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KEENE CORP. v. INSURANCE CO. OF NORTH AMERICA

October 4, 1984

KEENE CORPORATION, Plaintiff
v.
INSURANCE COMPANY OF NORTH AMERICA, et al., Defendants



The opinion of the court was delivered by: GREEN

 This action is before the Court on three independent motions for partial summary judgment regarding punitive damages brought by defendant Insurance Company of North America ("INA"), defendant Liberty Mutual Insurance Company ("Liberty"), and defendant Aetna Casualty and Surety Company ("Aetna"); defendant Aetna's motion for partial summary judgment regarding plaintiff's claim of misrepresentation; plaintiff Keene Corporation's ("Keene") opposition thereto; defendants' replies; plaintiff's supplemental responses; and the entire record herein. The Court heard oral argument on these motions on June 4, 1984.

 In its Third Amended Complaint ("Complaint"), Keene seeks punitive damages in potential excess of $150 million from INA, Liberty, and Aetna. *fn1" Complaint at paras. 66, 112; Memorandum of INA in Support of its Motion For Summary Judgment as to Keene's Claims for Punitive Damages ("Motion of INA") at 1. Keene bases its claim for punitive damages on defendants' alleged "malicious breach of contract" and "tortious acts arising from defendants' breaches of their contracts and of their express and implied obligations and duties, with respect to the asbestos damage claim lawsuits brought against Keene." Complaint at 1. Defendants contend that under the laws of the applicable jurisdiction punitive damages may not be imposed against them.

 The issue of whether punitive damages may lie in this case is governed by two threshold questions. First, which jurisdiction controls the punitive damages issue? Second, does the controlling jurisdiction's rule of law permit courts to impose punitive damages against insurance companies for "bad faith" dealing?

 Keene argues exhaustively on the merits of awarding punitive damages against defendants for their "bad faith" conduct in "blatantly switch[ing] to a manifestation interpretation of [their] comprehensive general liability . . . insurance policies on a national scale" to "enable [them] to escape [their] recognized enormous potential financial liability for the asbestos lawsuits." Keene's Statement of Points and Authorities in Opposition to Motion of INA for Partial Summary Judgment as to Keene's Claims for Punitive Damages ("Keene Opposition to INA Motion") at 6-7; see Keene's Statement of Points and Authorities in Opposition to Motion of Liberty for Summary Judgment as to Counts III, IV and VI of Keene's Third Amended Complaint ("Keene Opposition to Liberty Motion") at 3-14; Keene's Statement of Points and Authorities in Opposition to Motion of Aetna for Summary Judgment as to Count IV and as to Keene's Claims for Punitive Damages in Counts III, IV and VI of Keene's Third Amended Complaint ("Keene Opposition to Aetna Motion") at 7-23. But the issue here is not the propriety of awarding punitive damages for defendants' alleged misconduct. Rather, the issues are choice of law and interpretation of the applicable law regarding Keene's punitive damages claim. The material facts that bear on these issues are not in dispute. Therefore, the punitive damages question is ripe for adjudication and may properly be considered for summary judgment.

 The Court finds that Keene is not entitled to punitive damages against defendant INA as a matter of law. Thus, defendant INA's motion for partial summary judgment is granted. The Court defers final judgment on the motions of defendant Liberty and defendant Aetna as to punitive damages until further briefing is received from the parties.

 In Count IV of the Complaint, Keene states a cause of action for fraudulent misrepresentation to support in part its claim for punitive damages against defendants. The cause of action is based on defendants' representations as to the extent of coverage of Keene's insurance policies. Keene seeks compensatory and punitive damages. Complaint at paras. 113-15. Defendant Aetna seeks dismissal of the fraud claim.

 The appropriateness of the misrepresentation claim raises the same threshold questions as that of the punitive damages claim concerning choice of law and interpretation of the controlling jurisdiction's rule of law. As these questions raise no genuine issues of material fact, the Court properly may rule on the appropriateness of the misrepresentation claim on a motion for summary judgment. Fed. R. Civ. P. 56.

 The Court finds that Keene's claim of fraudulent misrepresentation against Aetna must be dismissed and, therefore, grants defendant Aetna's motion for partial summary judgment as to Count IV of Keene's Third Amended Complaint.

 I. Punitive Damages

 A. Choice of Law

 To determine the applicable law in a diversity case, a Federal court first must determine whether Federal or State law applies. Procedural issues are determined under Federal law, while substantive issues must be decided under State law. Erie Railroad v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). Since choice of law is a substantive issue under the Erie doctrine, a Federal court sitting in diversity must apply the choice-of-law rules of the forum in which it sits. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496-97, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941); Steorts v. American Airlines, Inc., 207 U.S. App. D.C. 369, 647 F.2d 194, 196-97 (D.C. Cir. 1981). This Court, therefore, must apply the choice-of-law rules of the District of Columbia to determine which State's law governs the punitive damages issue.

 District of Columbia courts employ an "interest analysis" approach which was originally applied to tort actions in Tramontana v. S.A. Empresa De Viacao Aerea Rio Grandense, 121 U.S. App. D.C. 338, 350 F.2d 468, 471-73 (D.C. Cir. 1965), and to contract actions in Fox-Greenwald Sheet Metal Co. v. Markowitz Bros. Inc., 147 U.S. App. D.C. 14, 452 F.2d 1346, 1353-54 (D.C. Cir. 1971). See Mazza v. Mazza, 154 U.S. App. D.C. 274, 475 F.2d 385, 388 (D.C. Cir. 1973); see also Semler v. Psychiatric Institute, 188 U.S. App. D.C. 41, 575 F.2d 922, 924 (D.C. Cir. 1978). In Mazza v. Mazza, the United States Court of Appeals stated that "the relevant inquiry focuses on the relationship of the . . . jurisdictions to the controversy, the interests involved, and whether application of foreign law would offend a strong and clearly defined local policy." Mazza v. Mazza, 475 F.2d at 391 (D.C. Cir. 1973).

 The process involves two steps. First, the Court must determine which States have an interest in the controversy at hand. Second, the Court must decide, from those found to have a conflicting interest, which State's policy would be advanced by application of its law. See Gaither v. Myers, 131 U.S. App. D.C. 216, 404 F.2d 216, 222 (D.C. Cir. 1968). "The state with the 'most significant relationship' should also be that whose policy would be advanced by application of the law, i.e., the state with the greatest interest in applying its law to the issue." In Re Air Crash Disaster at Washington, D.C., 559 F. Supp. 333, 342 (D.D.C. 1983); see also Semler v. Psychiatric Institute, 575 F.2d at 924.

 Keene's allegations of "bad faith" dealings by defendants arise from the insurance contracts between the parties. Keene, however, seeks punitive damages for defendants' tortious misrepresentations and misconduct. Complaint at paras. 104-08.

 In applying the "interest analysis" approach to tort claims, District of Columbia courts have considered the factors set forth in section 145 of the Restatement (Second) of Conflict of Laws. See Hitchcock v. United States, 214 U.S. App. D.C. 198, 665 F.2d 354, 360 (D.C. Cir. 1981). These factors are:

 
(a) the place where the injury occurred,
 
(b) the place where the conduct causing the injury occurred,
 
(c) the domicile, residence, place of incorporation and place of business of the parties, and
 
(d) the place where the relationship, if any, between the parties is centered.

 Restatement (Second) of Conflict of Laws § 145(2) (1971). The Restatement emphasizes that these contacts are not to be applied mechanically, but "are to be evaluated according to their relative importance with respect to the particular issue." Id. Therefore, the Court will examine not the general interests of various states, but the precise interests in the specific issue involved. In Re Air Crash Disaster Near Chicago, Illinois, 644 F.2d 594, 611 (7th Cir. 1981); In Re Air Crash Disaster at Washington, D.C., 559 F. Supp. at 341.

 In the instant case, the issue is punitive damages. States' interests in compensatory damages differ from those involved in punitive damages. E.g., James v. Powell, 19 N.Y.2d 249, 225 N.E.2d 741, 746-47, 279 N.Y.S.2d 10 (1967) (Puerto Rico law applies to compensatory damages; the law of New York governs punitive damages.). When the primary purpose of a rule of law is to deter or punish conduct, the States with the most significant interests are those in which the conduct occurred and in which the principal place of business and place of incorporation of defendant are located. See Restatement (Second) of Conflict of Laws § 145 comments c-e; In Re Air Crash Disaster Near Chicago, Illinois, 644 F.2d at 613. The State of domicile of plaintiff has no interest in imposing punitive damages. "The legitimate interests of [plaintiffs' domiciliary] states, after all, are limited to assuring that the plaintiffs are adequately compensated for their injuries. . . . Once the plaintiffs are made whole by recovery of the full measure of compensatory damages to which they are entitled under the law of their domiciles, the interests of those States are satisfied." In Re Air Crash Disaster Near Chicago, Illinois, 644 F.2d at 613. The place where the injury occurred and where the parties' relationship is centered do not claim as great an interest in the punitive damages issue as in other tort-related issues.

 The Court will apply this analysis to each of defendants' motions.

 1. Motion of Defendant INA

 Defendant INA is a Pennsylvania corporation with its principal place of business in Pennsylvania. Second Amended Complaint at para. 2; Answer of INA to Second Amended Complaint at para. 2. INA sold the insurance policies at issue to two Keene predecessors: Baldwin-Hill ("B-H") and Baldwin-Ehret-Hill ("B-E-H"). Keene Opposition to INA Motion at 3-4.

 B-H, at the time of sale of the policies, was a New Jersey corporation, with its principal place of business in New Jersey. Less than three years later, in 1959, the company merged with Ehret Magnesia Manufacturing Company to form B-E-H, a predecessor subsidiary of Keene. Keene Opposition to INA Motion at 5; Reply Memorandum in Support of INA's Motion for Summary Judgment as to Keene's Claims for Punitive Damages ("Reply of INA") at 8. B-E-H was incorporated under the laws of Pennsylvania. The new company's articles of incorporation stated that B-E-H "shall be governed by the laws of the Commonwealth of Pennsylvania." Exhibit 1D to Keene Opposition to INA Motion. Nevertheless, B-E-H continued its principal place of business in New Jersey, Keene Opposition to INA Motion at 5, and INA dealt with B-E-H at its New Jersey office between 1959 and 1968. Exhibits 3-4 to Keene Opposition to INA Motion; Reply of INA at 8.

 INA, however, executed the policies at issue in Pennsylvania, and sold them to B-E-H through a Pennsylvania broker. Additionally, the policies stated that B-E-H's "principal state" of operations for computing general liability and product liability premiums was Pennsylvania. Reply of INA at 6-10. Keene previously recited these facts in response to an earlier motion of INA for partial summary judgment regarding other damage issues. Keene's Statement Pursuant to Rule 1-9(h) in Response to INA's Motion for Summary Judgment and Accompanying Rule 1-9(h) Statement (February 24, 1983) para. 34. Keene does not now dispute these facts, although plaintiff asserts that discovery of the policies issued to B-H in New Jersey affects the Court's choice-of-law analysis. *fn2" Opposition of Keene at 27-28.

 Keene acquired substantially all outstanding stock of B-E-H in 1968, and B-E-H became a subsidiary of Keene. Exhibit 1 to Keene Opposition to INA Motion. Plaintiff Keene now has its principal place of business in New York. Keene Opposition to INA Motion at 27.

 INA and Keene have contested at length the issue of which jurisdiction's punitive damages rule should apply in this case. INA asserts that under the facts, Pennsylvania is the only appropriate jurisdiction because of the State's significant connection with both parties and the underlying insurance policies. Reply of INA at 14.

 Keene, however, contends that the choice-of-law issue is not as simple as INA suggests. Keene provides three alternative jurisdictions: the District of Columbia, New Jersey, and New York. The Court will address each proposed jurisdiction.

 Keene alleges that the company suffered financial injury in defending itself in more than 15,000 asbestos-related lawsuits around the country. Complaint at para. 66; see Keene Opposition to INA Motion. The cause of this injury, as contended by Keene, was INA's misrepresentation and misconduct in switching coverage positions from exposure to manifestation. Complaint at para. 82; Keene Opposition to INA Motion at 6-14. The decision to follow the manifestation theory of coverage presumably occurred in Pennsylvania at defendant INA's headquarters. Therefore, the place of conduct, as well as defendant INA's principal place of business and State of incorporation are Pennsylvania. These relationships to the controversy give Pennsylvania a definite interest in the punitive damages issue. The State's interest in punishing ...


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