COURT DECISIONS

Rough Notes, Sep 2005

Digested from case reports published in the North Eastern Reporter 2d, West Publishing Co., St. Paul, MN

City seeks damages from defunct company's former insurers

Studebaker Corporation was a Michigan corporation that, beginning in the 1850s, produced wagons and later automobiles in the city of South Bend, Indiana. Studebaker's manufacturing facilities encompassed 104 acres of land and 3.65 million square feet of buildings in the city. Studebaker stopped manufacturing automobiles in December 1963, and eventually combined with Worthington Corporation to form a new company, Studebaker-Worthington, Inc. Studebaker was reincorporated as Ballpark Enterprises, Inc., and transferred its assets to Saraband Properties, Inc., a wholly owned subsidiary of Studebaker-Worthington. Saraband also assumed "all of the liabilities and obligations of [Studebaker] existing on [November 22, 1967]." The original Studebaker Corporation was dissolved by Hallpark in 1968.

After Studebaker stopped manufacturing automobiles in South Bend, the facilities were used for a variety of other operations. In the early 1990s, the city conducted an environmental evaluation of the premises and found there were environmental releases affecting the soil and groundwater at those facilities and grounds. As the owner of significant portions of the former Studebaker facilities, the city filed a complaint for damages and declaratory relief against Certain Underwriters at Lloyd's, London, and Certain London Market Insurance Companies, Century Indemnity Company, and Zurich American Insurance Company (Insurers), the insurers alleged to have provided insurance to Studebaker between 1949 and 1963.

The city also sued McGraw-Edison Company, the alleged successor to Studebaker. The insurers filed motions to dismiss the complaint, alleging the city did not have a claim against them. The city asked for appointment of a receiver to represent Studebaker's interests, particularly with respect to the pursuit of coverage under the company's insurance policies. The trial court granted the insurers' motion to dismiss, and denied the city's motion for appointment of a receiver. The city appealed.

On appeal, the insurers argued that the city's action was barred by the "direct action rule," a rule that bars a third party from pursuing a claim based on the actions of an insured directly against the insurer. The city acknowledged the existence of the direct action rule but asserted that its case fell under an exception to the rule. The Court of Appeals of Indiana agreed. It found that the kinds of actions that have been allowed as exceptions to the direct action rule are actions seeking only a declaration of the insurer's responsibilities should the allegations regarding the insured's conduct be proved. The city was not seeking any direct compensation from the insurance company, only a declaration that, if it were to prove its underlying case, the insurers would be obligated to provide coverage. Thus the city's action fell under the exception to the direct action rule.

The Insurers and McGraw-Edison also argued there was no environmental liability to be covered by the insurance because Michigan law barred any claims against Studebaker as of 1971, two years after Studebaker was dissolved. The court disagreed. Had the city named only Studebaker as a party, the court would have agreed with the insurers' argument. However, the city also sued McGraw-Edison, alleging it was successor to Studebaker's assets as well as its insurance policies and liabilities existing at the time of dissolution. Thus Michigan law did not require dismissal of the city's action against the Insurers.

The decision of the trial court dismissing the city's action against the insurers was reversed, and the case was remanded to the trial court for further action. The decision of the trial court denying the city's motion to appoint a receiver was affirmed.

City of South Bend v. Century Indemnity Company-No.49A02-0403CV-201-Court of Appeals of IndianaJanuary 18, 2005-821 North Eastern Reporter 2d 5.

Insurer denies duty to defend under employee benefits liability

Kathleen Grant was a veterinarian and a past employee and part owner of Twin Maples Veterinary Hospital. She filed a lawsuit against Warren Snead and Craig Clause, her business colleagues, who were still employees and part owners of the hospital. In her complaint, Grant alleged that Snead and Clause had attempted to "squeeze [her] out" as a minority shareholder without paying her the value of her common stock in the corporation and her share of bonus pool money.

Twin Maples, Snead, and Clause were insured by Cincinnati Insurance Company under a businessowners policy and an umbrella policy. The BOP included veterinary professional liability coverage and employee benefit liability coverage. Twin Maples promptly notified Cincinnati of the lawsuit, but Cincinnati refused to defend. According to Cincinnati, the allegations contained in Grant's complaint were not covered under the policy because the policy language covered only negligent acts and expressly excluded claims arising from dishonest, fraudulent, criminal, or malicious acts. In addition, Grant's entitlement to the bonus money did not arise through her employment relationship with Twin Maples and was, therefore, not an "employee benefit" within the meaning of the policy.