Court narrows American Guarantee’s defenses to Norfolk Southern’s claim for additional insured coverage while allowing Norfolk Southern’s counterclaim for statutory penalties to be tried.
October 6, 2017
The Eastern District of Tennessee recently narrowed the coverage defenses of insurance carrier American Guarantee & Liability Insurance Company (“American Guarantee”) while allowing Norfolk Southern Corporate and Norfolk Southern Railway Company (collectively “Norfolk Southern”) to continue to pursue a statutory claim based on American Guarantee’s refusal to pay policy benefits in good faith within the statutorily mandated period. See Order Granting Mot. Summ. J. Oct. 6, 2017, American Guarantee and Liability Insurance Company v. Norfolk Southern Railway Company, et al., Case No. 3:16-cv-129 (E.D. Tenn., Oct. 6, 2017).
The underlying tort claim for which Norfolk Southern seeks coverage involves a May 2014 collision between a Norfolk Southern Railway Company train and an automobile at a railroad crossing in Harriman, Tennessee. Four young adults were in the automobile; two were killed and two suffered serious bodily injuries. Norfolk Southern owns the track at the crossing, and it had entered into a vegetation control agreement with a contractor, East Coast Right of Way Maintenance, Inc. (“East Coast”), by which East Coast agreed to monitor and control the vegetation at the crossing. The vegetation control agreement further required East Coast to indemnify Norfolk Southern for injuries caused by its vegetation control and monitoring work (except to the extent Norfolk Southern was solely negligent) and, in a separate provision, to obtain commercial general liability insurance naming Norfolk Southern as an “additional insured.” East Coast purchased two policies to satisfy the vegetation control agreement’s insurance provision: a primary-level commercial general liability policy and an excess “follow form” liability policy issued by American Guarantee and Liability Insurance Company (“American Guarantee”).
The primary-level policy issued to East Coast included an endorsement extending coverage to an “additional insured” when East Coast was required to do so by contract, provided that the putative additional insured’s liability was “caused, in whole or in part,” by East Coast’s acts or omissions. A separate provision extended insurance to East Coast for liabilities that it assumed in a qualified “insured contract” (extending coverage, for example to indemnification liability East Coast would have pursuant to the vegetation control agreement’s provision requiring East Coast to indemnify Norfolk Southern).
Following the collision, Norfolk Southern resolved one wrongful death claim, the Drummond claim. The resolution came in August 2014, at which point Norfolk Southern had not provided notice to American Guarantee. A few months after that, in January 2015, the two injured individuals and the estate of one of the decedents filed suit against Norfolk Southern in Tennessee state court seeking to hold Norfolk Southern liable for the bodily injuries. At the end of July, 2015, East Coast provided notice to the primary carrier and to American Guarantee. Norfolk Southern provided notice on September 11, 2015. Despite having heard nothing from American Guarantee in response to the notice, Norfolk Southern subsequently provided notice of an upcoming mediation. American Guarantee responded to the notice of mediation by directing Norfolk Southern to act as a “reasonable uninsured in evaluating and/or acting upon any settlement offers at the mediation.” American Guarantee’s response also purported to reserve “[a]ll” of its rights, albeit without further explanation or identification of what it considered those rights to be. At the scheduled mediation, Norfolk Southern reached an agreement with the tort plaintiffs and, that day, provided notice of the mediation results to American Guarantee. Hearing nothing from American Guarantee, it provided again wrote American Guarantee about the settlement two weeks later.
Norfolk Southern believed itself within the “additional insured” policy provision and sought indemnification coverage for the mediation settlement (but not the earlier Drummond claim) from American Guarantee. American Guarantee referred the claim to coverage counsel, and, relatively shortly thereafter, filed a declaratory judgment, seeking a declaration that it had no obligation to indemnify Norfolk Southern. Norfolk Southern counterclaimed, seeking a declaratory judgment and alleging a breach of contract by American Guarantee.
In July 2017, American Guarantee and Norfolk Southern filed cross-motions for summary judgment. On October 6, 2017, the court rendered a decision reaffirming Tennessee’s longstanding rule that an insurance policy should be interpreted according to its plain and ordinary meaning, and rejecting attempts by American Guarantee to incorporate terms from the vegetation control agreement into the insurance policy.
American Guarantee had contested Norfolk Southern’s “additional insured” status, contending that the vegetation control agreement only “require[d] East Coast to add Norfolk as an additional insured to a ‘Commercial General Liability Insurance’ policy,” and therefore could not have required that Norfolk Southern be named an “additional insured” to its “excess policy.” The court rejected American Guarantee’s as a matter of law, finding it to be a “narrow, hyper-technical reading of the Vegetation Control Agreement,” pointing to several instances in which the insurance provision contemplated the existence of excess-level policies to meet the minimum $2 million limit requirement. Order at 12-13. The court also noted that, because American Guarantee’s policy followed form to a primary-layer commercial general liability policy, “for all intents and purposes, [American Guarantee’s policy] is a CGL policy, albeit . . . excess.” Order at 13. The court also denied Norfolk Southern’s motion for summary judgment on the additional insured issue, finding that it was a triable issue of fact as to whether “the vegetation growth contributed to the accident.” Order at 15, 16-17.
Next, the court rejected American Guarantee’s defense that Norfolk Southern’s own negligence was not covered under the policy and that the policy only extended to vicarious liability. The court explained that an “additional insured ‘enjoys the full benefits of the [named insured’s] insurance policy,’” (citing § 126:7 9 Couch on Ins. 3d, “Additional Insured”) and that the “sine qua non of an insurance contract is the insurer’s assumption of the insured’s risk.” Order at 10-11, 25. As to American Guarantee’s effort to limit its policy obligation by invoking the indemnification provision from the vegetation control agreement (which excluded indemnification of Norfolk Southern’s sole negligence), the court affirmed that “Norfolk’s rights under AG’s policy cannot be limited by a separate, albeit related, contract to which AG is not a party.” Order at 22. The court further expressed confusion at American Guarantee’s attempted reliance on an anti-indemnification statute applicable to construction contracts to deny coverage, noting that “if the statute applied to insurance contracts, such as the AG policy here,” then “AG is essentially admitting it has conducted – and likely conducts – some of its insurance business in violation of Tennessee public policy.” Order at 26-27.
American Guarantee also had argued that it should be excused from indemnifying Norfolk Southern under its “Coverage A” because Norfolk Southern failed to secure its consent to the mediated settlement. The court found that American Guarantee waived the consent provision when it failed to object to the mediation and warn Norfolk Southern of the consent provision upon learning that settlement discussions were imminent (citing Rutherford v. Tennessee Farmers Mut. Ins. Co., 608 S.W. 2d 842, 846 (Tenn. 1980) (holding that an insurer cannot rely on the consent requirement if it is aware of an insured’s intent to negotiate a settlement and fails to warn). Order at 36. American Guarantee argued that it had made a reservation of “[a]ll” rights in its response to Norfolk Southern’s notice of the mediation, but the court explained that American Guarantee’s “lack of specificity was not sufficient to reasonably put Norfolk on notice that AG would strictly rely on the consent requirement.” Order at 37.
The court granted American Guarantee’s unopposed motion for a declaration that it owed no duty to indemnify Norfolk Southern for the Drummond claim, a claim for which Norfolk Southern had not asked for indemnification in the first place. Order at 34. The court also granted American Guarantee’s unopposed motion that its “Coverage B” part (the umbrella coverage) did not apply; American Guarantee had relied on a provision in “Coverage B,” the “umbrella portion of the excess/umbrella policy, making “Coverage B” inapplicable where the primary carrier underlying American Guarantee’s follow-form “Coverage A” had performed. Order at 35.
American Guarantee argued that it was excused from any obligation to Norfolk Southern because Norfolk Southern provided late notice and Tennessee presumes late notice prejudices an insurer, although that presumption can be rebutted. See Alcazar v. Hayes, 982 S.W.2d 845 (Tenn. 1998) (insurer presumed to be prejudiced by late notice, but the presumption must be rebuttable; if there can be shown to be no prejudice, the insurer should not be granted a windfall by being allowed to deny coverage). The court found a factual issue in the question of whether American Guarantee was prejudiced by the timing of East Coast’s and Norfolk Southern’s notices of the second claim. The court suggested that American Guarantee was less likely prejudiced if it received notice of the tort lawsuit “over three months” before the mediation, when it would have had plenty of time to prepare itself if that is what it would do, compared to receiving notice “mere weeks” before the mediation, identifying a triable factual dispute as to when American Guarantee actually received notice. Order at 31. In evaluating the potential for prejudice, the court also noted that a showing that the insured’s underlying tort defense counsel had collected “ample objective and empirical evidence that [would be] susceptible to subsequent analysis by an insurer” could help rebut Tennessee’s presumption of prejudiced. Order at 32.
In its counterclaim, Norfolk Southern alleged that American Guarantee failed to act with the requisite good faith in handling Norfolk Southern’s request for coverage and that American Guarantee should be subject to the penalty prescribed by Tenn. Code Ann. § 56–7–105. American Guarantee unsuccessfully sought summary judgment on Norfolk Southern’s claim, but the court determined that it could survive to be tried. American Guarantee argued that Norfolk Southern’s notice under Tenn. Code Ann. § 56–7–105 was insufficient because it was sent before the primary insurer exhausted its underlying limits through payment. The court looked to the language of American Guarantee’s policy stating that “[c]overage under this policy will not apply until the Insured, or the Insured’s underlying insurer has paid or is legally obligated to pay the full amount of the Underlying Limits of Insurance,” and held that there were “four circumstances in which [the] AG policy would have come due,” and found that “at the very least two of the four had occurred when Norfolk made its demand.” Order at 39-40. However, the court held that whether American Guarantee had any good faith basis to deny Norfolk Southern’s claim introduced “a factual question that should be resolved after a fact finding determination.” Order at 41.