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Standard Steel, LLC v. Nautilus Insurance Co.

September 17, 2008

STANDARD STEEL, LLC, PLAINTIFF,
v.
NAUTILUS INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Mitchell, Magistrate Judge

MEMORANDUM OPINION AND ORDER

Presently before the Court is the defendant's motion to dismiss Count III of the amended complaint or, in the alternative, to dismiss or strike the plaintiff's demands for consequential damages and expert fees in Count III. For reasons discussed below, the defendant's motion to dismiss Count III of the amended complaint (Document No. 22) will be denied, and its alternate motion to dismiss or strike the plaintiff's demands for consequential damages and expert fees in Count III (Document No. 22) will be granted.

The plaintiff, Standard Steel, LLC ("Standard Steel"), has filed a three-count amended complaint against defendant Nautilus Insurance Company ("NIC") for breach of contract (Count I), declaratory judgment (Count II), and bad faith pursuant to 42 Pa.C.S.A. § 8371 (Count III). The Court's diversity jurisdiction is properly invoked.

Standard Steel alleges:

This is a lawsuit for breach of contract and bad faith arising out of the failure and refusal of NIC to honor obligations that -- pursuant to NIC liability insurance policy number BK0002002-1 ("the Policy") -- it owed to Standard Steel in connection with a train derailment caused by a faulty railcar axle that Standard Steel had manufactured. The aforementioned derailment resulted in substantial damage to property owned by Canadian National Railway ("CNR"), Mitsui Rail Capital ("Mitsui") and American Coal ("AmCoal"), for which CNR requested recompense from Standard Steel.*fn1

Standard Steel contends that NIC failed to abide by its obligations under the Policy to defend or indemnify it in connection with property damage suffered as a result of the derailment, which forced Standard Steel to expend its own money to investigate and settle the derailment claim.*fn2

The record shows that on or before July 1, 2005, Standard Steel purchased from NIC the Policy, which provides commercial general liability insurance for the period July 1, 2005 to July 1, 2006.*fn3 In pertinent part, the Policy provides that:

* NIC "will pay those sums that the insured becomes legally obligated to pay as damages because of ... 'property damage' to which this insurance applies"; * NIC has "the right and duty to defend the insured against any 'suit' seeking those damages"; and * NIC "may, at [its] discretion, investigate any 'occurrence' and settle any claim or 'suit' that may result." See, Policy at Section I, ¶1.a.

In addition, the Policy includes an endorsement which provides that: * NIC's "obligation to pay any amount within the Limits of Insurance for the coverage provided ... will apply only in excess of a Self-Insured Retention ["SIR"] layer of $750,000." See, Policy at SIR Endorsement SC-2308-O. The Policy also provides that:

* "No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent." See, Policy at Section IV, ¶2.d.

In its amended complaint, Standard Steel makes the following allegations: it makes wheels and axles for the railway industry.*fn4 On or about June 4, 2006, a CNR coal train derailed between Jackson, Mississippi and Mobile, Alabama which destroyed 24 "hopper" cars owned by Mitsui, spilled approximately 3,170 tons of coal belonging to AmCoal, and caused damage to the track.*fn5 Standard Steel subsequently investigated the cause of the derailment, and it concluded the derailment was caused by the in-service failure of an axle which it improperly manufactured.*fn6 Following the derailment, CNR -- on behalf of itself, Mitsui and AmCoal --presented Standard Steel with a claim in excess of $2,275,000 for damages resulting from the incident.*fn7 Standard Steel tendered the claim to NIC and provided it with substantial information regarding the derailment, including an internal report prepared by Standard Steel's in-house expert and a memorandum summarizing its analysis of the costs submitted by CNR.*fn8

On or about December 21, 2006, Aon Risk Services ("Aon") wrote a letter to NIC on Standard Steel's behalf, requesting that NIC consent to Standard Steel's payment of its $750,000 SIR to CNR, so Standard Steel could maintain relations with that valued customer.*fn9

By letter dated December 28, 2006, NIC informed Standard Steel it would grant said request, with the understanding that the $750,000 SIR payment to CNR was not an admission of liability, nor a final resolution of the claim.*fn10

Although Standard Steel provided NIC with substantial information on the derailment, NIC issued a letter dated May 3, 2007 (nearly a year after the derailment occurred), acknowledging that Standard Steel's axle was defective, but denying any responsibility for the claim; NIC believed there was insufficient evidence to show what role the axle played in the derailment, but it did not point to any other definitive cause of it.*fn11 Following NIC's denial of the claim, Standard Steel, through Aon, submitted additional information to NIC and asked it to reconsider its position, but by letter dated September 11, ...


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