Karen H. Ventrell, TROUTMAN SANDERS LLP, 401 Ninth Street N.W., Washington, DC 20004; and Jeanne H. Unger, BASSFORD REMELE, PA, 33 South Sixth Street, Suite 3800, Minneapolis, MN 55402, for plaintiff.
Dale O. Thornsjo, O'MEARA LEER WAGNER & KOHL, PA, 7401 Metro Boulevard, Suite 600, Minneapolis, MN 55439, for defendant.
Andrew J. Detherage, BARNES & THORNBURG LLP, 11 South Meridian Street, Suite 1313, Indianapolis, IN 46204; and Marta M. Chou, BARNES & THORNBURG LLP, 225 South Sixth Street, Suite 2800, Minneapolis, MN 55402, for intervenor-defendant.
AMENDED MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT [*]
JOHN R. TUNHEIM, District Judge.
Plaintiff Continental Casualty Company ("Continental") brings this action against defendant National Union Fire Insurance Company of Pittsburgh, PA ("National Union") seeking various forms of declaratory relief. Continental seeks contribution from National Union for costs Continental incurred in defending The Valspar Corporation ("Valspar") against four underlying toxic tort lawsuits. Both Continental and National Union have insured Valspar at different times during the past several decades, and the underlying lawsuits, which relate to harm caused by long term exposure to Valspar's products, triggered coverage years of both insurers. After the complaint was filed, United States Magistrate Judge Jeanne J. Graham granted Valspar's motion to intervene as a defendant. Continental and Valspar both bring motions for summary judgment,  seeking a determination from the Court of whether Valspar and/or National Union are required to contribute to costs incurred by Continental in defending Valspar against the toxic tort lawsuits. For the reasons explained below, the Court will grant in part and deny in part both motions for summary judgment.
Valspar is a Minnesota corporation that manufactures paint, coatings, and related products. From at least 1963 to the present, Valspar purchased commercial general liability insurance from a number of different insurers. (Valspar Answer ¶ 8, Sept. 3, 2009, Docket No. 31.) These policies, issued annually, generally provide that the insurer has a duty to defend lawsuits against the insured seeking damages because of bodily injury caused by a covered occurrence. Other than the two insurance companies involved in the present dispute, Valspar's historical insurers also include Maryland Casualty Company (1961-1967), Employers Mutual Liability Company (1967-1971), Liberty Mutual Insurance Company (1976-1981; 1985-1990), American Insurance Company (1981-1984), and International Indemnity Company (1984-1985). (Second Aff. of Kristen Quast ¶ 4, May 31, 2012, Docket No. 187.)
I. THE CONTINENTAL POLICIES
Continental issued five commercial general liability insurance policies (the "Continental Policies") to Valspar, providing coverage from January 1, 1971, through January 1, 1976. (Compl. ¶ 9, Feb. 9, 2009, Docket No. 1.) Each Continental Policy provides that Continental "will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of  bodily injury or  property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage." ( Id. ¶ 10, Ex. A at 7.)
II. THE NATIONAL UNION INSURANCE PROGRAM
From 1990 through 2004 Valspar and National Union entered into annual agreements which together formed an insurance program (the "Program"). Valspar and National Union claim that the Program, in its various iterations, is a form of self-insurance and that under the Program, Valspar "is responsible for payment of its own first-dollar defense and indemnity costs, through a deductible, self-insured retention, fronting arrangement, promissory note, indemnity agreement, and/or other mechanism, up to the limit of the applicable annual deductible or retention." (Second Quast Aff. ¶ 5.)
A. The National Union Insurance Policies
Each Program year consists of a general commercial liability policy in addition to other documents. National Union issued commercial general liability policies (the "National Union Policies") annually to Valspar, which provided coverage from May 1, 1990, through May 1, 2004. (National Union Answer ¶ 9, May 4, 2009, Docket No. 11; Second Quast Aff. ¶ 29.) Each Policy contains two provisions that are directly relevant to this dispute. First, the Policies provide that National Union "will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury' or property damage' to which this insurance applies, " and that National Union "will have the right and duty to defend any suit' seeking those damages." ( See, e.g., Second Quast Aff., Ex. 1 at 0183,  Ex. 6 at 0365 (emphasis added).) Second, the Policies provide that "[t]his policy contains all the agreements between [Valspar and National Union] concerning the insurance afforded. [Valspar] is authorized to make changes in the terms of this policy with [National Union's] consent. This policy's terms can be amended or waived only by endorsement issued by [National Union] and made a part of this policy." ( Id., Ex. 1 at 0180, Ex. 6 at 0363.)
B. The Gallagher Service Agreement
When the Program began, National Union entered into an agreement with Gallagher Basset Services, Inc. ("Gallagher") whereby Gallagher contracted to act as National Union's general liability claims adjuster. ( See Decl. of Thomas Long, Ex. D, Jan. 11, 2010, Docket No. 79.) Pursuant to the claims adjustment agreement, Gallagher agreed to, among other things, prepare and maintain files for the defense of claims and other litigation; pursue possibilities of subrogation, contribution, and indemnity on behalf of National Union and Valspar; adjust, resist, and/or settle claims; and pay all claims and defense expenses on behalf of Valspar, pursuant to National Union's obligations under the Policies. Only the claims adjustment agreements for claims arising under the 1990-1991 and 1991-1992 Program years appear in the record. ( Id., Exs. D, F.) The parties agree, however, and other record evidence indicates that the relationship between National Union and Gallagher continued throughout the duration of the Program. ( See Second Quast Aff., Ex. 35 at 1631; Fifth Aff. of John P. Fischer, Ex. 1 (Dep. of Kristen Quast ("Quast Dep.") 70:12-24), July 5, 2012, Docket No. 201.)
C. The 1990-1991 Through 1992-1993 Program Years (Indemnity Agreement)
The first three Program years consist annually of: (1) a National Union Policy; (2) an Indemnity Agreement; (3) a Policy and Funding Schedule; and (4) a Promissory Note. The National Union Policies for the first three Program years are standard commercial general liability policies containing the language described above regarding National Union's duty to defend and amendments to the Policy being accomplished only through endorsements. The Policies for the first three Program years do not contain any language regarding the use of a deductible or retention for general liability coverage, and nowhere eliminate the language placing the duty to defend on National Union. The Indemnity Agreements that form part of the first three Program years obligate Valspar to reimburse National Union for certain costs incurred in insuring Valspar. The Policy and Funding Schedules list information on premiums, claim administration, and Valspar's applicable retention for each Program year. ( See Second Quast Aff., Exs. 5, 9, 13.) A Promissory Note for each Program year is attached to the Policy and Funding Schedule and acts as collateral for Valspar's obligation to reimburse National Union for costs identified in the Indemnity Agreement. ( Id., Exs. 5, 9, 13; see Quast Dep. 254:7-12.) Neither the Policy and Funding Schedules nor the Promissory Notes mention a duty to defend.
Valspar characterizes the Indemnity Agreement as "the controlling document of the [P]rogram." (Quast Dep. 258:21-24.) With respect to the scope of the Program, the Indemnity Agreements provide:
[National Union] will issue the insurance policies listed in the Schedule(s). Such policies and all renewals thereof are governed by this Agreement and are referred to herein as the "Policy(ies)". This Agreement, together with the Schedule(s) and Policy(ies), constitute the Program. The Program is a uniquely negotiated, single contract and no part of the Program would have been issued without the other parts being in force. Unless otherwise agreed, should the parties later adopt revised or different Schedule(s) or should renewals of the Policy(ies) be issued, such Schedule(s) and Policy(ies) shall be subject to this Agreement and be part of the Program.
( See, e.g., Second Quast Aff., Ex. 3 at 1995.)
With respect to costs incurred in insuring Valspar, The Indemnity Agreements obligate Valspar to "indemnify [National Union] against and Reimburse it in full for each Reimbursable Loss." ( Id., Ex. 3 at 1996.) Losses refer to National Union's duty to indemnify claimants under the National Union Policies and are defined as "the obligations of [National Union] to pay claimants pursuant to the Policy(ies)." ( Id., Ex. 3 at 1995.) "Where a loss is within the limits of liability of a Policy, Reimbursable Loss' shall mean the smaller of the Loss or the applicable Retention Limit(s). Should a Loss exceed the limits of liability of a Policy, Reimbursable Loss' shall mean the entire Loss payment minus [National Union]'s Retention." ( Id. ) National Union's Retention refers to "that coverage for loss provided by the Policy(ies) in excess of the Retention Limits up to the limits of liability of the Policy(ies)." ( Id. )
To understand how the Indemnity Agreements operate with respect to reimbursable losses, it is helpful to consider actual numbers. The 1990-1991 Policy has a general liability limit of $2 million per occurrence. ( Id., Ex. 5 at 0002.) The retention limit during the 1990-1991 Program year for general liability is $250, 000 per occurrence. ( Id. ) If an event occurs triggering liability insurance, and National Union settles the claim for $1 million (within the liability limit), Valspar would be required to reimburse National Union $250, 000 (the lesser of the loss and the applicable retention limit). If an event occurs triggering liability insurance, and National Union settles the claim for $3 million (outside the liability limit), Valspar would be required to reimburse National Union $1.25 million (the entire loss minus National Union's retention - defined as the amount of liability coverage in excess of the retention limit, or $1.75 million).
The Indemnity Agreements also impose certain obligations regarding costs incurred in defending Valspar, providing that Valspar "will indemnify [National Union] and Reimburse it in full for Allocated Loss Expenses" in a manner based on specified application of the retention limits. ( Id., Ex. 3 at 1996.) The Indemnity Agreements define Allocated Loss Expenses as:
all court costs and court expenses; pre- and post-judgment interest; fees for service of process; attorneys' fees; cost of undercover operative and detective services; costs of employing experts; costs for legal transcripts; costs for copies of any public records; costs of depositions and courtreported or recorded statements; costs and expenses of subrogation and any similar fee, cost or expense reasonably chargeable to the investigation, negotiation, settlement or defense of a claim or loss or to the protection and perfection of the subrogation rights of the Company and/or of the Client. "Allocated Loss Expenses" shall not mean fees for attorneys who are employees of the Company or on permanent retainer.
( Id. ) Specifically, the Agreements state that
1) if Reimbursable Loss is contained within the Retention Limit(s) - [Valspar] will pay all Allocated Loss Expenses; 2) if Reimbursable Loss exceeds the Retention Limit(s) - [Valspar] will pay that amount of Allocated Loss Expenses that is in proportion to the ratio that the Retention Limit(s) bears to the Loss paid under the Policy(ies); or 3) if there is no Reimbursable Loss - [Valspar] will pay all allocated Loss Expenses up to the Retention Limit(s) and fifty percent (50%) of the Allocated Loss Expenses which exceed the Retention Limit(s).
( Id. )
Again, an example considering the actual numbers from Program year 1990-1991 is useful to understand the operation of the Indemnity Agreements with respect to defense costs. Under the first scenario described in the Indemnity Agreements, if National Union settles a claim under the 1990-1991 Policy for $150, 000, and spends $50, 000 on defense costs, Valspar would be required to reimburse National Union the entire $50, 000 because the claim was within the Retention Limit. Under scenario two, if National Union instead settles a claim for $500, 000, still spending $50, 000 on defense costs, Valspar would be required to reimburse National Union only $25, 000, representing half of the defense costs, because the Retention Limit was half of the total loss paid under the Policy. Finally, under scenario three if National Union spends $50, 000 on defense costs, and never pays out to a claimant under the Policy, Valspar would be required to reimburse National Union for the entire $50, 000 (as it is within the Retention Limit).
The Indemnity Agreements define Valspar's reimbursement obligation as "the obligation of [Valspar] to forward funds to [National Union] for the purposes of: (i) Reimbursing [National Union] for payments already made to third parties which are reimbursable under this Agreement; or (ii) putting [National Union] in funds for payments to be made immediately to third parties and reimbursable under this Agreement." ( Id., Ex. 3 at 1996.) Finally, the Indemnity Agreements provide that "[a]ny recitals in this Agreement of the terms and provisions of the Policy(ies) are merely descriptive and [Valspar] is indemnifying, to the extent and in the amounts herein provided, the obligations of [National Union] under the Policy(ies)." ( Id. )
D. The 1993-1994 and 1994-1995 Program Years (Indemnity Agreement and Deductible Endorsement)
For years 1993-1994 and 1994-1995, the Program is largely the same as the first three years and consists annually of (1) a National Union Policy; (2) an Indemnity Agreement; (3) a Policy and Funding Schedule; and (4) a Promissory Note. However, the National Union Policies in these Program years contain a Deductible Liability Insurance Endorsement (the "Deductible Endorsement") that modifies National Union's coverage obligations. (Second Quast Aff., Ex. 14 at 0698, Ex. 18 at 0898.)
The Deductible Endorsements apply to Valspar's commercial general liability and products liability coverage, and state that National Union's "obligation under the Bodily Injury Liability and Property Damage Liability Coverages to pay damages on [Valspar's] behalf applies only to the amount of damages in excess of any deductible amounts stated in the Schedule above." ( Id., Ex. 14 at 0698, Ex. 18 at 0898.) The deductible amount in both Program years is $2, 000, 000 per occurrence. ( Id., Ex. 14 at 0698, Ex. 18 at 0898.) With respect to a duty to defend, the Deductible Endorsements state that:
The terms of this insurance, including those with respect to:
(a) [National Union's] right and duty to defend any suits' seeking [damages to which this insurance applies]; and
(b) [Valspar's] duties in the event of an "occurrence", claim, or "suit apply irrespective of the application of the deductible amount.
( Id., Ex. 14 at 0699, Ex. 18 at 0899.) Finally, under the Deductible Endorsements National Union reserves its right to "pay any part or all of the deductible amount to effect settlement of any claim or suit' and, upon notification of the action taken, [Valspar] shall promptly reimburse [National Union] for such part of the deductible amount as has been paid by [National Union]." ( Id., Ex 14 at 0699, Ex. 18 at 0899.)
Other than the Deductible Endorsements, the documents comprising the 1993-1994 and 1994-1995 Program years are largely identical to the documents contained in the first three Program years. The only notable change to the 1993-1994 Indemnity Agreement is an amendment to replace reference to "Retention Limits" with "Retention Limits and/or Deductible Amounts." (Second Quast Aff., Ex. 16 at 2155.) Additionally, the Retention Limits for liability insurance were increased to $2, 000, 000, matching the deductible limits from the Endorsements. ( Id., Ex. 17 at 2158, Ex. 19 at 0953.)
E. The 1995-1996 Through 1999-2000 Program Years (Payment Agreement, Large Risk Rating Plan, and Deductible Endorsement)
Beginning in the 1995-1996 Program year, the Program consists annually of (1) a National Union Policy; (2) a Payment Agreement; and (3) a Schedule of Policies and Payments. The National Union Policies included in the 1995-2000 Program years contain a Deductible Endorsement and a Large Risk Rating Plan Endorsement. The Deductible Endorsements in the 1995-1996 through 1999-2000 Program years are identical to the Deductible Endorsements from the 1993-1994 and 1994-1995 Program years. ( See, e.g., Second Quast Aff., Ex. 20 at 0991-0992, Ex. 23 at 1201, Ex. 25 at 1346.)
The Large Risk Rating Plan Endorsements ("the Large Risk Endorsements") set forth complicated formulas regarding the premiums Valspar is required to pay to National Union. ( See, e.g., Second Quast Aff., Ex. 21, Ex. 23 at 1221-29, Ex. 25 at 1362-72.) The Large Risk Endorsements base Valspar's premium in part on National Union's "Incurred Subject Losses." ( Id., Ex. 21 at 1156.) Incurred Subject Losses mean the "amounts [National Union] become[s] obligated under the terms of the policy to pay as damages, benefits or indemnify... because of an occurrence, accident, claim or suit" within the liability limits." ( Id., Ex. 21 at 1157-1158.) Incurred Subject Losses also include "all costs, fees and expenses [National Union] incurs in [its] investigation, negotiation, settlement or defense of claims or suits against [Valspar]." ( Id., Ex. 21 at 1158.) In calculating Valspar's premium, National Union reduces the Incurred Subject Loss amount, by any amount that Valspar "must reimburse [National Union] under any... Deductible' terms that are part of the policy or an endorsement to the policy." ( Id., Ex. 21 at 1156.)
The Payment Agreements essentially replace the Indemnity Agreements that governed the first five Program years. ( See, e.g., Second Quast Aff., Exs. 22, 24.) The Payment Agreements prior to the 1998-1999 Program year ("the Pre-1998 Agreements") state that National Union has "assumed certain of [Valspar's] risks of loss under the insurance policies." (Second Quast Aff., Ex. 22 1146.) The Pre-1998 Agreements also direct Valspar to pay to National Union "the deductible or reimbursable portions of all losses that [National Union] pays on [Valspar's] behalf under such Policies as are subject to deductible or loss reimbursement terms." ( Id. ) Finally, the Pre-1998 Agreements include a promissory note, providing collateral for Valspar's payment obligations. ( Id., Ex. 22 at 1148, 1153.)
Beginning in the 1998-1999 Program year, the Payment Agreements state that National Union agrees "to provide [Valspar] insurance and services according to the Policies" and also agrees to defer its demand "for full payment" of Valspar's payment obligation if Valspar "make[s] partial payments according to this Agreement." (Ex. 28 at 1418.) Pursuant to the Payment Agreements, Valspar agrees to pay National Union Valspar's Payment Obligation, and "provide [National Union] with collateral according to this Agreement." ( Id., Ex. 32 at 1623.) Valspar's payment obligation is defined as:
the amounts that [Valspar] must pay [National Union] for the insurance and services in accordance with the terms of the Policies, this Agreement, and any similar primary casualty insurance policies and agreements with us incurred before the inception date hereof. Such amounts shall include, but are not limited to, any of the following, including any portions thereof not yet due and payable:
the premiums and premium ...