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Fritz v. St. Paul Fire and Marine Insurance Co.

United States District Court, E.D. Tennessee

August 12, 2019




         This civil action is before the Court on plaintiffs' motion for partial summary judgment [Doc. 72] and defendant's motion for summary judgment [Doc. 74]. Defendant responded in opposition to plaintiffs' motion [Doc. 82], and plaintiffs replied [Doc. 86]. Plaintiffs in turn responded to defendant's motion [Doc. 78], to which defendant replied [Docs. 87]. For the reasons that follow, the Court will deny plaintiffs' partial motion for summary judgment and grant defendant's motion for summary judgment.

         I. Background

         This is a breach of contract case between an insurer and the third-party beneficiaries of its insured. The case arises out of an alleged carbon monoxide poisoning that took place on February 15, 2014, at Laxmiji LLC, d/b/a/ the Mountain Vista Inn and Suites (“Laxmiji” or “the hotel”) in Pigeon Forge, Tennessee [Doc. 25]. Plaintiffs Jessica and Travis Fritz (“the Fritzes”) were staying at the hotel when they sustained serious and permanent injuries allegedly caused by a malfunctioning pool heating and ventilation system, which emitted carbon monoxide that poisoned plaintiffs as they slept [Doc. 80].

         The Fritzes thereafter filed a lawsuit (“the Underlying Lawsuit”) on December 23, 2014, in the Circuit Court for Sevier County, Tennessee, against Laxmiji and its owners, Bharat Patel and Jagruti Patel (“the Patels”) [Id.]. A $20 million Consent Judgment was later entered in that case [Doc. 76-19]. This current case was filed against defendant St. Paul Fire and Marine Insurance Company (“St. Paul”) by the Fritzes, as third-party beneficiaries of Laxmiji, for recovery of damages for breach of contract [Doc. 25].

         A. The Insurance Policies

         At the time of the carbon monoxide incident, Laxmiji had two insurance policies. The first, an underlying commercial general-liability policy (“the Underlying Policy”), was issued by Liberty Surplus Insurance Corp. (“Liberty”) with limits of $1 million [Doc. 80]. The second, an umbrella, or excess, insurance program (“the Umbrella Policy”) was issued by St. Paul for members of Community Associations PG, Inc. (“the Program”) [Id.]. This Umbrella Policy had a $5-million-per-occurrence limit and was meant to provide coverage to Laxmiji once the Underlying Policy was exhausted [Id.].

         Laxmiji worked with Madison Insurance Group (“MIG”) to gain access to the Program [Doc. 80]. The parties disagree about MIG's relationship to The Travelers Companies (“Travelers”) and St. Paul, its wholly-owned subsidiary, during this transaction. St. Paul states that MIG was not its agent for the Program [Doc. 75], while plaintiffs argue that MIG was an actual agent of St. Paul by virtue of a written agreement, operation of statute, and principles of apparent authority [Doc. 78]. The parties also disagree whether MIG used an intermediary to solicit an application for Laximiji to become part of the Program and therefore gain access to the Umbrella Policy. St. Paul maintains that MIG used Appalachian Underwriters, Inc. (“Appalachian”), a wholesale broker, to obtain a quote from McGowan Program Administrators (“McGowan”), the sole administrator of the Program. Plaintiffs state, instead, that although McGowan was an administrator of the Program, its agency agreement with Travelers was not the only agreement governing all agency relationships relative to the Program. Rather, plaintiffs maintain that Travelers utilized both McGowan and MIG as agents in connection to the Program [Doc. 80], and that Laxmiji accessed the Umbrella Policy through MIG, not McGowan.

         The Umbrella Policy was delivered to the Patels in Tennessee [Doc. 80]. It identified McGowan as the agent, and the Evidence of Insurance identified Appalachian as the producer [Doc. 76-1]. MIG is not identified as a producer or agent in either the Umbrella Policy or the Evidence of Insurance.

         The Umbrella Policy establishes that St. Paul would cover Laxmiji only after the Underlying Policy limits were exhausted. The Policy states that St. Paul would pay on behalf of “the Insured all sums in excess of the Retained Limit that the Insured becomes legally obligated to pay as damages by reason of liability imposed by law” [Id.]. As applicable here, the “Retained Limit” is “the total of the applicable limits of all Scheduled Underlying Insurance . . . for Bodily Injury . . . covered by such Scheduled Underlying Insurance” [Id.]. In this instance, Laxmiji's $1 million policy with Liberty is the Underlying Insurance, thus, by the Umbrella Policy's terms, St. Paul would cover Laxmiji's damages payments once its policy limits under Liberty were reached.

         With respect St. Paul's duty to defend, the Umbrella Policy specifies:

A. We shall have the right and duty to assume control of the defense of any Claim or Suit seeking damages covered by this policy, and we shall have the right to investigate and settle such Claim or Suit, when the Retained Limit has been exhausted by payment of judgments or settlements that would be covered by this policy. These rights and duties apply even if the Claim or Suit is groundless, false or fraudulent.
B. Prior to the exhaustion of the Retained Limit we shall have the right, but not the duty, to participate in the investigation, settlement or defense of any Claim or Suit seeking damages that would be covered by this policy. This right includes the opportunity to participate in the defense of any Claim or Suit that may result in damages covered by this policy. If we exercise this right, we will do so at our own expense.
C. We have no duty to defend, investigate or settle any Claim or Suit seeking damages not covered by this policy.

[Id.]. The Umbrella Policy therefore makes clear that St. Paul's duty to defend arises only with respect to damages covered by the Policy and only after an Underlying Policy's limit was reached, in this case $1 million. Before that limit was reached, however, St. Paul only had a right, not a duty, to participate in any settlement or defense of a claim.

         Apart from St. Paul's duty to defend, the Umbrella Policy also contains a “Cooperation” clause, which contains requirements for the insured resulting from an Occurrence[1], Claim or Suit:

         F. Duties in the Event of an Occurrence, Claim or Suit

1. You must see to it that we are notified as soon as practicable of any Occurrence which may result in a Claim or Suit seeking damages covered by this policy . . . .
2. If a Claim is made or Suit is brought against any Insured that is reasonably likely to involve the coverage provided by this policy, you must notify us in writing as soon as practicable. You and any other involved Insured also must:
a. immediately send us copies of any demands, notices, summonses or legal papers received in connection the Claim or Suit . . . .

[Id.]. This section also contains a “Voluntary Payments” clause, which states:

3. No Insured will, except at that Insured's own expense, voluntarily make a payment, assume any obligation, make any admission, or incur any expense, other than for first aid for Bodily ...

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