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National Union Fire Insurance Company of Pittsburgh, PA v. Petco Petroleum Corp.

United States District Court, Fifth Circuit

November 4, 2013

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff,
v.
PETCO PETROLEUM CORP. and JOHN R. RICHARDSON, Defendants. PETCO PETROLEUM CORP. and JOHN R. RICHARDSON, Counter-Plaintiffs,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Counter-Defendant. PETCO PETROLEUM CORP., Third-Party Plaintiff
v.
CHUBB CUSTOM INSURANCE CO., Third-Party Defendant.

MEMORANDUM OPINION AND ORDER

CARLTON W. REEVES, District Judge.

Before the Court are National Union Fire Insurance Company of Pittsburgh, PA's ("National Union") and Chubb Custom Insurance Co.'s ("Chubb") motions for partial summary judgment, Docket Nos. 105 and 107, and John R. Richardson's motion for summary judgment, Docket No. 108. The parties seek a determination of whether Illinois, Kansas, or Mississippi law applies to coverage issues relating to insurance policies that National Union and Chubb (collectively referred to herein as "the Insurance Companies") issued to Petco Petroleum Corp. ("Petco"). The motions have been fully briefed. Docket Nos. 106, 109-10, 116-19, 121-23. The Court, after reviewing the motions, briefs of the parties, and relevant law, finds that Illinois law governs.

I. FACTUAL AND PROCEDURAL HISTORY

Petco is an independent oil and natural gas producer that was incorporated in Indiana and that maintains its principal place of business at its corporate headquarters in Hinsdale, Illinois. Docket No. 26, at 2; Docket No. 105-2, at 4. Petco is a holding company for at least six Illinois corporations that own, lease, or operate oil and gas wells: Ogden Corp., Bergman Oil & Gas, Inc., Bergman Petroleum Corp., Willowbrook Resources, Inc., Loudon Energy Corp., and J. D. Bergman Corporation. Docket No. 105-3, at 1-6; Docket No. 106, at 2. Petco's wells and facilities are located in various states: Indiana, Illinois, Mississippi, Oklahoma, and Texas. Docket No. 105-2, at 4.

The majority of Petco's employees, oil and gas wells, and business operations are located in Illinois. Id. at 4-7. Of Petco's approximately 200 employees, about 150 of them are employed in Illinois. Id. at 4. Approximately 800 to 1000 of Petco's more than 1200 producing wells are located in Illinois. Id. at 4-5. Most of Petco's business functions such as payroll, accounting, purchasing, managing insurance matters, recordkeeping, and regulatory filings take place at its corporate office in Hinsdale, Illinois. Id. at 6-7.

One of Petco's four regional offices is located in Quitman, Clarke County, Mississippi. Docket No. 107-16, at 3. Petco employs about seven people and operates about 50 to 60 wells in Mississippi. Docket No. 105-2, at 4, 17. However, most of the business functions relating to the Mississippi office, including the handling of insurance matters, occur at Petco's Illinois headquarters. Id. at 7.

In 2008, Petco's chairman, Jay Bergman, whose office was located at Petco's Illinois headquarters, instructed Petco's insurance broker, IMA of Kansas, Inc., which is located in Wichita, Kansas, to obtain a commercial general liability insurance policy and a commercial excess and umbrella insurance policy for Petco, Ogden Corp., Bergman Oil & Gas, Inc., Bergman Petroleum Corp., Willowbrook Resources, Inc., Loudon Energy Corp., and J.D. Bergman Corporation. Id. at 7, 10-12; Docket No. 1-1, at 13. Under Bergman's direction, IMA negotiated with National Union, a corporation that was organized under the laws of Pennsylvania and that has a principal place of business in New York, to obtain Petco's commercial general liability insurance policy. Docket No. 105-2, at 11-12. The policy period was from May 29, 2008, to May 29, 2009. Docket No. 1-1, at 4. IMA also arranged for Petco to obtain an excess policy from Chubb, a corporation that was organized under the laws of Delaware.[1] Docket No. 105-2, at 10-12. The period of the Chubb policy was from June 3, 2008, to May 29, 2009. Docket No. 26-1, at 7.

On September 17, 2008, John Richardson, a Mississippi resident, was injured while working as an employee of RK Services, LLC at an oil well facility operated by Petco in Clarke County, Mississippi. He sued Petco in the United States District Court for the Southern District of Mississippi, Civil Action No. 4:11-CV-128-CWR-LRA ("the Underlying Action"), on August 8, 2011, asserting that Petco was liable for negligent and/or intentional acts that contributed to his injuries. Docket No. 1-2. Petco was served with the complaint on August 15, 2011, and Petco and Richardson began engaging in settlement talks as the litigation progressed. Docket No. 1-3, at 2-3. RK Services' workers' compensation insurance carrier, Commerce and Industry Insurance Company, intervened as a plaintiff in April 2012 to attempt to recover amounts paid for Richardson's compensation benefits and medical services.

Warren McBride, a Petco consultant, notified the Insurance Companies of Richardson's claims by a letter dated May 8, 2012, which was mailed from Petco's Illinois headquarters to AIG Insurance Companies in New York. Docket No. 1-3, at 2-3. By the time Petco notified the Insurance Companies of Richardson's suit, the suit had been pending for nine months, and the parties had already participated in a settlement conference. The Insurance Companies denied Petco coverage, asserting that Petco had failed to notify them of Richardson's claim "as soon as practicable" as required by the notice provisions included in the policies. See Docket No. 1-1, at 23; Docket No. 26-1, at 31.

On August 9, 2012, National Union filed the present declaratory judgment action against Petco and Richardson in the United States District Court for the Northern District of Illinois. National Union's Complaint requests a judgment that National Union had no duty to defend Petco in the Underlying Action or to indemnify Petco for any loss or damages arising from the Underlying Action because, National Union argues, Petco did not provide timely notice of Richardson's claim. Docket No. 1. The action was transferred to this Court on October 11, 2012, Docket No. 14, and Richardson filed his answer and counterclaim against National Union on October 15, 2012, Docket No. 17. Along with its answer, Petco filed a counterclaim against National Union and a third-party complaint against Chubb on October 25, 2012. Docket No. 26. Chubb answered and filed a cross-complaint against Richardson and a counterclaim against Petco. Docket No. 32.

On January 31, 2013, Petco, Richardson, and Commerce and Industry Insurance Company executed a settlement agreement in the Underlying Action. See Docket No. 103, at 2. As part of the settlement, Petco assigned Richardson its rights to payment under its insurance policies with National Union and Chubb, thereby purportedly authorizing Richardson to attempt to collect the settlement amount directly from the Insurance Companies.[2] See id. The magistrate judge approved the settlement agreement in April 2013, and the Underlying Action was dismissed with prejudice. See id. at 3.

After the Underlying Action was dismissed, each party submitted summary judgment motions regarding whether the laws of Illinois, Kansas, or Mississippi apply to the notice issue that is central to this declaratory judgment action. Richardson also seeks a declaration that the notice of claim that Petco provided to the Insurance Companies was reasonable and not prejudicial to the Insurance Companies, as well as a declaration that the settlement agreement in the Underlying Action is binding and enforceable against the Insurance Companies. Docket No. 108, at 19.

II. SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A party seeking to avoid summary judgment must identify admissible evidence in the record showing a fact dispute. Id. at 56(c)(1). In cases like this, where the relevant facts are not in dispute and the critical questions turn purely on legal rights and relationships, summary judgment is appropriately considered. Canal Ins. Co. v. Owens, No. 4:10-CV-00009-CWR-LRA, 2011 WL 4833045, at *2 (S.D.Miss. Oct. 12, 2011). In ruling on a motion for summary judgment, the Court views the evidence and draws reasonable inferences in the light most favorable to the non-movant. Maddox v. Townsend & Sons, Inc., 639 F.3d 214, 216 (5th Cir. 2011).

III. DISCUSSION

In a diversity action, the Court applies the choice of law rules of the forum state to determine which state's substantive law applies. Hartford Underwriters Ins. Co. v. Found. Health Servs., Inc., 524 F.3d 588, 593 (5th Cir. 2008). Under the law of the forum state, Mississippi, a choice of law analysis is necessary "only when there is a true conflict between the laws of two states, each having an interest in the litigation." Zurich Am. Ins. Co. v. Goodwin, 920 So.2d 427, 432 (Miss. 2006). In this case, the three states that the parties assert may have interest in this litigation have conflicting law regarding a pertinent issue: whether an insurer is required to show prejudice to avoid providing insurance benefits based on the timing of a notice of claim.

In Illinois, the insurer is not required to show prejudice to rely on a late notice defense, while in Mississippi and Kansas, the insurer must demonstrate that it was prejudiced by the late notice in order to avoid liability. Compare Country Mut. Ins. Co. v. Livorsi Marine, Inc., 856 N.E.2d 338, 346 (Ill. 2006) (stating that "the presence or absence of prejudice to the insurer is one factor to consider when determining whether a policyholder has fulfilled any policy condition requiring reasonable notice, " but that if the insurer did not receive reasonable notice, "the policyholder may not recover under the policy, regardless of whether the lack of reasonable notice prejudiced the insurer"), with Capital City Ins. Co. v. Ringgold Timber Co., 898 So.2d 680, 682 (Miss. Ct. App. 2004) (stating that the insurer "must show prejudice in order to deny [the insured's] coverage" (citing Harris v. Am. Motorist Ins. Co., 126 So.2d 870 (Miss. 1961))), and Atchison, Topeka & Santa Fe Ry. Co. v. Stonewall Ins. Co., 71 P.3d 1097, 1137-39 (Kan. 2003) (holding that district court correctly concluded that the timing of insured's notice did not bar coverage because the insurer was not prejudiced). The Court must, therefore, undergo a choice of law analysis.

Mississippi courts take the following steps to determine what state's law applies to a particular issue: "(1) determine whether the laws at issue are substantive or procedural; (2) if substantive, classify the laws as either tort, property, or contract; and (3) look to the relevant section of the Restatement (Second) of Conflict of Laws." Hartford, 524 F.3d at 593. In the present case, the law on the notice issue is substantive and of a contractual nature. Thus, under Mississippi law, it is appropriate to apply a "center of gravity" analysis to determine "the law of the place which has the most significant relationship to the event and parties or which, because of the relationship or contact with the event and parties, has the greatest concern with the specific issues." Id. at 593-94 (citation omitted); see also Restatement (Second) of Conflict of Laws ยง 188(1) (1971). This inquiry involves analysis of relevant sections of the Restatement (Second) of Conflict of Laws. Hartford, 524 F.3d at 594 (quoting Ingalls Shipbuilding v. Fed. Ins. Co., 410 F.3d 214, 230 (5th Cir. 2005)). Mississippi courts have considered sections 193, 188, and 6 of the Restatement, sometimes in that order, to evaluate conflicts of law relating to insurance policies. See, e.g., Goodwin, 920 So.2d at 434-37.

1. Section 193

Section 193 of the Restatement, which relates to insurance policies other than life insurance ...


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