Certain Underwriters at Lloyd's, London v. Fidelity & Casualty Insurance

CUMMINGS, Circuit Judge. After Terrence Fahy was run over by an asphalt roller built by Dresser Industries, Inc., he sued and won a $3 million verdict. Dresser’s primary insurer, Fidelity and Casualty Insurance Company of New York, paid $1 million of Fahy’s award. Dresser’s excess carrier, Underwriters at Lloyd’s, London, and Companies in Interest (“Lloyd’s”), paid $2 million. Lloyd’s is now suing Fidelity to recoup the $2 million, claiming that Fidelity negligently failed to settle Fahy’s product liability suit against Dresser for $75,-000. The district judge granted Fidelity’s motion for summary judgment on the ground that Fidelity had no authority to settle the Fahy suit and thus breached no duty to Lloyd’s. We disagree, and remand the case so that Lloyd’s can pursue its tort claim against Fidelity. Fahy was crushed by the asphalt roller in August 1979. Two years later he brought a strict liability suit in Missouri state court against Dresser, as designer and manufacturer of the roller, and three other defendants. Fahy alleged that Dresser caused his injuries by failing to include an emergency stopping device on the roller because such a device would have prevented the roller from running over him when he fell from the operator’s seat. He sought $4.2 million in damages. Dresser notified Fidelity and Lloyd’s, its primary and excess liability insurers, of the suit. Dresser had two insurance policies and a contract arguably relevant to the legal questions in this case. Its primary policy with Fidelity covered personal injury awards up to $1 million per occurrence, subject to a $10,000 deductible. This policy required Fidelity to defend the Fahy suit, but Dresser had to cooperate in defense or settlement, and Fidelity retained an exclusive right to settle as it deemed expedient. Dresser’s excess policy with Lloyd’s covered up to $20 million of liabilities exceeding the $1 million limit on Dresser’s Fidelity policy. Dresser also had a contract with Underwriter’s Adjustment Company (“UAC”), an affiliate of Fidelity’s, to settle non-product liability claims below the $10,000 deductible on Dresser’s primary policy. The record suggests that Dresser controlled the Fahy case,1 although Fidelity approved Dresser’s retention of a St. Louis law firm to defend the suit and was fully informed of all developments in the litigation. In September 1984 the St. Louis defense counsel wrote Dresser and Lloyd’s to predict that the jury would find for Fahy with a verdict between $500,000 and $1.5 million. He concluded that $500,000 would settle the case, with Dresser paying $225,000 and the other defendants $275,000. Later that month, he sent Dresser some recent Missouri appellate decisions supporting Dresser’s liability, and that October, Lloyd’s urged Dresser to settle. Dresser refused, saying it was not liable to Fahy. In January, Lloyd’s demanded that Dresser settle but was rebuffed. Trial was set for June 1985. [543] Shortly before trial, Fahy reduced his settlement demand from $1.2 million to $500,000 against all four defendants, and Lloyd’s asked Dresser’s trial counsel for a recommendation about the new settlement offer. He replied that a Dresser in-house counsel, David Young, had ordered him “not to consider or pursue settlement, since Dresser management had made a determination that its asphalt roller was not defective * * Four days later trial counsel sent another letter to Lloyd’s and Dresser. He reiterated that Fahy had reduced his settlement demand to $500,000 and recommended that Dresser pay $200,000 as its share because its jury exposure was $1.5 to $4 million. On the same day, Lloyd’s demanded that Dresser settle the suit for $200,000. On the eve of trial, two of the defendants settled with Fahy for $75,000 each. A Dresser inter-office memorandum by David Young noted that Dresser and the vendor, the remaining defendants, could also settle for $75,000 each. Young recommended that Dresser accept, but the management refused. Trial began on June 24, 1985. Four days later, Dresser’s St. Louis defense counsel advised Young that Fahy’s attorney had begun to doubt the strength of his case and would still settle against Dresser for $75,000. Dresser would only consider $35,000. On July 3, the jury returned a $3 million verdict against Dresser but absolved the co-defendant vendor. The Missouri Supreme Court affirmed the award on November 17, 1987. Dresser had stood on principle, and consequently its insurers had to bear the loss. Fidelity and Dresser respectively paid Fahy $1 and $2 million, and Dresser turned to Lloyd’s for reimbursement under the excess policy. In September 1988 Lloyd’s paid nearly all of Dresser’s $2 million claim subject to a reservation of rights,2 and then filed a tort action in the Circuit Court of Cook County, Illinois, claiming that Fidelity negligently failed to settle the Fahy suit. Fidelity removed the ease to district court and sought summary judgment before the magistrate judge, who recommended denying Fidelity’s motion. The district court disagreed. It relied on Dresser’s contract with UAC, which gave UAC authority to settle non-product liability claims under $10,000 but reserved for Dresser sole control over all others. Since UAC was Fidelity’s affiliate, the court found that the UAC contract modified Dresser’s primary policy with Fidelity, and concluded that the UAC contract gave Dresser full control of products liability claims like the Fahy suit that were covered by the primary policy. Under this analysis, Fidelity had no power and therefore no duty to force Dresser to settle the Fahy suit, and the district court granted Fidelity’s motion for summary judgment. 789 F.Supp. 927. On appeal, Lloyd’s vigorously renews the position it argued below: that Dresser’s UAC contract did not modify or conflict with Fidelity’s obligations to Dresser under its primary policy. The sole question decided by today’s opinion is easily framed: under the UAC contract and the Fidelity policy, did Dresser or Fidelity have authority to control and settle the Fahy suit? If Dresser did, the district court was correct to find that Fidelity breached no duty to settle, and Lloyd’s suit cannot prevail as a matter of law. If Fidelity was responsible for the Fahy litigation, however, its hands-off approach may have breached a duty to Dresser or to Lloyd’s, and summary judgment must be reversed so that the issue can be resolved at trial. Certain Underwriters of Lloyd’s v. General Accident Insurance Co. of America, 909 F.2d 228, 232-233 (7th Cir.1990). A review of the UAC contract and the Fidelity policy shows that Fidelity, not Dresser, was responsible for defense of the Fahy suit. On January 16, 1979, .UAC and Dresser contracted for UAC to settle small claims brought against Dresser. This agreement gave UAC control of claims under $10,000 that did not involve products liability. UAC had no authority to settle any products liability claim or other claims over $10,000.3 In [544] deed, Fidelity has admitted that UAC lacked the authority to settle products liability claims without Dresser’s approval (App. at 249-250), and the affidavit of Dresser’s in-house litigation counsel states that “Dresser had full settlement authority, UAC none” over such claims. App. at 258. A week after Dresser signed the UAC contract, Fidelity and Dresser executed a policy for Fidelity to insure personal injury claims against Dresser up to $1 million per occurrence. This policy required Fidelity to defend Dresser and gave Fidelity sole power to decide whether a claim should be fought or settled.4 Dresser had to notify Fidelity of all claims under the policy and cooperate in their settlement or defense. Without Fidelity’s consent, Dresser could not pay claims or assume obligations under the policy except at its own expense. App. at 79, 85. Given these facts, the district judge erred in concluding that the UAC contract modified Dresser’s insurance policy with Fidelity. First, the UAC contract predated Dresser’s policy with Fidelity, and therefore could not “modify” it in any traditional contractual sense of the word. After signing the UAC contract on January 16, 1979, Dresser retained full rights to settle products liability claims. Dresser thus was free, a week later, to transfer these rights to Fidelity under the $1 million primary policy. In Article VII of their insurance contract, Dresser and Fidelity stated that their policy embodied all agreements relating to that insurance (App. at 67), and thus Fidelity cannot argue here that the primary policy incorporated or relied on the Dresser-UAC agreement. The primary policy gave Fidelity authority to settle products liability suits against Dresser, and nothing in Dresser’s earlier contract with UAC conflicts with or modifies the primary policy’s plain terms. We therefore conclude that Fidelity had a contractual duty to defend or settle the Fahy case for Dresser. At this juncture we express no opinion on the scope of that duty, whether Fidelity breached that duty, or whether Lloyd’s may proceed against Fidelity under an equitable subrogation or direct duty theory of liability or both.5 Equitable subrogation allows Lloyd’s to sue Fidelity for its breach of duties owed to Dresser; “direct duty” recovery allows Lloyd’s to sue Fidelity for its breach of duties owed to Lloyd’s. Compare Certain Underwriters, 909 F.2d at 232-233, with American Centennial Insurance Co. v. American Home Assurance Co., 729 F.Supp. 1228, 1230-1233 (N.D.Ill.1990), and Ranger Insurance Co. v. Home Indemnity Co., 714 F.Supp. 956, 961 (N.D.Ill.1989). See John C. McCarthy, Recovery of Damages for Bad Faith, § 2.11 at 336-341 (1990); Allan D. Windt, Insurance Claims and Disputes, § 7.08 at 410-413 (1988); Stephen S. Ashley, Bad Faith Actions; Liability and Damages, § 6.10 at 26-33 (1984). The availability of direct duty recovery may depend on which state’s law applies, and the parties have not briefed conflicts issues in this appeal. Fidelity and Lloyd’s view the Fahy litigation from heatedly different perspectives. Fidelity argues that under Missouri law, the Fahy suit was a long shot, and Dresser and Fidelity agreed it should be defended in court. Lloyd’s paints a different picture, [545] where Dresser wavered over the merits of Fahy’s claims and drifted into an ill-advised and disastrous jury trial, rudderless without Fidelity’s guiding hand. Because these issues cannot be resolved in this appeal, and because the district court erred in holding that Fidelity had no duty to defend or settle the Fahy suit, we reverse the grant of summary judgment for Fidelity and remand for trial before a different district judge under Circuit Rule 36. Footnotes [1] The account offered here reflects Lloyd’s perspective on the Fahy trial, since Lloyd's resisted summary judgment. We omit many disputed facts that relate to whether Fidelity breached any duty to Dresser — and also to Lloyd's — during the Fahy litigation, because resolution of these disputes must await the trial we order today. [2] An insolvent Lloyd’s affiliate owes Dresser $19,200. [3] The relevant provisions provided (App. at 260-261): [UAC agrees] To obtain the prior approval of Dresser before agreeing to the payment of [544] claims or losses (including allocated loss expenses) in excess of the settlement authority limit specified below: (a) Products Liability -0- (b) All others applicable $10,000 it # ‡ $ [Dresser agrees] UAC shall have full authority and control in all matters pertaining to the adjustment, handling, investigation, administration of claims and losses within the discretionary settlement authority limit and may make such adjustment or settlement of claims within discretionary settlement authority limit which in its judgment it deems proper unless Dresser notified UAC to the contrary on any specific claim. [4] Fidelity promised to (App. at 79): Defend any suit against [Dresser] alleging such personal or bodily injury * * * even if such suit is groundless, false, or fraudulent; but [Fidelity] may make such investigation, negotiation, and settlement of any claim or suit as it deems expedient * * *.