Opinion
Case No. 2:02-CV-1419 TC.
September 20, 2004
ORDER
This is a declaratory judgment action brought by Plaintiff Safety National Casualty Corporation ("Safety National"), an insurance company, against its insured, Defendant McWane, Inc., d.b.a. Pacific States Cast Iron Pipe Company ("McWane"). Safety National is seeking a declaration that it is not obligated to provide coverage to McWane for workers' compensation benefits McWane might have to pay to the dependents of a deceased employee of McWane, Ted Perkins.
Safety National claims that it has no obligation to provide coverage because McWane failed to provide it with timely notice of Mr. Perkins' death and the resulting claim under the insurance policy. In response, McWane argues that Safety National has not demonstrated that it was actually prejudiced by McWane's late notice and, therefore, Safety National must cover any claims arising out of Mr. Perkins' death.
This matter is before the court on the parties' cross motions for summary judgment. For the reasons set forth below, Safety National's Motion for Summary Judgment is DENIED and McWane, Inc.'s Motion for Summary Judgment is GRANTED.
FACTUAL AND PROCEDURAL BACKGROUND
The material facts of this case, which neither party disputes, stretch all the way back to 1982. On February 13, 1982, Mr. Perkins fell to his death while on duty as a maintenance foreman working for McWane. The parties do not dispute that Mr. Perkins died as a result of a work-related accident. Mr. Perkins left behind a widow and six minor children.
At the time of Mr. Perkins' death, McWane was subject to the Workers' Compensation Act of Utah. Accordingly, four days after Mr. Perkins' death, McWane reported to the Utah Industrial Commission the circumstances surrounding Mr. Perkins' work-related death, his monthly earnings, and information on his surviving dependents. McWane concluded that there was no dispute regarding these facts and did not challenge them during the Industrial Commission proceedings (indeed the Industrial Commission received a signed acceptance of liability from McWane).
The Industrial Commission initially awarded benefits for a period of six years (i.e., through February 12, 1988). (See Mar. 12, 1982 Utah Indus. Comm'n Findings of Fact, Conclusions of Law Order ("Order"), attached as Ex. 6 to Aff. of J. Douglas Huff.) The Commission found that, at the time of Mr. Perkins' death, he was earning a wage sufficient to entitle his dependents to the maximum benefits provided by the Workers' Compensation Act, totaling $68,016. (See Order at 1.) But the Order also provided Mr. Perkins' dependents with the opportunity to obtain additional benefits by filing a supplemental petition with the Commission at the end of the six-year benefit period. (See id. at 3.) The Perkins dependents followed the proper application procedures and obtained benefits (during a series of supplemental Industrial Commission proceedings held over the years) that continue to be paid to this day.
At the time of Mr. Perkins' death in 1982, McWane was self-insured for up to $250,000 for employee workers' compensation claims. McWane also had a re-insurance policy from Safety National for coverage of workers' compensation claims in excess of $250,000. (See Specific Excess Workers' Compensation Reinsurance Agreement ("Policy"), attached as Ex. 4 to Pl.'s Mem. in Supp. of Mot. for Summ. J.) It is the coverage under this Policy which is the subject of the lawsuit.
The Policy reads: "[T]he CORPORATION [Safety National] agrees to reimburse the EMPLOYER [McWane] against such Loss in excess of [$250,000]. . . ." (Policy at "B. Specific Excess Reinsurance" (emphasis added).) "Loss" is defined in the Policy as "actual payments made by the EMPLOYER [McWane] to employees and their dependents. . . ." (Id. at "C. Definitions" (emphasis added).)
It is undisputed that McWane did not provide notice to Safety National of Mr. Perkins' death or the subsequent workers' compensation claim until November 21, 2001. As of that date, McWane had not (and still has not) paid out $250,000 (its self-insurance limit) to Mr. Perkins' dependents. At the end of 2003, McWane had paid the Perkins approximately $147,000. McWane estimates that, unless certain contingencies occur (i.e., Ms. Perkins' remarriage or death), it will satisfy its $250,000 obligation in the year 2013, at which time Safety National's obligation to reimburse McWane under the Policy for payment of continuing benefits to Ms. Perkins will be triggered. To date, Safety National has not paid any amount to McWane, and, if Ms. Perkins remarries or dies before 2013, it "may never [have to] pay a penny [to McWane under the Policy] regardless of the outcome of this case." (Def.'s Mem. in Opp'n at 8.)
It appears from the record that McWane may have chosen to notify Safety National in November 2001 when McWane had incurred approximately $125,000 in benefit payments, which is fifty percent of McWane's total $250,000 obligation. McWane probably chose to notify Safety National at that time because the notice provision of the Policy states that "[a]s soon as the EMPLOYER [McWane] becomes aware, the EMPLOYER must provide timely notice to the CORPORATION [Safety National] of any claim or action commenced against the EMPLOYER which exceeds or is likely to exceed fifty percent (50%) of the Self-Insured Retention Per Occurrence. . . ." (Policy at "I. Timely Reporting of Claims," attached as Ex. 4 to Pl.'s Mem. in Supp. of Mot. for Summ. J. (emphasis added).) (See also Detail of Yearly Amounts [paid to Mr. Perkins' dependents] (attached as Ex. 15 to Aff. of J. Douglas Huff) (showing that, as of 2001, McWane had paid out approximately $124,000).)
Apparently, current benefits are being paid only to Mr. Perkins' widow. McWane's obligation to pay benefits to Mr. Perkins' children stopped when the children were no longer dependents of Mr. Perkins (e.g., reached the age of majority and stopped attending high school). (See Supplemental Orders of Indus. Comm'n (attached as Exs. 8-14 to Aff. of J. Douglas Huff) (finding continued dependency of Mr. Perkins' unemployed/unmarried widow and minor children still attending school).)
The Utah Workers' Compensation Act provides that benefits shall cease for a particular dependent when that dependent dies or, if the dependent is a surviving spouse, remarries during the benefit period. See Utah Code Ann. § 34A-2-414(5)-(6).
The Policy contains a notice provision that reads in its entirety as follows:
As soon as the EMPLOYER [McWane] becomes aware, the EMPLOYER must provide timely notice to the CORPORATION [Safety National] of any claim or action commenced against the EMPLOYER which exceeds or is likely to exceed fifty percent (50%) of the Self-Insured Retention Per Occurrence specified in Item 7 of the Declarations.
In addition, the following categories of claims shall be reported to the CORPORATION immediately, regardless of any question of potential. involvement of the CORPORATION:
(1) Fatalities;
(2) Paraplegics and quadraplegics;
(3) Serious burns;
(4) Brain injuries;
(5) Spinal cord injuries, and
(6) Any occurrence which causes serious injury to two or more employees.
Failure to render timely notice of any claim in a prompt, established manner to the CORPORATION by the EMPLOYER, or its designated representative(s), may result in the disclaimer of coverage for the particular claim. Failure of the EMPLOYER, or its designated representative(s), to notify the CORPORATION within two (2) years shall be considered untimely.
(Policy at "I. Timely Reporting of Claims", attached as Ex. 4 to Pl.'s Mem. in Supp. of Mot. for Summ. J. (emphasis added).) The Policy also states that "full compliance by the EMPLOYER with all terms of this [Policy] is a condition precedent to the CORPORATION'S liability hereunder." (Policy at "R. Acceptance" (emphasis added).) McWane provides no explanation for why it did not immediately notify Safety National of Mr. Perkins' death.
See also the discussion in Note 1, supra, surmising why McWane may have chosen to notify Safety National of the claim in November 2001.
Safety National asserts, without providing specifics facts, that it was prejudiced by its inability to participate in the Industrial Commission proceedings awarding benefits to the Perkins dependents. But the Policy provides that McWane, not Safety National, was obligated under the Policy to investigate and settle or defend against the Perkins family claim:
The EMPLOYER [McWane] shall investigate and settle or defend all claims and shall conduct the defense and appeal of all actions, suits and proceedings commenced against it. The EMPLOYER shall forward promptly to the CORPORATION [Safety National] copies of any pleadings or reports as may be requested. The EMPLOYER may not make any voluntary settlement involving liability to the CORPORATION except with the written consent of the CORPORATION.
The CORPORATION shall not be obliged to assume charge of the defense, appeal or settlement of any claim, suit or proceeding brought against the EMPLOYER, but the CORPORATION shall be given the opportunity to defend or participate with the EMPLOYER in the defense of any claim, if, in the opinion of the CORPORATION, its liability under this [Policy] might be involved.
(Policy at "J. Defense of Claims" (emphasis added).) Safety National does not identify any potential problems with the results of McWane's investigation or the Utah Industrial Commission's findings of fact. Safety National does not identify any problems with the Commission's legal conclusions or calculations of benefits and set-offs. And McWane did not enter into a "voluntary settlement involving liability to" Safety National, so McWane was not required to obtain any written consent from Safety National in 1982. (See id.) But there is also no dispute that Safety National was not provided the opportunity to determine whether the Perkins' claim might involve Safety National's liability, nor was it provided with the opportunity to defend or participate in the proceedings with McWane. And there is no dispute that almost twenty years went by before Safety National had any knowledge of the Perkins death and claim.
ANALYSIS
The Court's Jurisdiction
The threshold issue before the court is whether Safety National has demonstrated an actual controversy so that the court has jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201. The Declaratory Judgment Act provides that "[i]n a case ofactual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading,may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201 (a) (emphasis added). Because Safety National is not obligated, and may never be obligated, to pay any money to McWane until early 2013, McWane has raised the question of whether an "actual controversy" exists. But McWane nevertheless suggests that the court does have discretion to hear this case. Moreover, McWane says: "Having been forced to defend this case, and having incurred the expense of analyzing and briefing the issue on which the parties disagree, McWane requests that the court rule on the pending motions." (Def.'s Mem. in Opp'n at 10-11.)
The language of § 2201(a) does not give the court discretion to determine whether an actual controversy exists. The discretionary aspect under § 2201(a) comes into play only if an actual controversy exists. See Republic Ins. Co. v. Sinclair Oil Corp., 791 F. Supp. 278, 280 (D. Utah 1992) (Sam, J.) (setting forth factors a court should consider when deciding whether to allow a declaratory judgment action to proceed in a case where an actual controversy exists).
McWane cites to Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677 (7th Cir. 1992), in support of its position that an actual controversy exists. In that case, Bankers Trust sought a declaratory judgment holding that if it won a judgment in a related action in another jurisdiction, Old Republic was liable to indemnify as an excess insurer (the primary insurer claimed it had exhausted its policy limit). The Seventh Circuit held that even though it was possible that Old Republic would not be called upon to pay under the provisions of the excess liability policy, a real dispute existed regarding whether certain acts of Bankers Trust had negated coverage.
Here, an actual controversy exists because the past acts of McWane have given rise to the notice issue, even if Safety National ultimately ends up paying nothing. The overriding issue is whether an existing agreement between the two parties still has force and effect in light of McWane's late notice to Safety National, not whether McWane will be obligated to pay out more than $250,000 to the Perkins dependents thereby triggering Safety National's obligation to open its pocketbook. And Bankers Trust supports McWane's argument that an actual controversy exists.
As for the court's discretion to decide whether to adjudicate this particular declaratory judgment action, the factors set forth in Republic Ins. Co., as applied here, support an exercise of such discretion. Those factors are: Whether the declaratory action would settle the controversy; whether the action would clarify the legal relations at issue; whether the declaratory remedy is being sought merely for the purpose of "procedural fencing"; whether the declaratory action would improperly encroach upon state jurisdiction; and whether there is a more effective alternative remedy. Republic Ins. Co., 791 F. Supp. at 280. The decision requested by the parties would settle the entire controversy between Safety National and McWane. The case presents no issues regarding procedural fencing, jockeying for res judicata advantage, or encroachment on state jurisdiction. And there is no preferred alternative remedy. Accordingly, the court will adjudicate this declaratory judgment action on the merits.
Coverage Under the Policy in Light of McWane's Late Notice
Under Utah common law, an insurer must "show it suffered substantial prejudice from late notice where the policy contains no forfeiture clause and does not expressly condition coverage on strict fulfillment of the notice requirements."Federal Deposit Ins. Corp. v. Oldenburg, 34 F.3d 1529, 1546 (10th Cir. 1994) (applying Utah law and noting that even though court was not retroactively applying Utah Code Ann. § 31A-21-312(2), that statutory provision supported an application of the substantial prejudice rule).
Utah law applies here. See Houston Gen. Ins. Co. v. American Fence Co., 115 F.3d 805, 806 (10th Cir. 1997) ("The interpretation of an insurance is governed by state law and, sitting in diversity, we look to the law of the forum state.").
Utah Code Ann. § 31A-21-312(2) reads as follows: "[F]ailure to give notice or file proof of loss as required by Subsection (1)(b) does not bar recovery under the policy if the insurer fails to show it was prejudiced by the failure." This provision was enacted in 1986, four years after the date of the Policy and Mr. Perkins' death. McWane contended in its brief that this provision applies retroactively. The court does not need to reach this issue because Oldenburg, which dealt with a situation that arose before enactment of the statutory provision, applies essentially the same test.
The Policy does not contain a forfeiture clause and does not expressly condition coverage on strict compliance with the Policy's notice requirements. The Policy contains a "condition precedent" provision that states, in general terms, that "full compliance by the EMPLOYER [McWane] with all terms of this [Policy] is a condition precedent to the CORPORATION'S [Safety National's] liability hereunder." (Policy at "R. Acceptance" (emphasis added).) But more specific, and less strict, is the notice provision of the Policy, which reads, in pertinent part:
. . . [T]he following categories of claims shall be reported to the CORPORATION [Safety National] immediately, regardless of any question of potential involvement of the CORPORATION:
(1) Fatalities; . . .
Failure to render timely notice of any claim in a prompt, established manner to the CORPORATION by the EMPLOYER [McWane], or its designated representative(s), may result in the disclaimer of coverage for the particular claim. Failure of the EMPLOYER, or its designated representative(s), to notify the CORPORATION within two (2) years shall be considered untimely.
(Policy at "I. Timely Reporting of Claims" (emphasis added).) To the extent that these two provisions conflict with each other, the more permissive provision entitled "Timely Reporting of Claims" governs. See United States Fid. Guar. Co. v. Sandt, 854 P.2d 519, 522-23 (Utah 1993) ("if an insurance contract has inconsistent provisions, one which can be construed against coverage and one which can be construed in favor of coverage, the contract should be construed in favor of coverage"); Nielsen v. O'Reilly, 848 P.2d 664, 665 (Utah 1992) ("the terms of insurance contracts . . . should be read as a whole, in an attempt to harmonize and give effect to all of the contract provisions");Perkins v. Great-West Life Assurance Co., 814 P.2d 1125, 1129 (Utah Ct.App. 1991) ("any doubt should be resolved in favor of insurance coverage") (quoting American Cas. Co. v. Eagle Star Ins. Co., Ltd., 568 P.2d 731, 734 (Utah 1977)).
Moreover, both parties agree that the common law rule inOldenburg applies here. But even so, the parties have different views regarding the nature of the substantial prejudice rule. McWane contends that the rule requires Safety National to show that the result would have been different had Safety National been notified in 1982 and participated in the Industrial Commission proceedings. Safety National argues that it need only show it was deprived of its opportunity to investigate and make its own decision about how to proceed.
Essentially, Safety National argues for a presumption of prejudice. But the Tenth Circuit in Oldenburg rejected Safety National's reading of the rule. "Under [the standard suggested by the insurance company — that is, that prejudice is established when there were steps the insurer could have taken which may have changed the result], late notice would create a presumption of prejudice in almost every instance, thus relieving the insurer of its burden of proving it actually suffered material prejudice from the delay in notice. We have explicitly chosen not to adopt such a presumption in this case." Oldenburg, 34 F.3d at 1547 n. 21 (internal citation omitted). To accept Safety National's argument would be to accept the argument in Oldenburg that the Tenth Circuit rejected.
Safety National has not shown that it was materially prejudiced by McWane's late notice. Given the unique facts of this workers' compensation case, Safety National was not deprived of a meaningful opportunity to investigate and defend against claims. First, the factual situation surrounding Mr. Perkins' death was clear. There was nothing meaningful to investigate. A worker's negligence, assuming there was any, has no effect on whether his dependents are entitled to workers' compensation benefits. The only relevant question was whether Mr. Perkins died while working in the course and scope of his employment, a fact not disputed by Safety National. Once that fact was determined, McWane had no choice but to report the accident to the Utah Industrial Commission. Nothing in the record suggests that McWane or the Utah Industrial Commission improperly found facts surrounding the death of Mr. Perkins, his employment status, his wage, or the identity and age of his dependents.
And the unusual language in Paragraph J of the Policy placed the obligation to defend on McWane, the insured. Safety National's interest was in not spending money to defend an indefensible claim. Essentially, Safety National got the benefit of its bargain in this case.
Safety National points to abstract harms, but nothing to show that it would have been better off had it received notice in 1982. Accordingly, the court finds that McWane's untimely notice did not prejudice Safety National and did not nullify coverage for McWane under the Policy.
ORDER
For the foregoing reasons, Plaintiff Safety National Casualty Corporation's Motion for Summary Judgment is DENIED and Defendant McWane, Inc.'s Motion for Summary Judgment is GRANTED.