United States District Court, D. Minnesota
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, and AMERICAN HOME ASSURANCE COMPANY, Plaintiffs,
DONALDSON COMPANY, INC., and FEDERAL INSURANCE COMPANY, Defendants.
S. Moon, NICOLAIDES FINK THORPE MICHAELIDES SULLIVAN LLP, and
Patrick D. Reilly, ERSTAD & RIEMER, PA, for plaintiffs.
J.F. Gross and Rikke A. Dierssen-Morice, FAEGRE BAKER DANIELS
LLP, for Donaldson Company, Inc.
E. Bushnell, ARTHUR, CHAPMAN, KETTERING, SMETAK & PIKALA,
PA, for Federal Insurance Company.
MEMORANDUM OPINION AND ORDER
R. TUNHEIM, CHIEF JUDGE UNITED STATES DISTRICT COURT
Order addresses the longstanding litigation between an
insurer, AIG,  and an insured, Donaldson Company, Inc.
(“Donaldson”), over the proper application of
commercial general liability (“CGL”) policies AIG
issued to Donaldson over a number of years. In prior orders,
the Court has resolved AIG's claims against Donaldson,
the focus of which were AIG's efforts to recover
additional deductibles from Donaldson. Donaldson also
asserted counterclaims against AIG seeking declaratory relief
regarding the proper interpretation of the CGL policies and
alleging that in the course of handling Donaldson's
claims, AIG breached the insurance policies and the covenant
of good faith and fair dealing. AIG now moves for summary
judgment on Donaldson's counterclaims.
Court will grant the summary judgment motion for the
following reasons. First, the Court has already decided on
the correct interpretation of the contracts in prior orders
in a manner that differs from Donaldson's counterclaim
for declaratory relief; therefore, it will grant AIG's
motion as to that claim. Second, the Court will grant the
motion as to Donaldson's breach-of-contract claim because
Donaldson does not seek recoverable damages and AIG's
filing of the instant lawsuit was not a breach of contract.
Finally, the Court will also grant the motion as to the
claimed breach of the covenant of good faith and fair dealing
for two reasons: there is insufficient evidence of bad faith,
and Mississippi law regarding an insurer's duties to an
insured are inapplicable under Minnesota's choice-of-law
are two related insurance companies - National Union and
American Home. National Union is a Pennsylvania corporation
with its principal place of business in New York, while
American Home is a New York corporation with its principal
place of business in New York. Nat'l Union Fire Ins.
Co. of Pittsburgh v. Donaldson Co. (Donaldson
I), No. 10-4948, 2012 WL 1072329, at *2 (D. Minn. Mar.
30, 2012); (Am. Compl. ¶¶ 3-4, June 28, 2011,
Docket No. 45). Donaldson is a Delaware corporation with its
principal place of business in Minnesota. (Am. Compl. ¶
DONALDSON'S INSURANCE POLICIES
companies insured Donaldson from July 31, 1996 to July 31,
2002, with largely identical consecutive annual CGL policies.
Donaldson I, 2012 WL 1072329, at *2. Each policy
contained a $1, 000, 000 per-occurrence limit and a $500, 000
per-occurrence deductible for bodily injury or property
damage. Id. The policies imposed on AIG (1) a duty
to defend Donaldson in actions seeking damages for property
damage caused by an occurrence, and (2) a duty to “pay
those sums [Donaldson] becomes legally obligated to pay as
damages because of . . . ‘property damage' . . .
caused by an ‘occurrence.'” (E.g.
Am. Compl., Ex. A, Pt. 1 at 8-12.)
policies also contain a Batch Clause Endorsement, which
combines certain property damage that might otherwise be
subject to separate deductibles into one
“occurrence.” The Clause states:
As respects “Products Completed Operations
Hazard” all . . . “property damage”
arising out of and attributable directly or indirectly to the
continuous, repeated or related exposure to substantially the
same general conditions affecting one lot of goods or
products manufactured, sold, handled or distributed by you or
others trading under your name, shall be deemed to result
from a single “occurrence.” Such
“occurrence” will be deemed to occur with the
first injury notified to you during the policy period.
(E.g., Am. Compl., Ex. A, Pt. 2 at 28.)
addition to the CGL policies and other insurance policies not
relevant to the instant motion, National Union issued two
consecutive annual commercial umbrella liability policies to
Donaldson from July 31, 2000 to July 31, 2002. (See
Decl. of Cody S. Moon (“Moon Decl.”), Ex. 16 at
19, Oct. 28, 2016, Docket No. 462.) The National Union
umbrella policies do not contain a batch clause endorsement,
nor do they contain “follow-form”
THE UNDERLYING LIABILITY LITIGATION
Arender and Related Litigation
the 1990s, Donaldson designed and manufactured plastic
air-intake ducts for logging and construction trucks
manufactured and sold by Western Star Trucks (“Western
Star”). Donaldson I, 2012 WL 1072329, at *1.
On January 5, 2000, a Western Star representative notified
Donaldson that air ducts in Western Star trucks were
malfunctioning because of a defect that in some instances
caused engine failure. Nat'l Union Fire Ins. Co. of
Pittsburgh v. Donaldson Co. (Donaldson II), No.
10-4948, 2015 WL 1292561, at *2 (D. Minn. Mar. 23, 2015).
Starting in 2001, various purchasers of Western Star trucks
filed actions against Donaldson because of the defect.
Id. at *1.
such lawsuit, fifteen purchasers of Western Star trucks filed
a case, Otho Arender v. Burroughs Diesel, Inc., on
November 8, 2001, in Mississippi state court against
Burroughs Diesel, Inc. (“Burroughs”), Donaldson,
and Western Star, alleging that the Western Star trucks they
purchased were inoperable. Id. Burroughs, a
commercial dealer of Western Star trucks, filed a cross-claim
against Donaldson (the “Burroughs
cross-claim”) alleging the premature failure of engines
was due to the defective air-intake ducts. Id.
AIG Provides a Defense Subject to a Reservation of
notified American Home of the cases regarding the defective
ducts shortly after they were filed. On December 17, 2001,
AIG's third-party claims administrator, Gallagher Bassett
Services, Inc. (“Gallagher Basset”), retained
attorney Kenneth Perry at the law firm Shell Buford to defend
Donaldson in the Arender lawsuit. (See Moon
Decl., Exs. 2-3.) Gallagher Bassett also provided Donaldson
with a list of AIG's approved panel counsel; the document
listed attorney by name, firm, and practice area.
(Id., Ex. 5.) Donaldson rejected Perry's
representation and opted to find its own counsel licensed in
both Mississippi and Alabama. (Id., Ex. 3.) Donaldson
selected Robert A. Miller from the law firm Butler Snow.
(Id., Ex. 4.) The Butler Snow law firm was on the
list of approved panel counsel, but only for employment and
not for casualty work in Mississippi, while Miller was not
specifically on the list at all. (Id., Ex. 5 at 5.)
Regardless of the discrepancy, AIG approved Donaldson's
retention of Miller and paid for Donaldson's legal fees
during the Arender litigation. Donaldson I,
2012 WL 1072329, at *4.
March 11, 2002, AIG's claims administrator sent a letter
regarding the faulty duct lawsuits to Gallagher Bassett,
copying Donaldson, which stated:
[Due to the] Batch Clause Endorsement . . . all claims
related to alleged faulty air intake systems on Western Star
trucks would fall under one occurrence. All the claims are
subject to one deductible, and the limits of insurance for
this occurrence are $1, 000, 000 . . . . Per the Batch Clause
Endorsement, we have created a date of loss of November 14,
2001, the date on the first summons received by the insured.
28, 2002, AIG sent Donaldson a reservation of rights letter,
stating that AIG would defend Donaldson in the
Arender litigation pursuant to the 2001-2002 CGL
Policy. (Moon Decl., Ex. 7 at 5.) The letter contained a
broad reservation of rights, including the right “to
decline coverage . . . should there be a future determination
that there is no potential for coverage.”
9, 2003, National Union's claims administrator sent a
letter to Donaldson purporting to reserve its rights related
to the National Union umbrella policy in effect beginning
July 31, 2001. (Moon Decl., Ex. 8.) The letter broadly
reserved National Union's rights as to the faulty air
duct lawsuits. (Id. at 8.) The letter also stated:
There is only one occurrence where there is but one
proximate, uninterrupted and continuing cause which results
in all the injuries and damage, even though several discrete
items of damage resulted. Moreover, when property damage is
the result of a latent defect which subsequently becomes
manifest, property damage is deemed to have occurred at the
time of the injury not at the time of the negligent act. The
first date of injury alleged in the Arender
Complaint occurred on or about September 1, 2000. The
Bonner Complaint alleges that injury occurred on
April 17, 2001. Accordingly, the injuries alleged in both
Complaints manifested prior to the inception of the National
Union policy. National Union, therefore, reserves its rights
to deny coverage for damage that did not occur during the
(Id. at 5.)