Policy Language Excludes Breach Of Contract

July 12, 2016 / Writing and Speaking

The 7th U.S. Circuit Court of Appeals recently rejected coverage under a liability insurance policy issued to an interstate motor carrier for a compensation claim asserted against the carrier by a contract driver and, in the process, dismissed from the action the underlying claimant whose presence arguably destroyed diversity jurisdiction.

The case is Altom Transport Inc. v. Westchester Fire Insurance Co., 2016 U.S.App.Lexis 9292 (7th Cir. 2016). The carrier, Altom, was represented by Emerson & Elder P.C. Walker Wilcox Matousek LLP represented the insurer, Westchester Fire Insurance Co.

Driver Michael Stampley sued Altom in 2014, claiming that the carrier had wrongfully withheld payment from him and other similarly situated owner-operators who leased their services to Altom. Stampley’s complaint offered three theories in support of his claim.

One was that the leasing contract violated U.S. Transportation Department regulations, 49 C.F.R. Section 376.12, for the computation of compensation. A second claim was that Altom failed to pay the compensation required by the contract. And the third asserted that Altom unjustly enriched itself by retaining more gross revenue from Stampley’s and other drivers’ services than what was allowed under the contract.

Altom tendered to its liability insurer, Westchester, which had issued a policy covering the relevant period. Westchester denied coverage, so Altom defended itself and attempted to negotiate a settlement with Stampley, which was presented to Westchester. After Westchester failed to respond, Altom brought the instant lawsuit against Westchester and named Stampley as an additional defendant.

Westchester removed the case to federal court and then moved to dismiss. It did so based on two exclusions in the policy, including the contract claim exclusion, which barred coverage for claims arising out of breach of contract except to the extent Altom “would have been liable in the absence of such contract.” The district court granted the motion; Altom brought this appeal.

Diversity Jurisdiction

In an opinion by Chief Judge Diane P. Wood, the 7th Circuit affirmed. She first addressed a jurisdictional issue. Because the case came to federal court based on diversity of citizenship, she observed that Altom was an Illinois corporation with a principal place of business in Illinois and Westchester was a Pennsylvania corporation with a principal place of business in Pennsylvania. Stampley, however, was a citizen of Illinois and his presence as a defendant arguably destroyed diversity.

Wood noted, however, that the Supreme Court has endorsed a flexible rule with respect to dispensable, non-diverse parties for purposes of preserving subject-matter jurisdiction. She noted further that Illinois case law defines an injured claimant as an indispensable party in coverage actions, especially when an insurer sues an insured. An insured nonetheless can represent both its own interests and the interests of the injured third party and thereby obviate the need to join that third party.

Under the federal joinder rules, moreover, Wood said, particularly Federal Rule of Civil Procedure 19, it was entirely possible to accord complete relief among the existing parties in the absence of Stampley. In fact, she said, he had no claims against Altom or Westchester in this coverage case, nor they against him. Since his continued presence destroyed diversity, she ordered Stampley dismissed from the lawsuit.

The Merits

On the merits, Wood reviewed the rules requiring an insurer to defend when the facts alleged in the underlying complaint potentially fell within coverage. Nevertheless, she said, “the language of the policy is king” and here the policy unambiguously excluded coverage for lawsuits stemming from the insured’s contracts with third parties.

Altom, however, focused on the language in the contract exclusion providing an exception “to the extent the company would have been liable in the absence of such contract,” apparently taking the position that Stampley would have a claim under the federal regulations on which his suit in part rested, even in the absence of the leasing contract.

Wood rejected the argument because Stampley’s claim, asserting that the leasing contract failed to comply with federal regulations, depended entirely on the content of the contract. Thus, in her view, whether the regulation imposed independent liability in the absence of contract was irrelevant.

She also determined that Stampley’s unjust enrichment count, along with his contract count, sought only contract damages. Thus, all three counts fell within the policy’s contract claim exclusion.

Finally, Wood rejected Altom’s argument that Westchester was estopped from rejecting coverage by not providing a defense, because the claimed estoppel would apply only if Westchester breached its duty to defend, and it did not.

The court, therefore, affirmed the dismissal in favor of Westchester.

Key Points

  • Although a claimant may be an indispensable party in coverage litigation in Illinois state court, if a federal court may accord complete relief among the parties to a coverage action in the absence of the claimant, the claimant may be dismissed, even on appeal, if the claimant’s presence would destroy diversity.
  • Where a claimant’s claim to compensation against an insured rests upon contract, and the liability policy in issue excludes coverage for claims arising out of contract, the insurer has no duty to defend.
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