F I L E D
United States Court of Appeals
Tenth Circuit
MAR 16 2001
PUBLISH
PATRICK FISHER
Clerk
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
MARATHON ASHLAND PIPE LINE
LLC, and PLATTE PIPE LINE
COMPANY,
Plaintiffs-Appellants, Nos. 98-8080
98-8081
v. 98-8110
98-8114
MARYLAND CASUALTY
COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the District of Wyoming
(D.C. Nos. 97-CV-1037-J & 97-1039-J)
Peter Buscemi, of Morgan, Lewis & Bockius, LLP, Washington, D.C. (Mark A.
Srere, Morgan, Lewis & Bockius, LLP, Washington, D.C., and Richard E. Day
and Ann M. Rochelle, of Williams, Porter, Day & Neville, P.C., Casper,
Wyoming, with him on the briefs), for Plaintiffs-Appellants.
James C. Nielsen, of Wright, Robinson, Osthimer & Tatum, San Francisco,
California (J. Kent Rutledge, of Lathrop & Rutledge, P.C., Cheyenne, Wyoming,
with him on the briefs), for Defendant-Appellee.
Before SEYMOUR, EBEL and HENRY, Circuit Judges.
SEYMOUR, Circuit Judge.
Marathon Ashland Pipe Line LLC and Platte Pipe Line Company
(hereinafter collectively referred to as “Marathon”) 1 appeal from the district
court’s grant of summary judgment in favor of Maryland Casualty Company on an
insurance coverage dispute and Marathon’s bad faith and assigned claims.
Marathon also appeals several of the district court’s discovery orders and its grant
of costs to Maryland Casualty. After fully reviewing the record, we affirm in
part, reverse in part, and remand.
I
BACKGROUND
Marathon is a Wyoming-based company that operates an energy pipeline
and related properties. Marathon entered into a service contract with Steel
Structures, Inc. (“SSI”), a building erection company, covering any work SSI
would perform at Marathon’s request. In addition to providing the terms for this
work, the service contract required SSI to acquire a liability insurance policy and
to name Marathon as an additional insured under that policy. Pursuant to this
agreement, SSI endorsed Marathon as an additional insured on its commercial
1
Marathon Ashland operates the petroleum pipeline owned by Platte Pipe
Line Company. Although Platte filed a separate brief, its arguments mirror those
of Marathon’s, and we see no reason to treat these two entities separately for
purposes of our disposition here. Those few times that these parties need to be
considered separately, we do so.
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general liability (CGL) policy with Maryland Casualty, which included a
supplemental employer’s liability insurance (SELI) provision. The policy
provided for a $500,000 per accident limit on the CGL coverage, and a $1 million
limit on the SELI coverage.
During the summer of 1996, Marathon requested that SSI hire Justis Berg, a
seventeen-year old high school student, to work at Marathon’s direction for the
summer. The undisputed facts show that this type of arrangement was not an
isolated event. Marathon had requested that SSI hire a specified individual as a
temporary employee to work under Marathon’s control and direction several times
over the thirty-year term of their relationship. Under this arrangement, SSI hired
Mr. Berg and paid his wages, tax withholdings, and workers’ compensation
premiums. Marathon directed and controlled all of Mr. Berg’s work assignments,
was responsible for his training and supervision, and reimbursed SSI’s expenses
related to Mr. Berg.
On June 28, 1996, while Mr. Berg was mowing a steep incline at
Marathon’s site in Casper, the front-loader he was driving overturned. After
losing a leg and suffering other permanent injuries as a result of the accident, Mr.
Berg tendered his claim as an injured SSI employee to Maryland Casualty. On
October 1, Maryland Casualty denied his request for indemnification based on the
CGL policy’s workers’ compensation and employee exclusions. This denial made
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no mention of potential coverage under other provisions in the CGL policy
applying to temporary workers.
In March 1997, Mr. Berg filed a personal injury action against Marathon,
alleging that he was injured due to Marathon’s negligence. Mr. Berg asserted he
was hired by SSI pursuant to the contract with Marathon, “whereby Marathon
agreed to compensate [SSI] in exchange for the right to exclusive use of Berg’s
services throughout the summer of 1996.” App., Vol. 1 at 33, ¶ 9. On April 14,
Marathon notified Maryland Casualty of the Berg suit, requesting a copy of the
policy and a defense as an additional insured. Although Marilyn Griffith, a
Maryland Casualty claims adjuster, left one telephone message with Marathon’s
counsel a few weeks later purporting to offer to share in defense costs with other
insurers, Maryland Casualty did not respond in writing to Marathon’s repeated
requests to provide a defense until many months later, and never provided
Marathon with a copy of the policy.
Marathon wrote the company again in late April stating there were no other
insurers, demanding a defense, and requesting a copy of the policy. The letter
warned that Marathon would sue SSI for breach of contract if Maryland
Casualty’s silence continued. Maryland Casualty did not respond. On May 23,
Marathon filed a third-party complaint against SSI in the Berg suit, asserting that
SSI was liable to Marathon for failing to procure insurance covering its liability
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arising from SSI’s operations, as required by the service contract. SSI tendered
this complaint to Maryland Casualty and requested a defense. Maryland Casualty
responded immediately, providing SSI with defense counsel from the law firm of
Murane & Bostwick.
On July 15, after Maryland Casualty had still failed to respond to its
inquiries, Marathon filed the present action against Maryland Casualty seeking a
declaration that the SSI policy provides defense and indemnity coverage to
Marathon and alleging a bad faith tort claim. On August 15, Maryland Casualty
finally informed Marathon that it would defend the company in the Berg lawsuit
under a reservation of rights as to coverage. Recognizing that Marathon had
already procured its own defense counsel, Maryland Casualty requested that
Marathon forward all of the bills it had already incurred. Marathon did not
respond.
Marathon entered into settlement negotiations with Mr. Berg and SSI,
ultimately settling with Mr. Berg for an undisclosed amount in late September.
Marathon also settled with SSI, which confessed judgment for breach of the
service contract provisions. SSI assigned to Marathon all of its rights against
Maryland Casualty in exchange for Marathon’s agreement not to enforce its
confessed judgment against SSI.
In the present action, Marathon seeks a declaration that its liability to Mr.
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Berg is covered under the CGL and SELI provisions of the policy, and that
Maryland Casualty had a duty to defend Marathon in the Berg suit. In addition to
these contractual claims, Marathon alleges Maryland Casualty acted in bad faith
by its failure to defend and its delay in responding to Marathon’s requests. Under
the assignment of claims from SSI, Marathon also alleges Maryland Casualty
acted in bad faith toward SSI by causing Marathon to sue SSI and by refusing to
grant SSI permission to settle that action (hereinafter the “assigned claims”).
Concluding there were no genuine issues of material fact, the district court
granted Maryland Casualty summary judgment on all of Marathon’s claims. The
district court held that Marathon was not covered under the policy. See Marathon
Pipeline Co. v. Maryland Casualty Co. , 5 F. Supp. 2d 1252, 1257 (D. Wyo.
1998). In subsequent orders, the district court also held that Maryland Casualty
had no duty to defend Marathon in the Berg suit, and that as a result Marathon
could not claim bad faith. With respect to the assigned claims, the court held that
because Maryland Casualty fully defended SSI against Marathon’s third-party
complaint, Marathon as SSI’s assignee could not assert bad faith against
Maryland Casualty.
During the discovery phase, Marathon attempted to review Maryland’s
claims file and other documents which Maryland refused to reveal under a claim
of attorney-client privilege. After reviewing the materials in camera , the district
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court held they did not raise an issue of material fact and declared them non-
discoverable. Finally, the court granted Maryland Casualty’s request for
deposition costs incurred during discovery.
Marathon appeals each of these rulings. We address each issue in turn.
“We review the district court’s grant of summary judgment de novo, applying the
same legal standards used by that court. Summary judgment should not be
granted unless the evidence, viewed in the light most favorable to the party
opposing the motion, shows there are no genuine issues of material fact and the
moving party is due judgment as a matter of law.” Blackhawk-Central City
Sanitation Dist. v. American Guar. & Liab. Ins. Co. , 214 F.3d 1183, 1187-88
(10th Cir. 2000) (citations omitted). “[W]hen, as here, a federal court is
exercising diversity jurisdiction, it must apply the substantive law of the forum
state.” Id. The parties agree that Wyoming law governs our interpretation of the
insurance policies. We review the district court’s determination of Wyoming law
de novo. See id.
II
COVERAGE
Under Wyoming law, interpretation of the insurance policy “is a question
for the court to resolve as a matter of law.” State ex rel. Farmers Ins. Exch. v.
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District Court of the Ninth Judicial Dist., 844 P.2d 1099, 1102 (Wyo. 1993).
The Wyoming Supreme Court has set forth several basic principles to follow.
See id. at 1101-02. First, the words used in the policy must be given their
“common and ordinary meaning,” and must not be tortured to create an
ambiguity. Id. at 1101. Second, “[t]he intention of the parties is the primary
consideration and is to be ascertained, if possible, from the language employed in
the policy, viewed in the light of what the parties must reasonably have
intended.” Id. The language “should not be so strictly construed as to thwart the
general object of the insurance,” and, absent ambiguity, “the policy will be
enforced according to its terms.” Id. at 1101-02. Finally, where policy language
is “ambiguous and uncertain” or “fairly susceptible of two constructions,” the
interpretation “favorable to the insured will be adopted.” Id. at 1102 (citations
omitted).
A. Coverage under the Endorsement
The endorsement provision modifying SSI’s policy to include Marathon as
an additional insured provides that: “WHO IS AN INSURED (Section II) is
amended to include as an insured the person or organization shown in the
Schedule, but only with respect to liability arising out of your ongoing operations
performed for that insured.” App., Vol. 1 at 205. Marathon was listed in the
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Schedule as follows:
SCHEDULE
Name of Person or Organization:
MARATHON PIPELINE
ATN: LISA MERSHAD
P.O. BOX 4816
HOUSTON, TX 77253-4816
RE: BUILDING ERECTION
Id. 2
The district court granted summary judgment to Maryland Casualty on the
coverage issue, holding Marathon did not qualify as an additional insured under
these facts. The court first rejected Maryland Casualty’s argument that Marathon
was only an additional insured for operations relating to building erection,
holding instead that all of SSI’s operations, including hiring Mr. Berg and giving
Marathon the exclusive use of his services, were covered. However, the court
interpreted the contract language to require negligence on the part of the named
insured before coverage is triggered. Because SSI, the named insured, was not
the alleged negligent party, the court held the endorsement provision did not
Platte Pipe Line’s endorsement language is somewhat different. It limits
2
coverage to “liability arising out of ‘your work’ for that insured by or for you,”
and the listing in the Schedule under Platte’s name and contact address describing
SSI’s operations is stated as “PROJECT: ERECTING BUILDING &
REMODELING OLD BUILDINGS.” App., Vol. 1 at 195.
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apply. See Marathon , 5 F. Supp. 2d at 1257 (holding that because SSI’s duties
with respect to Mr. Berg were carried out competently, the initial condition
bringing Marathon under policy as additional insured remained unmet). In its
denial of Marathon’s motion to reconsider, the district court further clarified that
this final conclusion was based on the undisputed fact that Marathon, not SSI,
controlled every aspect of Mr. Berg’s work, including the initial decision to hire
him. See Order Denying Motion to Reconsider, App., Vol. 1 at 918. The court
reaffirmed its original holding that Mr. Berg’s injuries did not arise out of SSI’s
ongoing activities for Marathon. See id. at 920. After reviewing the undisputed
facts and applying Wyoming law, we disagree. We conclude that Marathon
qualifies as an additional insured under the endorsement for its liability to Mr.
Berg.
Initially, we agree with the district court that the language “RE:
BUILDING ERECTION” under Marathon’s name and address does not limit
Marathon’s coverage as an additional insured to those activities relating solely to
SSI’s construction of buildings for Marathon. According to Maryland Casualty,
because Mr. Berg was not involved in constructing buildings when he was
injured, the endorsement provision did not cover Marathon’s subsequent liability.
As the district court aptly noted, “an obscure reference to the primary insured’s
business description . . . does not adequately inform an additional insured of the
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potential limitation.” Marathon , 5 F. Supp. 2d at 1255.
We also agree with the district court that the placement of this reference
under the heading “name and organization,” and not in some other prominent
location where limitations to the endorsement attach, cannot limit coverage. See
id. This is particularly true given the fact that this reference is not printed in the
section limiting coverage to Marathon’s liability arising out of SSI’s ongoing
operations, the only language plainly limiting coverage under the endorsement.
Although Maryland Casualty argues that disregarding this language renders it
meaningless, whether this language was intended by the parties to be a limitation
is at the very least ambiguous and thus must be read in favor of Marathon. See
Ulrich v. United Serv. Auto. Ass’n. , 839 P.2d 942, 948 (Wyo. 1992).
Maryland Casualty contends that because SSI’s operations are described as
the erection of buildings, its conduct in providing Mr. Berg’s services was not an
“ongoing operation” within the meaning of the endorsement, and Marathon
therefore does not qualify as an additional insured under these facts. Because an
“ongoing operation” is undefined in the policy, we look to the common and
ordinary meaning of the words to determine whether SSI’s conduct here can be
so classified. See Farmers Ins. Exch. , 844 P.2d at 1101.
The dictionary defines “ongoing,” when used as an adjective, as “that
[which] is going on; that [which] is actually in progress.” Webster’s Third New
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International Dictionary (Unabridged 2000) at 1576. “Operations” is defined as
“a doing or performing esp[ecially] of action.” Id. at 1581. The common and
ordinary meaning of this phrase is that a company’s “ongoing operation” is
simply those things that the company does, as opposed to the meaning suggested
by Maryland Casualty which would limit “ongoing operations” to mean only the
core or most prominent operations that a company might undertake. 3
The undisputed facts show that SSI’s ongoing operations included hiring
specified individuals at Marathon’s request to work under Marathon’s sole
direction and control. See Dep. of Randy Farmer, President of SSI, App., Vol. 1
at 258-60 (describing similar arrangements over the past thirty years); Dep. of
We note that in Platte’s endorsement, instead of limiting coverage to SSI’s
3
“ongoing operations,” the language limits coverage to liability arising out of
“your work” for Platte. In contrast to “ongoing operations,” “your work” is
defined in the policy. That definition, however, is circular:
“Your work” means:
a. work or operations performed by you or on your behalf; and
b. Materials, parts or equipment furnished in connection with
such work or operations.
“Your work” includes:
a. Warranties or representations made at any time with respect to
the fitness, quality, durability, performance or use of “your
work”; and
b. The providing of or failure to provide warnings or instructions.
App., Vol. 1 at 218. This definition of “your work” is similarly not limited to
certain SSI activities, but may include SSI’s activity of providing individuals to
work under Marathon’s direction and control because the phrase is redundantly
defined as meaning “work or operations performed by you.”
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Dean Dick, Marathon employee, App., Vol. 1 at 268 (SSI provided temporary
workers for Marathon’s use to perform general roustabout work); Dep. of
Marilyn Griffith, Maryland Casualty Claims Adjuster, App., Vol. 4 at 1066 (SSI
informed her that it had been loaning employees to other business entities for
over twenty years). The occasional nature of this activity does not negate the fact
that it was an “ongoing operation” for SSI. 4
Given that Maryland Casualty chose
not to define this term as limited to the named insured’s most frequent or core
operations, the common and ordinary meaning of the words informs a reasonable
insured in Marathon’s position that the endorsement covers risks associated with
SSI’s activity of hiring and paying individuals who worked solely under
Marathon’s control. At the very least, this limitation is ambiguous as to whether
the parties intended to cover the risks associated with SSI’s activities in this
regard and therefore must be read in favor of the insured.
Although we have agreed with the district court thus far, we reject its
4
In an effort to show this was Marathon’s operation rather than SSI’s,
Maryland Casualty points out Marathon requested that SSI hire Mr. Berg and that
Marathon reimbursed SSI for the expenses incurred in doing so. However, the
fact that SSI was ultimately reimbursed by Marathon for Mr. Berg’s services has
no effect on whether Mr. Berg’s presence was due to SSI’s or Marathon’s
operations. A subcontractor is always rewarded for its services in some way,
which in turn finances its ability to pay those who perform the service.
Moreover, the fact that Marathon approached SSI and requested that it hire Mr.
Berg does not undermine the causal connection between SSI’s fulfilling that
request and Mr. Berg’s injuries.
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holding that Marathon’s liability did not “arise out of” SSI’s activities. Our
review of the undisputed facts convinces us there was a sufficient causal
connection between SSI’s operations and Mr. Berg’s injuries to trigger the
additional insured endorsement. Under Wyoming law, “arising out of” language
as used in insurance contracts carries a “natural consequence” level of causation.
Worthington v. State , 598 P.2d 796, 807 (Wyo. 1979) (interpreting automobile
insurance policy providing coverage for liability “arising out of” use of a
vehicle); see also Ulrich , 839 P.2d at 949 (reaffirming Worthington ). Applying
this standard, Marathon’s liability must be “the natural and reasonable incident or
consequence of” SSI’s ongoing operations for Marathon, “the causal connection
being reasonably apparent.” Id. Coverage will not lie, however, if Marathon’s
liability “was directly caused by some independent or intervening cause wholly
disassociated from, independent of or remote from” SSI’s operations for
Marathon. Id. at 948 (quoting Worthington , 598 P.2d at 807). Therein lies the
real crux of this dispute: while Marathon argues that Mr. Berg’s injuries arose
out of SSI’s activity of employing persons who worked at Marathon’s direction
and control, Maryland Casualty contends that Mr. Berg’s injuries arose solely out
of Marathon’s activities, independent and remote from SSI’s operations. Because
the “arising out of” language is “plain and unequivocal,” this is a question of law
for this court to resolve. See Farmers Ins. Exch. , 844 P.2d at 1102.
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In the district court’s initial published order, it relied on the fact that Mr.
Berg was Marathon’s employee for concluding that his injuries did not arise out
of any of SSI’s operations. See Marathon , 5 F. Supp. 2d at 1257 . In its denial of
Marathon’s motion to reconsider, the court clarified that this conclusion was
based on the undisputed fact that Marathon, not SSI, controlled every aspect of
Mr. Berg’s work, including the hiring decision. See App., Vol. 4 at 920. While
the district court described its original reliance on Mr. Berg’s employment status
as “used for illustrative purposes” and as “perhaps overbroad,” id. at 918, it
reaffirmed its original position by stating “there was only one arguable basis for
finding the liability could have arisen out of [SSI]’s ongoing operations for
Marathon; namely, that Berg was an employee of SSI.” Id. We have a different
view of the matter.
Mr. Berg’s employment status is largely immaterial to whether his presence
on Marathon’s site arose out of SSI’s ongoing operations. What is material, and
indeed decisive, is that Mr. Berg was present and working at Marathon’s site due
to SSI’s agreement with Marathon to hire and pay individuals who were to work
at Marathon’s complete direction and control. Moreover, it was foreseeable that
such individuals could be hurt as a result of Marathon’s negligence. We are
persuaded that SSI’s act of hiring and paying Mr. Berg at Marathon’s request and
then sending him out to work under Marathon’s sole direction and control was an
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ongoing operation out of which Mr. Berg’s injuries were a natural consequence.
We therefore disagree with the district court’s ruling that Marathon was not an
additional insured for purposes of its liability to Mr. Berg.
Finally, Maryland Casualty asserts that the named insured must be primarily
negligent, with the additional insured no more than vicariously liable, for this
endorsement provision to apply. Under this theory, Mr. Berg’s injuries did not
arise out of SSI’s operations because SSI was not negligent. We have held,
however, that an endorsement provision with identical language provides
coverage for an additional insured’s liability arising out of its own negligence.
See McIntosh v. Scottsdale Ins. Co. , 992 F.2d 251 (10th Cir. 1993) (applying
Kansas law). In McIntosh , we were faced with the same additional insured
endorsement provision at issue here and concluded the language was “ambiguous
as to whose negligence is covered and whose negligence is excluded from
coverage.” Id. at 254. We therefore interpreted the policy as providing coverage
for the additional insured’s liability arising out of its sole negligence. Id. This
appears to be the majority rule. Accord Mid-Continent Cas. Co. v. Swift Energy
Co. , 206 F.3d 487, 499 (5th Cir. 2000) (rejecting argument that identical policy
language limited endorsement’s coverage to additional insured’s liability arising
from named insured’s negligence); Admiral Ins. Co. v. Trident NGL, Inc. , 988
S.W.2d 451 (Tex. Ct. App. 1st Dist. 1999) (interpreting identical policy language
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and holding that coverage provided for additional insured’s sole negligence
resulting in injuries to named insured’s employee) (citing McIntosh holding as the
majority rule); Acceptance Ins. Co. v. Syufy Enterprises , 81 Cal. Rptr. 2d 557,
561-62 (Cal. App. Ct. 1999) (identical policy language does not allocate coverage
based on named insured’s fault). See also Lisa Oonk, The Construction Industry:
Coverage Issue Created by Claims Against Additional Insureds , 28 B RIEF 8, 11
(Summer 1999) (citing McIntosh as illustrative of majority rule and noting that
“many cases flat out reject arguments that coverage does not exist if the
additional insured’s liability arises from its own conduct or negligence.”). We are
not persuaded the language presented here is clearer on that point, and we
conclude this policy language does not limit coverage to the additional insured’s
vicarious liability. 5
Moreover, we believe the Wyoming Supreme Court would
5
We reject Maryland Casualty’s argument that the intent of an additional
insured endorsement is to “provide protection where the named insured,
performing a job for the additional insured, blunders.” Brief for Appellee at 26.
Where the additional insured is held no more than vicariously liable for the acts
of the named insured, the additional insured would have an action for indemnity
against the primary wrongdoer. “Thus, an endorsement that provides coverage
only for the additional insured’s vicarious liability may be illusory and provide no
coverage at all.” Douglas R. Richmond & Darren S. Black, Expanding Liability
Coverage: Insured Contracts and Additional Insureds, 44 D RAKE L. R EV . 781,
806 (1996). In this light, it is obvious that additional insureds expect more from
an endorsement clause than mere protection from vicarious liability.
We also reject Maryland Casualty’s citation to the underlying service
contract to determine whether Marathon’s own negligence was intended to be
covered by this endorsement. Under Wyoming law, the policy must be interpreted
and enforced according to its own terms. See Farmers Ins. Exch., 844 P.2d at
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adopt this view as Wyoming law.
In summary, we hold that Mr. Berg’s injuries arose out of SSI’s operations
because Mr. Berg’s presence at the Casper site was a natural consequence of
SSI’s activity of hiring him and paying his salary while releasing him to
Marathon’s control. Marathon therefore qualifies as an additional insured under
the policy.
B. Coverage under the policy provisions
Maryland Casualty contends that even if Marathon qualifies as an
additional insured, the policy’s use of “you” makes it clear that named insureds
and additional insureds are provided different coverage. Maryland Casualty
argues that “you” refers only to the named insured, whereas “insured” refers to all
other insureds under the policy, including Marathon. To support this argument,
Maryland Casualty relies on the preamble’s language which states, “[t]hroughout
this policy the words ‘you’ and ‘your’ refer to the Named Insured shown in the
Declarations, and any other person or organization qualifying as a Named Insured
under this policy.” App., Vol. 1 at 207. According to Maryland Casualty, all of
1101-02; see also Container Corp. of Am. v. Maryland Cas. Co., 707 So.2d 733,
735 (Fla. 1998) (contractual language in indemnity contract between
subcontractor and general contractor not dispositive of insurance coverage issue;
language of insurance policy controls).
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the provisions, exclusions, and definitions within the policy which use the term
“you” apply only to named insureds. For example, the SELI provision provides
coverage for “all sums which you shall become legally obligated to pay as
damages because of bodily injury by accident . . . sustained . . . by any employee
of yours.” App., Vol. I at 202.
The district court rejected Maryland Casualty’s argument on this point
concluding that additional insureds qualify as named insureds under the policy,
and therefore “you” refers to additional insureds like Marathon, providing the
same coverage as a named insured. See Marathon , 5 F. Supp. 2d at 1255-56. We
agree with the district court’s determination for all the reasons stated in its
opinion, and we add a few of our own.
At a minimum, the use of “you” in the policy is ambiguous as to whether it
refers to additional insureds and, as such, must be interpreted in their favor. 6
Under the policy language and in the Marathon endorsement, it is not clear that
6
We note that Maryland Casualty’s argument has not fared well in
insurance cases across the country. See, e.g. , Prisco Serena Sturm Architects,
Ltd. v. Liberty Mutual Ins. , 126 F.3d 886, 892 (7th Cir. 1997) (interpreting same
policy language, rejecting insurer’s argument that “your” refers only to named
insured); Wyner v. North American Specialty Ins. Co , 78 F.3d 752, 756 (1st Cir.
1996) (rejecting additional insured’s argument that “you” as used throughout
policy only applied to named insured); K&W Builders, Inc. v. Merchants &
Business Men’s Mutual Ins. Co. , 495 S.E.2d 473, 476 (Va. 1998) (interpreting
same preamble language and holding “you” as used in policy referred to
additional insureds).
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“you” as used in the policy excludes additional insureds. The endorsement
adding Marathon as an additional insured stated that “ WHO IS AN INSURED
(Section II) is amended to include as an insured the person or organization shown
in the Schedule .” App., Vol. 1 at 195. This amendment, by its own language,
adds Marathon as an “insured,” and does not relegate it to a lesser status than
named insureds under the policy. Moreover, Section II does not define classes of
insureds in terms of lesser or greater coverage. Instead, it describes which
persons related to the insured are included under the policy. In paragraph 1 of
Section II, for example, the policy reads: “if you are designated in the
Declarations as an organization . . . you are an insured. Your ‘executive officers’
and directors are insureds, but only with respect to their duties as your officers or
directors.” App., Vol. 1 at 212, ¶ 1c (emphasis added). Reading the policy as
excluding additional insureds everywhere the word “you” is employed would
make the policy’s coverage amorphous, leaving additional insureds open to all
sorts of unanticipated exclusions. “The purpose of provisions to add insureds is
‘to extend the policy coverage to others . . . not to change the nature of th[e]
coverage.’” Wyner , 78 F.3d at 756 (quoting Sonoco v. Travelers Indem. Co. , 315
F.2d 126, 128 (10th Cir. 1963)).
The mere use of the word “you” in connection with the entire policy also
does not place additional insureds on notice that they are excluded from its
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provisions. Surely Maryland Casualty could have included a plain statement in
the endorsement that additional insureds were to be treated differently under the
policy than named insureds through the use of the word “you.” Alternatively,
Maryland Casualty could have included a plain statement in the preamble, in
Section II, or in the endorsement specifying that additional insureds do not
qualify as named insureds. Absent such a clear exclusion, the policy is at least
ambiguous whether “you” includes endorsed additional insureds.
The preamble pointed to by Maryland Casualty does not convince us
otherwise. That preamble states that “‘you’ and ‘your’ refer to the Named
Insured shown in the Declarations, and any other person or organization
qualifying as a Named Insured under this policy.” App., Vol. 1 at 207. The
entire policy, read as a whole, is ambiguous as to whether this language
differentiates an additional insured such as Marathon from a named insured. We
agree with Marathon that the endorsement can reasonably be interpreted as
qualifying Marathon as a named insured, and therefore including Marathon
within the scope of “you” as used in the policy. 7
See, e.g. , Greene v. General
Cas. Co. , 576 N.W.2d 56, 60 (Wis. Ct. App. 1997) (common sense reading of
While the policy does provide another way for an entity to “qualify as a
7
Named Insured,” it is not clear from the policy that this is the only way to qualify.
See App., Vol. 1 at 212, ¶ 4 (stating that any organization newly acquired or
formed is covered as a Named Insured).
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similar preamble is that named insured has been expanded to include additional
insured, and thus “you” as used throughout policy referred to additional insured).
We asked the parties to submit additional briefing on the Wyoming
Supreme Court’s recent determination in Page v. Mountain West Farm Bureau
Mut. Ins. Co. , 2 P.3d 506 (Wyo. 2000). In Page , the court interpreted a farm and
ranch insurance policy and concluded that “you” as used in the policy referred
only to the named insureds, Mr. and Mrs. Page, and did not include the Pages’
employees who were covered as omnibus insureds under the policy. See id. at
509. In Page , however, the court’s holding was premised on its conclusion that
the policy language was unambiguous in its use of “you” as referring only to the
Pages. See id. (“[a] careful reading of the policy leads to the ineluctable
conclusion that . . . ‘you’ and ‘your’ refer only to the [Pages”]. The policy in
Page did not define “you” to include “any other person or organization qualifying
as a Named Insured.” Compare Preamble, App., Vol. 1 at 207, with Page , 2 P.3d
at 508. Because we hold that the language adding Marathon as an insured is
ambiguous as to whether it expands the named insured category to include
Marathon for purposes of the policy’s use of “you,” the Wyoming Supreme
Court’s determination in Page is inapposite.
Given our conclusion that “you” includes Marathon, Maryland Casualty’s
contention that the supplemental employer’s liability insurance provision does
-22-
not cover Marathon is without merit. Maryland Casualty presents no other reason
why the SELI coverage would not apply. 8
While it is hotly contested between the
parties whether Mr. Berg was an employee of SSI, none of the parties contests
the fact that Mr. Berg was an employee of Marathon. We therefore accept as
undisputed that Mr. Berg was a Marathon employee for purposes of coverage.
See Marathon , 5 F. Supp. 2d at 1257 (stating as a prior adjudicated fact that
Marathon was Berg’s employer). We hold that the SELI provision covers
Marathon for Mr. Berg’s injuries.
C. Discharge of Maryland Casualty’s coverage obligations
Maryland Casualty argues on appeal that even if it owed a duty to
Marathon, that duty was discharged completely by Marathon’s “flat rejections” of
Maryland Casualty’s offer to defend Marathon and its rejection of Maryland
Casualty’s offer of the SELI limits “shortly” after the Berg settlement conference.
Aplee. Br. at 40, 46. We reject this argument because Maryland Casualty’s offer
to perform was untimely and therefore insufficient to discharge its duty to
8
Because Marathon did not pay Mr. Berg’s workers’ compensation
premiums, none of the parties contends that Marathon’s claim is excluded under
the workers’ compensation provision, App., Vol. 1 at 203, exclusion (e). See
generally Eric Mills Holmes & Mark S. Rhodes, Appleman’s on Insurance § 1.17
at 83 (2d ed. 1996) (noting that “employers’ liability insurance is intended to
apply only when the insured employer is not subject to workers’ compensation
law”).
-23-
Marathon.
On April 14, 1997, Marathon notified Maryland Casualty of the Berg
litigation and demanded that Maryland Casualty provide Marathon with a
defense. App. vol. 1 at 104-05. Maryland Casualty did not respond to this
demand until its letter of August 15, 1997. In that letter, Maryland Casualty
notified Marathon that Maryland Casualty believed it had neither a duty to defend
nor a duty to indemnify Marathon, but would defend the company under a
“reservation of rights.” Id. at 240, 247-48. On October 6, 1997, Maryland
Casualty wrote a second letter to Marathon in which it reaffirmed its earlier
conclusions regarding its duty to defend or indemnify Marathon and added only
that it believed that SELI coverage might not apply to Marathon. See id. at 249,
250.
Maryland Casualty’s letters to Marathon in both August and October of
1997 were untimely under Wyoming law. See W YO . S TAT . A NN . § 26-15-124
(Michie 1977). Under section 26-15-124, an insurance company has only 45 days
in which to decide whether it will defend or indemnify an insured. See id. This
court has held that when an insurer fails to decide a claim within Wyoming’s 45-
day statutory time limit, “its failure to do so constitute[s] a refusal to pay,” even
if the insurer later attempts to cure that breach. Smith v. Equitable Life
Assurance Soc’y , 614 F.2d 720, 722 (10th Cir. 1980). Since Marathon notified
-24-
Maryland Casualty of the Berg litigation on April 15, 1997, Maryland Casualty’s
response was due to Marathon by June 1. That limit was far exceeded by
Maryland Casualty, which did not respond until 125 days had passed. Maryland
Casualty’s attempt to cure its failure to respond by offering to defend Marathon
under a reservation of rights did not cure this breach. Although Maryland
Casualty argues that, under a variety of standards, its response time was
reasonable, those arguments are not persuasive given the existence of an express
statutory time limit.
In accordance with Wyoming law, we hold that when Maryland Casualty
gave the untimely notice that it would only cover Marathon under a reservation
of rights, Marathon’s rejection did not waive coverage and Maryland Casualty’s
coverage defenses are disallowed. 9
II
DUTY TO DEFEND
The SELI provision obligated Maryland Casualty to defend suits brought
9
The coverage provided by the SELI provision is limited to “each accident”
and is “in lieu of and shall not be cumulative with any limit of liability stated
elsewhere in the policy.” App., Vol. 1 at 203. Because we hold Marathon is
covered under the SELI provision, it is unnecessary to determine whether the
CGL provision provides coverage as well, or whether Platte is covered under
some other provision.
-25-
against an insured by an employee claiming damages for bodily injury by
accident arising out of his employment with the insured. Comparing the
allegations in the Berg complaint to the policy’s provisions, the district court
concluded that Maryland Casualty had no duty to defend Marathon in the Berg
suit for substantially the same reasons it held there was no coverage. See App.,
Vol. 4 at 969 (granting Maryland Casualty summary judgment on contract claim
“because the complaint does not allege facts showing liability arising out of SSI
ongoing operations performed for Marathon”). Marathon appeals this order.
It is a well-settled principle of insurance law in Wyoming as elsewhere that
“the duty of the insurer to defend is more extensive than its duty to indemnify the
insured.” Shoshone First Bank v. Pacific Employers Ins. Co. , 2 P.3d 510, 513
(Wyo. 2000); see also First Wyoming Bank v. Continental Ins. Co., 860 P.2d
1094, 1097-98 (Wyo. 1993); 46 C.J.S. Ins. § 1145(a) (“The insurance company
owes its insured a duty to defend actions brought against its insured; such duty is
broader than the company’s duty to indemnify . . .”). The duty to defend is a
“separate and distinct” contractual requirement under the policy. First Wyoming
Bank , 860 P.2d at 1073; see also 46 C.J.S. Ins. § 1145(a) and (c). Whether
Maryland Casualty had a duty to defend Marathon in the Berg litigation is
determined not by an analysis of the insurer’s ultimate obligation to indemnify
the insured “but rather by examining the facts alleged in the complaint that the
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claim is based upon.” Shoshone First Bank , 2 P.3d at 513; see also Aetna Ins.
Co. v. Lythgoe , 618 P.2d 1057, 1061 n.2 (Wyo. 1980). “The insurer is obligated
to afford a defense as long as the alleged claim rationally falls within the policy
coverage.” Shoshone First Bank , 2 P.3d at 513; see also Hutchinson Oil Co. v.
Federated Serv. Ins. Co. , 851 F.Supp. 1546, 1553 (D.Wyo.1994) (quoting Axton
Cross Co. v. Lumbermen's Mut. Cas. Co. , 176 A.D.2d 482, 574 N.Y.S.2d 561,
562 (N.Y. App. Div. 1991)). If there be any doubt as to whether the insurance
company need defend the insured, that doubt must be resolved in favor of the
insured. First Wyoming Bank , 860 P.2d at 1095; see also 46 C.J.S. Ins. §
1145(a). The Berg complaint, naming Marathon as a defendant, alleged that
Mr. Berg was “hired as a summer laborer by [SSI],” and that SSI paid his
workers’ compensation premiums. App., Vol. 1 at 33, ¶ 8. The complaint further
alleged that SSI hired Mr. Berg “pursuant to a contract with Marathon, whereby
Marathon agreed to compensate [SSI] in exchange for the right to exclusive use
of Berg’s services throughout the summer of 1996.” Id. at ¶ 9. Mr. Berg also
asserted a claim for negligence against Marathon resulting in bodily injury during
the course of his employment. Marathon argues that these allegations establish a
potential for coverage under the additional insured endorsement and the SELI
provision or, at the very least, that any doubts should have been resolved in its
favor. We agree.
-27-
The policy provisions as set out above endorsed Marathon as an additional
insured for its liability arising out of SSI’s work for Marathon. The complaint
alleges that SSI hired Mr. Berg and granted Marathon the exclusive use of his
services pursuant to a contract with Marathon. These allegations certainly raised
the strong possibility that any liability on the part of Marathon would arise out of
SSI’s operations for Marathon. The allegations also demonstrate that Mr. Berg
was an employee of either Marathon, SSI, or both. Finally, the complaint stated
that SSI paid Mr. Berg’s workers’ compensation premiums, thereby alerting
Maryland Casualty that the workers’ compensation exclusion might not apply to
Marathon. Each of these claims “is potentially covered under the policy.”
Shoshone First Bank , 2 P.3d at 514; First Wyoming Bank , 860 P.2d at 1099-
1100. Since “the claim, liberally construed, is within the embrace of the policy,
the insurer must defend.” Hutchinson Oil Co., 851 F. Supp. at 1553 (quoting
Axtan Cross Co. Inc. , 574 N.Y.S.2d at 562 (N.Y. App. Div. 1991)).
In a case somewhat similar to the instant one, the Wyoming Supreme Court
recognized that “as a general rule . . . the insurer is obligated to defend if there is
potentially a case under the complaint within the coverage of the policy.” Boston
Ins. Co. v. Maddux Well Serv. , 459 P.2d 777, 779 (Wyo. 1967). In that case, a
fire broke out at a well which was owned by Belco but was being serviced by
Maddux at the time of the fire. Two Maddux employees were injured and
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Maddux paid them workers’ compensation as required by Wyoming law.
Subsequently, the two employees sued Belco for negligence. Belco responded by
filing a third-party claim against Maddux, seeking indemnification for any
judgments against Belco obtained in the negligence case. Belco alleged that it
was not negligent and that any negligence was due entirely to the actions of
Maddux. Maddux’s insurance company refused to defend Maddux against the
third-party claim. The Wyoming Supreme Court examined the pleadings in the
case and concluded that the third-party complaint was a case against Maddux,
that the suit by the two employees against Belco alleged bodily injury, and that
Belco claimed that Maddux alone was responsible for any injuries to the two
employees. Id. at 778-779. The Court held that these three facts, when compared
with the plain language of the insurance policy, were sufficient to trigger a duty
to defend on the part of the insurance company, regardless of the ultimate merit
outcome of the proceedings. Id. at 780.
Maryland Casualty argued to the district court that Mr. Berg’s failure to
allege SSI’s negligence or to allege his injuries resulted from any activities
associated with erecting buildings negated any potential for coverage. We have
rejected this reading of the policy. See supra , Part I.A. While Maryland
Casualty may have had doubts as to whether there was a duty to defend
Marathon, those doubts should have been resolved in Marathon’s favor in
-29-
accordance with Wyoming law. See First Wyoming Bank , 860 P.2d at 1095. In
light of the allegations in the Berg complaint, we conclude the potential for
coverage was apparent and Maryland Casualty therefore had a duty to defend
Marathon in the that suit.
Citing Glenn Estess , 763 F.2d 1237, Maryland Casualty argues
alternatively that any duty to defend was discharged both by its offer on August
15 to defend Marathon under a reservation of rights, and by Marathon’s
subsequent failure to send its bills for costs incurred. Maryland Casualty’s
belated offer, five months after the Berg suit was filed against Marathon, was
insufficient to discharge its duty to defend for the same reasons that its offer to
fund the settlement did not discharge it of its duties under the SELI provision.
See supra , Part I.C. This offer was made three weeks after Marathon had
instituted the present suit seeking a declaration that Maryland Casualty had a duty
to defend. Under all of these circumstances, Marathon was not forced to choose
between forwarding all of its legal bills or facing termination of Maryland
Casualty’s defense duties.
III
BAD FAITH
In claims IV and V of the amended complaint, Marathon asserted a bad
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faith cause of action against Maryland Casualty for its handling of Marathon’s
claim. Marathon alleged two separate instances of bad faith. The first concerned
Maryland Casualty’s refusal to defend Marathon in the Berg case where its duty
to do so was not “fairly debatable.” The second stemmed from Maryland
Casualty’s refusal to respond, in a timely manner, either to Marathon’s repeated
demands for a defense or to its numerous requests for a copy of the insurance
policy, thereby forcing Marathon to sue SSI in the Berg litigation and to file the
present action against Maryland Casualty. The district court granted summary
judgment to Maryland Casualty on this cause of action, concluding that neither
instance cited by Marathon constituted bad faith. Marathon contends the grant of
summary judgment was in error, and we agree.
The district court did not deal squarely with the bad faith cause of action
because it failed to recognize that this claim was distinct from Marathon’s
contractual claim against Maryland Casualty and accordingly required different
legal analysis. Instead, the district court erroneously applied a contract analysis
to the bad faith claim. Marathon’s contractual claim was a coverage claim -- a
claim that Maryland Casualty owed Marathon a defense because Marathon was an
additional insured under the SSI policy. We dealt with that claim in Section II of
this opinion. In its order disposing of the bad faith claim, the district court
applied the analysis appropriate for a coverage dispute, comparing the allegations
-31-
contained in the Berg complaint with the insurance policy provisions in order to
determine whether Maryland Casualty had a contractual duty to defend
Marathon. See App., vol. 4 at 961. Concluding that Maryland Casualty owed
Marathon no contractual duty to defend, the district court held there was no bad
faith.
As we have pointed out, however, a bad faith claim requires an entirely
separate analysis from a contractual claim. Bad faith claims are a species of tort
law, not of contract law. They constitute a violation of the insurer’s separate,
non-contractual, “duty to process claims fairly and in good faith.” 46A C.J.S.
Ins. § 1342. Under Wyoming law, a bad faith claim is an independent tort action
based on the theory that insurers owe a duty of good faith to policyholders not to
unreasonably deny a claim for benefits under the policy. See McCullough v.
Golden Rule Ins. Co. , 789 P.2d 855, 857-58 (Wyo. 1990); see also 46A C.J.S.
Ins. § 1580. That bad faith tort action is known in Wyoming as “the tort of
violation of the duty of good faith and fair dealing.” Id. at 855; see also Herrig
v. Herrig , 844 P.2d 487, 490 (Wyo. 1992). In order to prevail, the insured must
prove that the denial of his claim by the insurer was not “fairly debatable,” which
is an objective standard. McCullough , 789 P.2d at 860; see also 46A C.J.S. Ins.
§ 1580. Namely, the insured must prove the insurer did not properly investigate
and develop the claim or recklessly ignored or disregarded the claim. See
-32-
McCullough , 789 P.2d at 860. Further, the insured must prove that there is no
reasonable basis for denying the benefits of the policy, and that the insurer knew
of or recklessly disregarded the lack of a reasonable basis for the denial. See id.
The standard to be employed by a jury in evaluating the insured’s argument that
the claim was not “fairly debatable” is that of a reasonable insurer – i.e., would a
reasonable insurer under the circumstances have denied or delayed payment? Id. ;
See also 46A C.J.S. Ins. § 1580.
Since its initial ruling in McCullough , the Wyoming Supreme Court has
expanded its definition of this tort to include a second kind of bad faith described
as “oppressive or intimidating claims practices.” Hatch v. State Farm Fire &
Cas. Co. , 842 P.2d 1089, 1099 (Wyo. 1992). In Hatch , the court held that even
if the insurer can prove its denial of the claim was legitimate because the claim
was fairly debatable, the insured may still prevail on its bad faith claim if he can
demonstrate that the insurer’s investigation, handling and denial of the claim
violated the implied covenant of good faith and fair dealing.
Hatch underscores the difference between the bad faith tort and the
contractual claims. Even if an insured loses the underlying contractual claim, he
may still prevail on the bad faith tort claim because the tort claim is essentially a
“due process” type of claim which is concerned with the insurer’s conduct in
handling the insured’s claim. Id. at 1099. This is so because “the duty of good
-33-
faith and fair dealing emanates from the special relationship of the parties to the
insurance contract, not from the express or implied provisions contained in the
contract.” Id. at 1099. Indeed, even if an insurer subsequently pays the claim in
full, that does not extinguish the insured’s bad faith tort claim. See Darlow v.
Farmers Ins. Exch. , 822 P.2d 820, 826 (Wyo. 1991).
In light of Wyoming law, it is apparent that the district court’s grant of
summary judgment to Maryland Casualty was based on an incorrect legal
analysis. Moreover, we are persuaded that summary judgment was inappropriate
given the facts pled by Marathon regarding Maryland Casualty’s handling of its
claim. We turn now to an analysis of this issue.
As we have discussed, the Wyoming Supreme Court has identified two
ways by which an insurer can violate the duty of good faith and fair dealing: by
“unreasonable denial” of a claim by an insurer where that claim is not “fairly
debatable,” and by employement of “oppressive or intimidating claims practices”
in handling the insured’s claim. Marathon alleges that Maryland Casualty
committed both kinds of bad faith. We deal with each in turn.
Marathon contends Maryland Casualty unreasonably denied its request to
be provided with a defense in the Berg litigation. Since we have already
determined that Maryland Casualty owed Marathon that defense, the question is
-34-
whether that duty to defend was “fairly debatable” at the time. 10
One
consideration is whether the insurer “properly investigated and developed” the
claim or “recklessly ignored and disregarded” it. McCullough , 789 P.2d at 860.
Here, Maryland Casualty repeatedly refused to respond to Marathon’s tender of
the Berg complaint and demands for a defense. Maryland Casualty’s only
response to this assertion is that Ms. Griffith, its claims adjuster, left a telephone
message with Marathon’s counsel. Several letters written by Marathon after its
initial tender and demand for a defense did not mention this phone call and
continuted to request a response from Maryland Casualty. These letters warned
of an impending suit against SSI and Maryland Casualty if the latter’s
unresponsiveness continued. See App., vol. 1 at 110. These letters also informed
Maryland Casualty that Marathon and Platte had no other insurers. It is
undisputed that the letters went unanswered over a four-month period. Under
these circumstances, we believe Marathon has, at minimum, raised a triable issue
on whether Maryland Casualty “recklessly ignored or disregarded” its requests
for a defense, in which event Maryland Casualty’s duty to defend would not be
“fairly debatable.”
Marathon’s second bad faith argument concerns Maryland Casualty’s
10
Marathon does not claim Maryland Casualty was in bad faith for refusing
or delaying the payment of its claim, apparently in recognition that coverage itself
was “fairly debatable.”
-35-
“oppressive or intimidating claims practices.” Marathon asserts that Maryland
Casualty’s failure to respond to Marathon’s repeated requests for a copy of the
insurance policy and for a defense in the Berg suit forced Marathon to file suit
against both SSI and Maryland Casualty. It is undisputed that Maryland Casualty
failed to respond in writing to Marathon’s tender until after Marathon filed suit.
In Hatch , which dealt with this type of bad faith claim, the Wyoming Supreme
Court listed several examples of “oppressive or intimidating claims practices.”
These included delay of payment, an insurer’s failure to respond to an insured’s
request for clarification of its rights under the policy, and conduct which forces
insureds to litigate. See Hatch , 842 P.2d at 1097. Maryland Casualty engaged in
exactly the kind of claims handling practices that the Hatch court found
constituted bad faith. Maryland Casualty’s only defense to this conduct is that it
was pursuing a coverage opinion from its counsel before responding to Marathon.
Aside from the fact that Maryland Casualty did not seek such an opinion for over
a month after Marathon tendered its claim, Wyoming law plainly requires
insurers to either accept and pay or reject an insured’s claim within 45 days of
receipt as we have said. See supra Part I.C. If an insurer does not comply with
the statute, the insurer’s actions are deemed a refusal to pay. 11
See Smith , 614
11
Maryland Casualty’s contention that section 26-15-124 does not apply to
this claim because it was not made by a named insured and was not supported by
evidence is without merit. First, only subsection (c) granting attorneys fees and
-36-
F.2d at 722. Given Maryland Casualty’s violation of its statutory obligations as
well as its conduct in handling Marathon’s claim, the district court erred in
granting summary judgment to it. 12
IV
EIGHTH AND NINTH CLAIMS
After settlement of the Berg suit, Marathon amended its complaint to add
an eighth and ninth claim against Maryland Casualty. The eighth claim was
based on SSI’s assignment of rights to Marathon and alleged that Maryland
Casualty acted in bad faith toward SSI in the following ways: causing SSI to be
sued by Marathon because of Maryland Casualty’s lack of response to
Marathon’s requests; hiring a conflicted attorney to represent SSI without
revealing that conflict; defending SSI without discussing the possible exclusions
interest for an “unreasonable” delay mentions “named insureds,” and that
subsection is not before us. Subsection (b), the subsection at issue here, applies
to all claims made for benefits without any restriction on who makes the claim.
Second, the only evidence required to support a request for a defense is tender of
the complaint against the insured, which Maryland Casualty admits was tendered
on April 14. Notably, Maryland Casualty never informed Marathon of any
asserted failings in its tender at the time it was made.
12
We reject out of hand Maryland Casualty’s arguments that a bad faith
cause of action should only protect individual insureds and not business entities
such as Marathon. Maryland Casualty cites no case to support such a sweeping
statement, and we note that the Wyoming Supreme Court allowed a bad faith
claim by a bank against an insurer in First Wyoming Bank, N.A., Jackson Hole v.
Continental Insurance Co., 860 P.2d 1094 (Wyo. 1993).
-37-
that would apply; and employing an expert to testify at trial which would increase
SSI’s potential liability. The ninth claim alleged Maryland Casualty acted in bad
faith toward both SSI and Marathon in its conduct during the settlement
conference. Specifically, Marathon alleged that Maryland Casualty acted in bad
faith toward SSI by appointing a conflicted attorney to defend SSI and refusing
to consent to SSI’s settlement of the third-party complaint, and that it acted in
bad faith toward Marathon by failing to offer the $1 million limits on the SELI
coverage during the settlement conference.
Maryland Casualty filed a motion to dismiss these claims. Converting
Maryland Casualty’s dismissal motion into a motion for summary judgment, the
district court granted Maryland Casualty summary judgment on both claims. On
the eighth claim, the district court concluded that because Maryland Casualty
defended SSI without any reservation of rights, SSI could not make out a bad
faith claim against Maryland Casualty. See App., Vol. 4 at 955-56. As to the
assigned portion of the ninth claim, the district court concluded that SSI’s bad
faith cause of action would not accrue until the confessed judgment was actually
entered against it for an amount in excess of the policy limits. See id. at 958.
Finally, as to Marathon’s own claim of bad faith, the district court agreed with
Marathon’s concession that it could not establish this particular claim absent the
existence of SELI coverage under the policy, and the court had already found in
-38-
Maryland Casualty’s favor on that issue. See id. at 958. Marathon appeals from
these grants of summary judgment.
A. The Assigned Claims
1. Breach of Contract
In its second amended complaint, Marathon asserted a new claim against
Maryland Casualty on behalf of SSI. 13
Marathon asserted that “Maryland is
contractually obligated to indemnify Steel Structures, Inc. . . . [and Maryland]
breached its obligations to its insured, Steel Structures, Inc., and acted in bad
faith.” App., vol. 2 at 444. The district court asked Marathon to clarify its
assigned claims. See App., vol. 4 at 952. Marathon filed a written clarification
in response, stating that it was “assert[ing] a claim for breach of contract” as the
assignee of SSI. See id . at 840. Specifically, Marathon cited Maryland
Casualty’s “failure to communicate” with Marathon, which resulted in
Marathon’s suit against SSI; Maryland Casualty’s provision of an attorney to SSI
who “had an obvious conflict of interest;” and Maryland Casualty’s failure to
13
We note that Platte’s brief asserts arguments on this point different from
those made below. We refuse to consider those arguments, however, in
accordance with the general rule that this court will not consider an issue on
appeal that was not raised in the district court. In re Walker, 959 F.2d 894, 896
(10th Cir. 1992). It should also be noted that all of the district court pleadings
discussed in this section of the opinion were filed jointly by counsel for Marathon
and Platte.
-39-
inform SSI that certain claims made against it by Platte were specifically
excluded from its insurance policy with Maryland Casualty. Id.
Marathon based most of this breach of contract argument on the case of
Insurance Co. of North America v. Spangler , 881 F.Supp. 539 (D. Wyo. 1995).
Spangler involved a lawsuit brought by the widow of a man killed in a bar brawl
after both the deceased and his assailant had been drinking. The widow filed a
negligence suit against the bar owner, among others. The insurance company
who provided general liability insurance to the bar owner notified the bar owner
that it was defending him under a reservation of rights. Simultaneously, the
insurance company filed a declaratory judgment action against the bar owner,
claiming that because the bar owner’s insurance policy specifically excluded
claims resulting from the consumption of alcohol, the insurer had no duty to
indemnify the owner. On the eve of trial of the negligence suit, the bar owner
entered into a settlement with the widow wherein he assigned his rights against
the insurance company to her in exchange for her agreement not to execute
against him personally. See id. at 541. The insurance company refused to ratify
the settlement or to indemnify the bar owner because, the company contended,
the bar owner violated the duty of cooperation by settling with the widow. See
id. at 542. The insurer then added the widow as a party to its declaratory
judgment action, seeking a declaration that it did not have to pay her the
-40-
settlement amount. See id. The district court held that “where the insurer [1]
was defending under a reservation of rights and [2] had filed a declaratory
judgment action contesting coverage, the insured’s assignee is not barred from
recovery from the insurer for a stipulated liability to which the insurer did not
consent and the insured is not personally liable.” Id. at 544 (numbers added).
In its clarification below, Marathon argued that Spangler applies to the
case at hand because while Maryland Casualty did not file a declaratory judgment
action against SSI, it did defend SSI under a reservation of rights. App., vol. 4 at
845. Alternatively, Marathon argued that even if there were no reservation of
rights, the rationale of Spangler should be extended to this case because SSI was
placed in a “precarious position” by Maryland Casualty, thus satisfying the policy
rationale behind Spangler . App., vol. 4 at 846-47.
The district court rejected Marathon’s argument. It found that Maryland
Casualty defended SSI wholeheartedly, id. at 955, and that its July 25, 1997,
letter to SSI, wherein it notified SSI of the amount of the policy limit and that
liability in the Berg litigation could exceed that limit, did not constitute a
reservation of rights. Id. at 956. The district court declined to extend the
“precarious position” rationale of Spangler beyond the facts of that case and
reaffirmed that the case only applied where there was a reservation of rights and
a declaratory judgment action. Id. The court granted summary judgment to
-41-
Maryland Casualty on the eighth claim.
We affirm the district court’s ruling on this issue. It is plain to us that
Maryland Casualty did not defend SSI under a reservation of rights; rather the
letter sent by Maryland Casualty to SSI was merely a notification to the insured
of the possibility of a judgment that would exceed policy limits. We are also
persuaded that the holding of Spangler should not be extended beyond the very
narrow facts of that case. To do otherwise would be to introduce an element of
uncertainty and unpredictability into insurance law regarding the extent of the
insured’s duty of cooperation.
Alternatively, the district court noted that in addition to a contractual
claim, Marathon appeared to be making a bad faith claim on SSI’s behalf.
Marathon contended that Maryland Casualty acted in “procedural” bad faith with
regard to its defense of SSI. 14
Although Marathon styled its claim as one of bad
faith, Marathon referred to it as a “breach of contract” claim in its clarification to
the district court, thereby confusing the matter. Under Wyoming law bad faith is
a tort, the violation of “the duty of good faith and fair dealing.” McCullough ,
789 P.2d at 855; see also Herrig , 844 P.2d at 490. Marathon cited no case law to
the district court in support of its argument that Maryland Casualty engaged in
See Section III, supra, for a detailed discussion of the two types of first-
14
party bad faith under Wyoming law.
-42-
bad faith towards SSI. As a consequence, the district court construed Marathon’s
claim as one for third-party bad faith, i.e., Maryland Casualty’s bad faith towards
Marathon itself in the latter’s settlement with SSI. Under Wyoming law, as the
district court noted, a claim for third-party bad faith can only be brought where
the insurer has failed to settle within policy limits. Here, there “was no evidence
of a judgment against SSI in excess of policy limits.” App., vol. 4 at 957.
Although we do not believe Marathon was limited, as the district court implied,
to asserting only a third-party bad faith claim, we conclude that Marathon failed
to coherently argue its first-party claim to the district court. Remand on this bad
faith issue, therefore, would be inappropriate. We hold the district court did not
err in dismissing the eighth claim.
2. Bad faith settlement practices as to SSI
Marathon also complains that Maryland Casualty unreasonably failed to
consent to Marathon’s settlement offer to SSI. As the district court recognized,
this is a third-party bad faith cause of action. See Jarvis v. Farmers Ins.
Exchange , 948 P.2d 898, 900 (Wyo. 1997) (stating that third-party bad faith
cause of action lies when insurer refuses in bad faith to settle a third-party claim
against its insured within policy limits). The Wyoming Supreme Court has held
that such a claim will not accrue until after a judgment has been entered against
the insured in excess of the policy limits. See id. at 902 . Because it is
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undisputed that the judgment against SSI has not been enforced against it, we
agree with the district court that Maryland Casualty was entitled to summary
judgment on this claim, which constitutes part of the ninth claim in the
complaint.
In sum, all of the assigned claims involving SSI were properly dismissed
by the district court, including the entire eighth claim and a portion of the ninth
claim.
B. Bad faith refusal to offer SELI limits
As to its first-party bad faith claim, Marathon asserts that Maryland
Casualty acted in bad faith towards it when it failed to offer the $1 million dollar
SELI coverage limits during the Berg settlement conference. The district court
held that this claim was dependent upon Marathon being covered and granted
summary judgment to Maryland Casualty on that basis, see App., Vol. 4 at 958.
However, we concluded above that Marathon has SELI coverage. 15
The Wyoming Supreme Court has recognized that where an insurer fails to
accept a reasonable settlement offer within policy limits, that conduct is the basis
of a bad faith cause of action. See Western Cas. & Surety Co. v. Fowler , 390
The parties have represented to us that Marathon’s settlement with Mr.
15
Berg exceeded the $1 million SELI provision limits.
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P.2d 602, 604 (Wyo. 1964). See also Eric Mills Holmes & Mark S. Rhodes,
Appleman’s on Insurance 2d § 8.9 at 471 (2d ed. 1996) (citing cases that follow
this rule). Since then, other courts have held an insurer’s failure to offer the
limits of the insurance policy during settlement may amount to bad faith when the
claim against the insured has merit and the insured’s potential liability exceeds
the policy’s limits, as was the case here. See, e.g. , Courvoisier v. Harley
Davidson of Trenton, Inc. , 742 A.2d 542, 549, 550 (N.J. 1999) (insurer’s offer of
only a fifth of the policy limits where claim had merit and far exceeded the policy
limits was remanded for trial on claims of bad faith); Opperman v. Nationwide
Mut. Fire Ins. Co. , 515 So.2d 263, 267 (Fla. Dist. Ct. App. 1987) (insurer’s
repeated refusal to offer full limits of policy in face of convincing evidence that
value of plaintiff’s case far exceeded those limits constituted sufficient
allegations of bad faith to survive summary judgment); Rova Farms Resort, Inc.
v. Investors Ins. Co. , 306 A.2d 77, 78-79 (N.J. Super. Ct. App. Div. 1973)
(insurer’s failure to offer policy limits constituted bad faith notwithstanding there
was no assurance from plaintiff that action could be settled within policy limits).
In Ahrenholtz , 968 P.2d at 951, the Wyoming Supreme Court held that where the
record shows any conduct which has been held to constitute bad faith, the claim
must go to the jury. Indeed, in Jarvis , 958 P.2d at 902, the Wyoming Supreme
Court recognized just this type of claim, although it held the claim would not
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accrue until a judgment in excess of the policy limits was entered against the
insured.
Important here is the fact that the magistrate judge ordered Maryland
Casualty to be at the settlement conference with full authority to offer the limits
of the policy. Maryland Casualty claims this order did not include the SELI
limits. Whether this belief was in good faith is a question of fact for the jury.
Consequently, we reverse the district court’s grant of summary judgment
regarding whether Maryland Casualty’s failure to offer the limits of the SELI
coverage during settlement amounted to bad faith as to Marathon.
V
DISCOVERY ISSUES
As set forth above, Maryland Casualty appointed the law firm of Murane &
Bostwick on May 29, 1997, to defend SSI against Marathon’s third-party
complaint. On that same day, according to the deposition testimony of Maryland
Casualty employees and an attorney at Murane & Bostwick, Maryland Casualty
hired Murane & Bostwick to prepare a coverage opinion regarding whether
Marathon and Platte were covered under SSI’s policy as additional insureds,
apparently finally acting on Marathon’s initial tender from April 14.
Maryland Casualty received that coverage opinion on July 8, 1997, but it
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did not act upon it. A week later, on July 15, a month before the settlement
conference in the Berg litigation and in the face of Maryland Casualty’s
unresponsiveness, Marathon filed this action. On July 25, Maryland Casualty
retained litigation counsel from the Wyoming-based firm of Lathrop & Rutledge
and the San Francisco-based firm of Wright, Robinson, Osthimer & Tatum to
defend against Marathon’s claims. At some point Ms. Griffith, Maryland
Casualty’s claims adjuster, asked James Nielsen, an attorney at the latter firm, to
write Marathon’s counsel and offer a defense to Marathon in the Berg litigation
under a reservation of rights. He did so on August 15.
Maryland Casualty explains its failure to respond to Marathon’s repeated
tenders until August 15 with the assertion that it had been waiting for Murane &
Bostwick’s coverage opinion, and that Marathon filed this action before it had a
chance to act upon that opinion. During discovery, Marathon sought production
of the entire claims file for its claim, the coverage opinion from Murane &
Bostwick, and any documents showing when Maryland Casualty requested a
coverage opinion from Murane & Bostwick and when the policy and
endorsements were provided to Mr. O’Neill to aid in that effort. Maryland
Casualty resisted production of these documents, asserting attorney-client
privilege.
Marathon filed a motion to compel. The magistrate judge ordered the
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production of several documents which he held were not privileged. In addition,
he ordered production of all the documents he found were privileged, ruling that
Maryland Casualty could not assert its privilege for several reasons. See App.,
Vol. 3 at 548. Among those reasons was the magistrate judge’s conclusion that
Maryland Casualty created a conflict of interest for Murane & Bostwick by hiring
the firm to represent SSI against Marathon’s third-party complaint while
simultaneously representing Maryland Casualty for purposes of the coverage
opinion. Citing no case law, the magistrate judge ruled that Maryland Casualty’s
claim to privilege would be inequitable under these circumstances. Continuing
this reasoning and citing Shapiro v. Allstate Ins. Co. , 44 F.R.D. 429 (E.D. Penn.
1968), the magistrate judge held that SSI’s assignment of claims to Marathon
permitted Marathon to “learn all the information to which SSI was entitled.” Id.
at 549. He also said that because Maryland Casualty was relying on the advice of
counsel as a defense to Marathon’s claims of bad faith, it had waived its attorney-
client privilege. The Magistrate Judge accordingly ordered Maryland Casualty to
produce the documents.
Maryland Casualty appealed to the district court. The district court first
concluded that any conflict which Murane & Bostwick might have had did not
waive Maryland Casualty’s attorney-client privilege. See App., Vol. 3 at 694,
702. The court then addressed Maryland Casualty’s alleged reliance on the
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advice of counsel. Although the court cautioned that Maryland Casualty “may
have, under the tests discussed in Frontier Refining, [Inc. v. Gorman-Rupp Co.,
Inc. , 136 F.3d at 695, 699 (10th Cir. 1998),] have [sic] waived its privilege,” it
would nonetheless accept Maryland Casualty’s assertion that it was not relying on
advice of counsel as a defense to the bad faith claims. I d. at 704. As a
consequence, the district court ruled it would not allow Maryland Casualty to
offer any advice-of-counsel defense at trial, or present any evidence relating to
such a defense. See id. The court ordered Maryland Casualty to produce the
documents for its in camera review to determine whether they showed when
Maryland Casualty asked for and received legal advice relating to Marathon’s
claims of coverage. See id. at 705. After an in camera review, the district court
held that Maryland Casualty had claimed a valid attorney-client privilege and was
therefore not required to produce the materials. See App., Vol. 4 at 855. In
denying Marathon’s motion to reconsider, the district court pointed to its original
ruling that Maryland Casualty was not relying on the advice of counsel and that it
would not be allowed to use a privilege defense at trial. See id. at 911.
Marilyn Griffith, the adjuster who handled Marathon’s claims for Maryland
Casualty, ended her employment with Maryland Casualty during this litigation.
On July 31, 1998, after the district court’s rulings on the coverage issues but
before its rulings on the bad faith claims, the magistrate judge ordered the
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production of Marilyn Griffith’s personnel file. Maryland Casualty appealed this
ruling to the district court. Not reaching the appeal until after its grant of
summary judgment to Maryland Casualty on the bad faith claims, the court
dismissed the appeal as moot.
Marathon appeals these various orders. 16
We will not reverse a trial court’s
order denying discovery absent an abuse of discretion. See Frontier Refining, 136
F.3d at 699 . “In this context, however, we review the court’s underlying factual
determinations for clear error and review de novo purely legal questions.” Id.
A. Claims File Documents and Coverage Opinion
On appeal, Marathon encourages us to adopt the magistrate judge’s
reasoning and hold that Murane & Bostwick’s conflict of interest waived
Maryland Casualty’s attorney-client privilege, or, alternatively, that Maryland
Casualty’s reliance on advice of counsel as a defense to the bad faith claims
waives the privilege. We decline to adopt either conclusion.
1. Conflict as a waiver
Believing that Maryland Casualty created a conflict by hiring Murane &
16
Marathon also asserts it is entitled to documents protected by SSI’s
attorney-client privilege to support its claim that Maryland Casualty’s hiring of a
conflicted attorney to defend SSI amounted to bad faith. Due to our disposition
of this claim, we need not address this assertion.
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Bostwick to undertake both representations, the magistrate judge determined that
“[u]nder these circumstances, it would be inappropriate to allow Maryland
Casualty to raise the attorney-client privilege and protect documents from
discovery concerning the Marathon/Platte coverage issue.” App., Vol. 3 at 549.
To the extent the conflict argument relates to the assigned claims of SSI, the issue
has become moot given our affirmance of the district court’s dismissal of these
claims. To the extent the conflict issue may impact any of Marathon’s claims
upon which we have reversed the district court, we remand any discovery issues
to the district court for further consideration.
2. Reliance upon advice of counsel
The district court accepted Maryland Casualty’s assertion 17
that it was not
relying on the advice of counsel, but Marathon strenuously disagrees. After
17
We do note that the district court’s acceptance of Maryland Casualty’s
assertion is not without precedential support. See, e.g. , Oil, Chem. & Atomic
Workers Int’l Union v. Sinclair Oil Corp. , 748 P.2d 283, 290 (Wyo. 1987)
(holding defendant’s discovery response that its attorney participated in decision
to disseminate letter allegedly containing defamatory material did not amount to
reliance on the advice of counsel such that the attorney-client privilege was
waived); see also Frontier Refining , 136 F.3d at 700 (discussing Sinclair ).
Moreover, it is worth pointing out that dates as to when an insurer seeks a
coverage opinion are subject to discovery, but a court should not compel
production of privileged documents as a means of verifying those dates. See,
e.g. , Remington Arms Co. v. Liberty Mut. Ins. Co. , 142 F.R.D. 408, 415-16 (D.
Del. 1992) (noting that privileged documents should not be compelled solely as a
means of checking when a party sought coverage from insurer) (cited in Frontier
Refining , 136 F.3d at 702).
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reviewing the record and Maryland Casualty’s position throughout the litigation
below and continuing here on appeal, we find this to be a close question because
of Maryland Casualty’s continued assertion that it was waiting for advice from
counsel before acting.
Nevertheless, we have confidence that the district court will faithfully
enforce its order that Maryland Casualty may not enter anything into evidence at
trial concerning matters about which it claimed a privilege. After our own in
camera review of these documents, we are convinced that the dates Maryland
Casualty has admitted to concerning when it requested and received the coverage
opinion are supported by the privileged documents. We therefore find no abuse
of discretion in the district court’s order.
B. Marilyn Griffith’s Personnel File
In its reply brief, Marathon urges us to rule on this issue because, although
it became moot in the district court, it is squarely before this court. Because we
are remanding in any event, we remand this issue as well for consideration by the
district court in the first instance.
In summary, we affirm in part and remand in part the district court’s
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discovery orders for further consideration. 18
VI
COSTS
The district court, in its final order, granted Maryland Casualty’s motion
for deposition costs amounting to $1,114.75, without responding to Marathon’s
strenuous objection. Marathon appeals this grant of costs, asserting that the
district court violated its local rule and therefore abused its discretion. As the
district court’s power to grant costs is discretionary, we accordingly review its
grant for an abuse of that discretion. See Jones v. Unisys Corp. , 54 F.3d 624,
633 (10th Cir. 1995).
“Although a federal statute provides that a judge may tax deposition
expenses as costs if the depositions are ‘necessarily obtained for use in the case,’
28 U.S.C. § 1920, a more stringent local district court rule allows costs only for
18
On appeal, Marathon attempts to make arguments that certain of the
documents sought in its motion to compel are not privileged materials, but are in
fact business records that are discoverable. While the magistrate judge apparently
agreed and found they were not privileged and thus must be produced, see App.,
Vol. 3 at 548, we cannot discern from the record whether Maryland Casualty ever
produced those documents or whether they were included in its appeal to the
district court. Furthermore, it does not appear that the documents the magistrate
judge found not privileged were ever separately addressed by the district court.
We therefore leave this issue to the district court for further action on remand
upon appropriate motions made by the parties.
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depositions received in evidence.” Hernandez v. George , 793 F.2d 264, 268-69
(10th Cir. 1986). Local Rule 54.2(f) addresses when the district court here will
allow costs, and subsection (2)(D) sets forth the following:
Costs of depositions are taxable if the depositions or portions thereof
were read into evidence at trial in lieu of the appearance of the
deponent; or if the deposition is used at trial to impeach a witness on
the witness stand with his/her prior testimony; or it is necessary
during the course of trial that a witness’s recollection be refreshed
from his/her deposition testimony.
D. Wyo. L.R. 54.2(f)(2)(D). From this rule it is clear that the district court is
only empowered under its own rules to grant costs in three separate situations, all
of which involve using evidence from the deposition at trial. This case was
decided prior to trial. The record does not reflect that the court was intentionally
overlooking its local rule and exercising its more general statutory authority as
Maryland Casualty suggests. In any event, since we are reversing the grant of
summary judgment in favor of Maryland Casualty, the district court will need to
redetermine costs when these proceedings become final. Consequently, we
reverse the grant of deposition costs to Maryland Casualty.
VII
CONCLUSION
In sum, we REVERSE the district court’s grant of summary judgment to
Maryland Casualty on the coverage issues, holding instead that Marathon
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qualified as an additional insured and was covered under the SELI provisions of
the policy for its liability to Mr. Berg. We also hold that Maryland Casualty had
a duty to defend Marathon during the Berg litigation. In addition, we REVERSE
the district court’s grant of summary judgment to Maryland Casualty on
Marathon’s fourth and fifth claims asserting bad faith delay by Maryland
Casualty, and REMAND this issue for trial. We AFFIRM the district court’s
grant of summary judgment on the claims SSI assigned to Marathon. We
REMAND for further consideration the discovery challenges surrounding Ms.
Griffith’s personnel file. We also REVERSE the district court’s grant of costs
to Maryland Casualty.
The case is REMANDED to the district court for further proceedings in
accordance with this opinion.
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Marathon Ashland Pipe Line LLC v. Maryland Casualty Co.
Court: Court of Appeals for the Tenth Circuit
Date filed: 2001-03-16
Citations: 243 F.3d 1232
Copy CitationsCombined Opinion