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Select Comfort Corporation v. Arrowood Indemnity Co.

United States District Court, D. Minnesota

August 26, 2014

Select Comfort Corporation, Plaintiff,
v.
Arrowood Indemnity Company, Defendant,
v.
American Family Mutual Insurance Company, St. Paul Mercury Insurance Company, Third-Party Defendants.

Jeffrey J. Bousloug and Patrick M. Fenlon, Oppenheimer Wolff & Donnelly LLP, appeared for Plaintiff Select Comfort Corporation.

Robert D. Brownson and Sarah A. Wall, Brownson & Ballou, PLLP, appeared for Defendant Arrowood Indemnity Company.

Steven P. Pope, appeared for Third-Party Defendant American Family Mutual Insurance Company.

ORDER

JOAN N. ERICKSEN, District Judge.

Select Comfort Corporation ("Select Comfort") filed the complaint in this action in connection with an insurance dispute with one of its general commercial liability insurers, Arrowood Indemnity Company ("Arrowood"). Arrowood filed a third-party complaint for contribution against various other insurers, including American Family Mutual Insurance Company ("American Family"). The present coverage disputes relate to coverage for a putative class-action lawsuit filed in California on or around April 25, 2008, naming Select Comfort Retail Corporation ("Select Comfort Retail") as a defendant ("the Stearns Action").

The matter is before the Court on motions filed by Select Comfort and Arrowood, pursuant to Federal Rule of Civil Procedure 56, as well as a motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), filed by American Family. The Select Comfort and Arrowood motions present the question of whether Arrowood's reservation of rights, while accepting defense of the Stearns Action, created a conflict of interest that converted its duty to defend into a duty to reimburse Select Comfort for reasonable defense costs. American Family seeks dismissal of the complaint against it on the ground that it never insured the defendant in the Stearns Action-Select Comfort Retail. For the reasons stated below, Select Comfort's motion for partial summary judgment is granted, Arrowood's motion for summary judgment is denied, and American Family's motion to dismiss is granted.

BACKGROUND

After the filing of the Stearns Action, Select Comfort tendered its defense to Arrowood, American Family, and other insurers. The original complaint in the Stearns Action was filed against Select Comfort Retail and other defendants on behalf of all "original purchasers and users" of a Sleep Number® bed "manufactured by [Select Comfort Retail] between January 1, 1987 and December 31, 2005." ECF No. 75-4 at 7.[1] The complaint alleged that the beds had a propensity to develop and incubate mold, leading to adverse health consequences for users, and that the defendants failed to take appropriate remedial measures. The complaint asserted claims for strict products liability, breach of express warranty, breach of implied warranty, concealment, intentional misrepresentation, and negligent misrepresentation.

1. Background relevant to Select Comfort and Arrowood's motions

Defendant Arrowood provided insurance to Select Comfort under two one-year policies spanning the time period from February 1, 2001, to February 1, 2003.[2] ECF Nos. 75-2, 75-3. The Arrowood policies provide for a $1, 000, 000 per occurrence limit of liability and a $2, 000, 000 general aggregate limit of liability. The policies additionally cover defense fees and costs without reducing those limits.

A series of letters between counsel for Select Comfort and Arrowood form the relevant communications for assessing the reservation of rights and conflict of interest dispute. In response to Select Comfort's notice of the Stearns Action, Arrowood confirmed, by a letter dated June 23, 2008, that it agreed to participate in the defense of the action, subject to a reservation of rights. ECF No. 105-4. The letter enumerates several issues that Arrowood reserved its right to raise later in challenging coverage, the first of which is most relevant to the present dispute. For that item, the letter notes that the policies define "bodily injury" and "property damage" in terms of "physical injuries to persons or their tangible property, or loss of use of property caused by an occurrence'"-defined to be "an accident, including continuous or repeated exposure to substantially the same harmful conditions"-and the Stearns complaint sought compensation for injuries that may not qualify, "such as intangible injuries, economic losses, attorneys' fees and statutory damages." Id. at 5-6. The letter concludes with a general reservation of the right to withdraw, raise additional defenses, seek reimbursement related to noncovered claims or liability, and seek a judicial ruling on coverage.

The June 23, 2008, letter also communicated Arrowood's referral of the defense of the Stearns Action to counsel at the law firm of Lewis, Brisbois, Bisgaard & Smith LLP in San Francisco, California. The letter states Arrowood's position that none of the issues identified in the letter created a conflict of interest for the counsel retained by it. The letter also notes that Select Comfort would be "welcome to associate counsel of its choice to work with retained counsel in the defense of this action at its own expense." Id. at 8.

Select Comfort responded to Arrowood through counsel at the Oppenheimer Wolff & Donnelly LLP firm in Minnesota in a letter dated July 2, 2008. ECF No. 105-6. Select Comfort communicated its position that Arrowood's reservation of rights created a conflict of interest that converted Arrowood's "duty to defend into a duty to reimburse reasonable defense costs." Id. at 3. Based on its position, Select Comfort intended to have the Oppenheimer firm litigate the Stearns Action on Select Comfort's behalf and represent it with regard to the coverage issues raised by Arrowood.

Arrowood sent a letter on July 16, 2008, disagreeing that any conflict existed. ECF No. 105-5. The July 16, 2008, letter states that Arrowood reserved its rights on the five grounds of:

• Injury other than "bodily injury" or "property damage";
• Relief other than "damages";
• "Bodily injury" or "property damage" that occurred outside of ...

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