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AMERICAN UNDERWRITERS v. ZURN INDUSTRIES

June 28, 1991

AMERICAN INTERNATIONAL UNDERWRITERS CORPORATION, AMERICAN HOME ASSURANCE COMPANY, AND GRANITE STATE INSURANCE COMPANY, PLAINTIFFS,
v.
ZURN INDUSTRIES, INC., DEFENDANT. ZURN INDUSTRIES, INC., PLAINTIFF, V. AMERICAN INTERNATIONAL UNDERWRITERS CORPORATION, AMERICAN HOME ASSURANCE COMPANY, AND GRANITE STATE INSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Mencer, District Judge.

MEMORANDUM OPINION

By its complaint, Zurn industries seeks to recover funds allegedly owed by several insurers under various excess insurance policies. The insurers, American International Underwriters Corporation (AIU), American Home Assurance Company (American), and Granite State Insurance Company (Granite), (collectively "the Insurers"), have filed their own complaint seeking a declaratory judgment stating that they are not obligated under the insurance policies to pay Zurn. Jurisdiction is based on diversity of citizenship.*fn1

Zurn made the first legal maneuver by instituting a damages action in the U.S. District Court for the Northern District of Texas. Zurn Industries, Inc. v. American Int'l Underwriters Corporation, Civil Action No. CA3-89-0342-D, Memorandum Opinion and Order (ND Tx 5/31/89). The insurers then instituted a declaratory judgment action in this court. Next, the Texas District Court transferred Zurn's action here, Id., where it was given the Western District of Pennsylvania Docket Number Civil Action No. 89-137 Erie (We will refer to 89-137 as the "damages action."). By an order of June 28, 1989, we consolidated the damages action with the insurer's declaratory judgment action, Civil Action No. 89-24 Erie, which had been pending in this court. Counterclaims were filed making each case the mirror image of the other, but because the declaratory judgment action had the lower docket number, it became the "lead" case. We find it confusing and inappropriate to proceed on the declaratory judgment when an identical damages action is also pending. Thus, for purposes of today's opinion, as well as all future motions, we will treat the damages action as the "lead" case. Zurn, the party seeking affirmative relief, will be the plaintiff, and the Insurers, the defendants. See, e.g., Kearney & Trecker Corp. v. Cincinnati Milacron, Inc., 562 F.2d 365, 368 (6th Cir. 1977).

Currently before the court is Zurn's Motion For Partial Summary Judgment, Insurers' Supplemental Motion for Summary Judgment and to Dismiss, Zurn's Motion To Be Designated Plaintiff at Trial, and Zurn's Motion to Compel. We will outline the pertinent facts, discuss choice of law, and then address the substantive issues.

I. Factual Background

This case arises from the damage sustained by the city of Garland, Texas, as a result of the failure of its Duck Creek Wastewater Treatment Plant. More specifically, it arises from the Insurers' refusal to indemnify Zurn for the damages it paid out in settlement of Garland's claims stemming from Zurn's role in the failure. The pertinent facts as set out by Zurn are accepted by the Insurers except where noted. See Insurer's Brief in Opposition to Summary Judgment [hereinafter "I-SJ Brief"] at 2.

Garland sought to construct a wastewater treatment plant to meet effluent standards of 10 mg/1 BOD*fn2 and 10 mg/1 TSS,*fn3 together, the 10/10 effluent requirement. To achieve this, it engaged the URS Company to design and engineer the Duck Creek Wastewater Treatment Plant. Zurn, in turn, built a critical component of the overall system, a carbon adsorption system. ("Carbon Unit").

The Carbon Unit failed in late 1977 or early 1978 when an important part of it, the underdrains,*fn4 suddenly ruptured. The Carbon Unit could not function without the underdrains and the plant could not function without the Carbon Unit; as a result, the City was unable to meet the 10/10 effluent standard. Because of the failure to meet the standard, the Environmental Protection Agency (EPA) withheld grant funds which had been promised to Garland. Litigation ensued.*fn5 Garland sought $19,000,000 (later amended to $25,000,000) in damages from Zurn, URS, and others on two main theories. First, negligence in the plant's overall design, and second, negligence in construction of the Carbon Unit.

Eventually, Garland agreed with Zurn that Zurn was similar to a subcontractor and could not be responsible for any defective design of the overall plant. Zurn's primary liability centered on the damage resulting from the failure of the Carbon Unit it constructed — approximately $5,182,994 in lost interest on the EPA funds. See "City of Garland Wastewater Treatment Plant Damage Summary," I-SJ Brief at Exhibit 11. Repair costs incurred by both Zurn and Garland offset each other. After a minitrial/mediation on November 2, 1988, Zurn, Garland and others settled their claims for $5,025,000: $4,975,000 was in compensation for the Carbon Unit failure and $50,000 was to compensate for any possible effect on the design claim. Zurn's Evidentiary Supplement to its Brief in Support of Its Motion for Partial Summary Judgment [hereinafter "Motion Exhibit"], Exhibit 22 (Settlement agreement). Zurn's share of the overall settlement was $2,850,000. Id. at 12. The URS engineers later settled the design claims for $8,250,000.

According to Zurn, and without opposition from the Insurers, Zurn had the following insurance policies in effect at the relevant times:

  (1) A Liberty Mutual Insurance Company ("Liberty")
  comprehensive general liability policy with a
  limit of $1,000,000. ("LP1"). Coverage was
  effective 4/1/ 77-4/1/78. Motion Exhibit 3.
  (2) A Liberty excess liability policy of
  $9,000,000 over $1,000,000, ("LP2"), covering the
  same period as LP1. Motion Exhibit 4.
  (3) An American excess liability policy with
  limits of $5,000,000 in excess of $9,000,000 in
  excess of $1,000,000. ("American policy"). The
  American policy was effective 12/17/74-12/17/77.
  Motion Exhibit 5.
  (4) A Granite excess liability policy, also for
  $5,000,000 in excess of $9,000,000 in excess of
  $1,000,000. ("Granite policy"). The Granite policy
  was effective 12/17/77-12/17/79. Motion Exhibit
  6.*fn6

Liberty assumed 80% of the litigation expenses of the underlying claims, and then paid $1,068,716 on behalf of Zurn into the settlement. This exhausted Liberty's policy aggregate. Motion Exhibit 21. Liberty's payment still left Zurn without reimbursement of $1,752,926 of the settlement amount, and Zurn felt that sum was due from the Insurers. The Insurers refused to contribute to the settlement.

American was aware of the Garland litigation on November 22, 1985 at the latest. Motion Exhibit 14. By February 10, 1986, AIU was aware of the litigation and its potential to breach the excess layer of coverage. Motion Exhibit 15.*fn7 Insurers took no action until September, 1988, when they began an investigation into the matter in preparation for the November 2, minitrial/mediation. The Insurers denied coverage and refused to contribute to the settlement on the grounds that "the liability and loss which is the subject of this case, did not constitute a covered loss under the terms of the Liberty Policy 1, Liberty Policy 2, the American Policy nor the Granite Policy." I-SJ Brief at 3; Motion Exhibit 20.

II. Choice of Law

A.

We must determine whether Texas or Pennsylvania law applies to plaintiff's causes of action, first, in order to govern our inquiry into contractual interpretation,*fn8 and second, in order to rule on The Insurers Motions to Dismiss Zurn's claims based upon Texas statutory law. Count III of Zurn's Amended Complaint which is based on the Texas Business and Consumer code, and count IV, based on Article 21.21 of the Texas Insurance code, will be dismissed since we determine, infra, that Pennsylvania law applies.

At the outset, we note that the parties' positions on choice-of-law issues have not been clearly staked out. In fact, they are internally inconsistent. In its Amended Complaint, Zurn bases count I on "the common and statutory law of Texas." Amended Complaint ¶ 20. However, in seeking summary judgment on that count, Zurn discusses Third Circuit Pennsylvania law almost exclusively without noting any choice of law issue, and The Insurers' extensive opposition similarly contains no reference to choice of law. Thus, it appears that the parties would have Pennsylvania law apply. In contrast, Counts III and IV of Zurn's amended complaint are based on Texas statutory law. In its opposition to the Insurers motions to dismiss counts III and IV, Zurn takes the position that "Texas law Applies to Zurn's Claims for Relief." Zurn's Response to Insurers' Motion to Dismiss Counts III and IV of Zurn's Counterclaim ("Z-Dis.Opp.") at 2-7; Zurn Industries, Inc.'s Brief in Response to the Insurers' Supplemental Brief in Support of Their Motions to Dismiss and for Summary Judgment ("Z-Supp.Opp.") at 4 ("Texas Law [is] the body of law Zurn contends should apply in this case."). For their part, The Insurers employ choice of law principles to vigorously argue for application of Pennsylvania law in their own motions to dismiss counts III and IV.

In diversity cases, a federal court must apply the choice of law principles of the forum state in which it sits. Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Melville v. American Home Assurance Co., 584 F.2d 1306, 1308 (3d Cir. 1978). In Docket number 89-137 Erie then, we look to Pennsylvania conflicts rules. Docket number 89-24 Erie, however, was transferred to our court on defendants motion under 28 U.S.C. § 1404(a) and we must, therefore, look to the choice of law rules of the transferor forum, Texas. Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964); Ferens v. Deere & Co., 862 F.2d 31, 34 (3d Cir. 1988), rev'd on other grounds, 494 U.S. 516, 110 S.Ct. 1274, 108 L.Ed.2d 443 (1990). We would be faced with a difficult question indeed, if we found that different law would be applied to the respective actions. Thankfully, Texas and Pennsylvania choice of law rules both indicate that Pennsylvania law should apply.

B.

The conflicts methodology of Texas and Pennsylvania are quite similar, and both states, of course, seek to protect the legitimate expectations of the contracting parties. Restatement (Second) of Conflict of Laws [hereinafter Restatement] § 6(2)(d), (f) (1971). Pennsylvania's conflicts law is an amalgam of the "significant relationship" test as stated in the Restatement § 188, and 'interest analysis' which evaluates the effect of the choice of law on the policy interests of the rival jurisdictions. Compagnie des Bauxites v. Argonaut-Midwest Ins., 880 F.2d 685, 688-89 (3d Cir. 1989); Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796 (1964); Melville, 584 F.2d 1306, 1311. Texas choice of law is based solely on the "significant relationship" test of the Restatement — nominally the same test as the first prong of Pennsylvania's analysis. It is apparent, however, that those concerns of policy evaluated under Pennsylvania's second prong, are subsumed into the Texas "significant relationship" test. Gulf Consol. Services v. Corinth Pipeworks, SA, 898 F.2d 1071, 1075 (5th Cir. 1990); Atlantic Mutual Ins. Co. v. Truck Ins. Exchange, 797 F.2d 1288, 1291 (5th Cir. 1986); Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984).*fn9

Under both Texas and Pennsylvania law then, we must group the various relevant contacts in an effort to determine which jurisdiction has the most significant relationship with the parties and the occurrence. Griffith, 203 A.2d at 802. "Contacts considered vital in determining the state of most significant relationship include place of injury, place of conduct, domicile of the parties, and the place where the relationship between the parties is centered." Id. In the words of the Restatement, we consider (a) the place of contracting, (b) the place of the contract's negotiation, (c) the place of performance, (d) the location of the subject matter of the contract, (e) the domicil, residence, nationality, state of incorporation, or place of business of the parties. Argonout, 880 F.2d at 689; Uniwest Mort. Co. v. Dadecor Condominiums, Inc., 877 F.2d 431, 435 (5th Cir. 1989); DeSantis, 793 S.W.2d at 678-79 and n. 2.

Pennsylvania has the larger number of contacts with the matters at hand. Zurn is incorporated there and has its principle place of business there, the policy was delivered there, premiums were paid from there, the policies were countersigned by Zurn's insurance agent, Lee Cabelof, in Pennsylvania, Motion Exhibits 3 at 1, 4 at 1, the contract was negotiated between Pennsylvania and New York, and the place of performance (the payment of the benefits) is Erie Pennsylvania. The only contact Texas has, though it is an important one, is that the insured risk, the risk of a lawsuit and liability, was located there. The raw total of ...


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