing or design defect “occasioned loss” for Heubel, but rather
on the indemnification-type theory that the Raymond indemnification program gave
Raymond the primary duty to cover Heubel’s damages for such a claim, regardless
of causation.
Of course, parties sometimes use the terms “subrogation” and
“indemnification” in ways that vary from the traditional understandings of these
terms. In determining the effect of subrogation waiver clauses upon indemnification
provisions, the court must “rely on the plain and ordinary meaning of the words in the
contract and ‘consider the document as a whole.’” Nodaway Valley Bank v. E.L.
Crawford Constr., Inc., 126 S.W.3d 820, 825 (Mo. Ct. App. 2004) (quoting SD Invs.,
Inc. v. Michael–Paul, L.L.C., 90 S.W.3d 75, 81 (Mo. Ct. App. 2002)). “It is
preferable to attribute a reasonable meaning to each clause and harmonize all
provisions, rather than leave some provisions non-functional or nonsensical.” Id. at
827.
Here, the plain language of the Universal policy treats indemnification and
subrogation in the traditional sense of separate potential claims against third parties.
For example, the policy recognizes that any right to subrogation occurs solely “[o]nce
WE have made a payment under this policy,” but it references the insured’s duty “to
cooperate and assist US in the . . . enforcement of . . . indemnification” in a separate
clause entitled “Insured’s Duties after Injury, . . . Occurrence, Claim or Suit”
(emphasis added). Thus, the policy recognizes the traditional broad right of
subrogation that arises after the insurer makes payment as well as the express ability
to enforce an indemnification claim immediately after the injury occurs, which is
possible only in the narrower case where another party has a preexisting duty to cover
the claim—the traditional meaning of indemnification. In contrast to the subrogation
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clause, there is no provision for the insured to request that Universal not pursue
indemnification. Because the plain language of the policy distinguishes between
subrogation claims and indemnification claims, we hold that the subrogation clause,
including the waiver, is inapplicable to indemnification claims. Thus, Heubel had no
grounds under the policy to negate or waive Universal’s right to seek indemnification
from Raymond.
2. Enforceability of the Raymond indemnification program
Next, Heubel and Raymond argue that the Raymond indemnification program’s
coverage of suits “arising from an alleged Raymond product failure” does not
expressly cover the case where the alleged failure results from the dealer’s own
negligence. “As a general proposition, . . . contractual provisions releasing a party
from liability for its own negligent acts must be stated clearly, unequivocally, and
conspicuously.” Util. Serv. & Maint., Inc. v. Noranda Aluminum, Inc., 163 S.W.3d
910, 913 (Mo. 2005). Nevertheless, a sophisticated commercial entity, such as
Raymond, may agree to indemnify another party for its own negligence “without
specifically mentioning ‘negligence,’ ‘fault,’ or an equivalent.” Id. at 914 (quoting
Purcell Tire & Rubber Co. v. Exec. Beechcraft, Inc., 59 S.W.3d 505, 509 (Mo.
2001)). In such cases, the operative language to indemnify a party for its own
negligence typically includes broad phrases such as “any and all claims,” id. at 911,
or “any damages or expenses claimed,” Purcell, 59 S.W.3d at 508.
In this case, the Raymond indemnification program does not refer to “any” or
“all” claims. This is not surprising, however, because the program is tailored to cover
solely product liability claims, not all forms of liability. The program contains other
express language that indicates Raymond intended to indemnify Heubel for product
failures even when caused by Heubel’s own negligence. For example, Raymond
promises, as part of its “risk control” under the indemnification program, to instruct
“key [Heubel] service personnel, through the Raymond Training Center, as to the
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proper and safe repair of Raymond equipment.” By definition, repairs and service
performed by Heubel would not create a “risk” to Raymond if negligence in such
work was not subject to indemnification under the agreement. Furthermore, there
would be no reason for dealers to contribute to the funding of the program if they
received coverage only for damages caused by Raymond’s fault—for which they
would be entitled to contribution in any event—and no coverage for damages caused
by their own fault. Thus, the plain language of the Raymond indemnification
program expresses an intent for Raymond to indemnify Heubel even for Heubel’s
own negligence in sufficiently clear and unequivocal terms to be effective as to a
sophisticated business entity such as Raymond.
In addition, Heubel and Raymond contend that the Raymond indemnification
program actually constitutes an insurance purchasing group, rather than an
indemnification agreement. An insurance “purchasing group” is a group of
businesses with similar or related liability exposure formed to purchase liability
insurance on a group basis. 15 U.S.C. § 3901(a)(5); see Swanco Ins. Co.-Ariz. v.
Hager, 879 F.2d 353, 354 (8th Cir. 1989). However, the Raymond indemnification
program never indicates that Raymond and its dealers are forming a group to
purchase liability insurance. Instead, the program states that its purpose is to
“provide defense, indemnity and insurance in amounts to be determined by Raymond”
and that “Raymond or its insurance carrier . . . will indemnify the Dealership to the
fullest extent allowed by law” (emphases added). It is undisputed that Raymond
itself, rather than a group, purchased the Liberty Mutual policy out of Raymond’s
general fund. The fact that the program requires dealers to contribute to Raymond’s
general fund to help fund the indemnification coverage does not convert Raymond’s
program for indemnifying its dealers into an insurance purchasing group.
Because nothing in the Universal policy or the Raymond indemnification
program precluded a third-party indemnification claim by Universal against Raymond
in the Harris suit, Universal suffered substantial prejudice from Heubel’s refusal to
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allow Universal to control the defense. As a result, Universal was justified in denying
coverage based on Heubel’s breach of the cooperation clause.
III. Conclusion
For the foregoing reasons, we affirm the grant of summary judgment to
Universal.
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