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National Union Fire Insurance Company of Pittsburgh, PA v. Donaldson Company, Inc.

United States District Court, D. Minnesota

August 23, 2017

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, and AMERICAN HOME ASSURANCE COMPANY, Plaintiffs,
v.
DONALDSON COMPANY, INC., and FEDERAL INSURANCE COMPANY, Defendants.

          Cody S. Moon, NICOLAIDES FINK THORPE MICHAELIDES SULLIVAN LLP, and Patrick D. Reilly, ERSTAD & RIEMER, PA, for plaintiffs.

          David J.F. Gross and Rikke A. Dierssen-Morice, FAEGRE BAKER DANIELS LLP, for Donaldson Company, Inc.

          Sarah E. Bushnell, ARTHUR, CHAPMAN, KETTERING, SMETAK & PIKALA, PA, for Federal Insurance Company.

          MEMORANDUM OPINION AND ORDER

          JOHN R. TUNHEIM, CHIEF JUDGE UNITED STATES DISTRICT COURT

         This Order addresses the longstanding litigation between an insurer, AIG, [1] 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.

         The 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 rules.

         BACKGROUND

         I. THE PARTIES

         Plaintiffs 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. ¶ 5.)[2]

         II. DONALDSON'S INSURANCE POLICIES

         AIG 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.'”[3] (E.g. Am. Compl., Ex. A, Pt. 1 at 8-12.)

         The CGL 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”[4] 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.)

         In 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” language.[5]

         III. THE UNDERLYING LIABILITY LITIGATION

         A. Arender and Related Litigation

         Throughout 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.

         In one 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.

         B. AIG Provides a Defense Subject to a Reservation of Rights

         Donaldson notified American Home of the cases regarding the defective ducts shortly after they were filed.[6] 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.[7] (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.[8] (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.

         On 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.

Id.

         On May 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.” (Id.)

         On June 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 policy period.

(Id. at 5.)

         C. Burroughs ...


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