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Bits & Pieces

Norfolk Southern v. Kirby

Supreme Court of the United States

NORFOLK SOUTHERN RAILWAY COMPANY, Petitioner,

v.

James N. KIRBY, Pty Ltd., dba Kirby Engineering, and Allianz Australia

Insurance Limited.

Argued Oct. 6, 2004.

Justice O’CONNOR delivered the opinion of the Court.

This is a maritime case about a train wreck. A shipment of machinery from Australia was destined for Huntsville, Alabama. The intercontinental journey was uneventful, and the machinery reached the United States unharmed. But the train carrying the machinery on its final, inland leg derailed, causing extensive damage. The machinery’s owner sued the railroad. The railroad seeks shelter in two liability limitations contained in contracts that upstream carriers negotiated for the machinery’s delivery.

I

This controversy arises from two bills of lading (essentially, contracts) for the transportation of goods from Australia to Alabama. A bill of lading records that a carrier has received goods from the party that wishes to ship them, states the terms of carriage, and serves as evidence of the contract for carriage. See 2 T. Schoenbaum, Admiralty and Maritime Law 58-60 (3d ed.2001) (hereinafter Schoenbaum); Carriage of Goods by Sea Act (COGSA), 49 Stat. 1208, 46 U.S.C.App. § 1303. Respondent James N. Kirby, Pty Ltd. (Kirby), an Australian manufacturing company, sold 10 containers of machinery to the General Motors plant located outside Huntsville, Alabama. Kirby hired International Cargo Control (ICC), an Australian freight forwarding company, to arrange for delivery by “through” (i.e., end-to-end) transportation. (A freight forwarding company arranges for, coordinates, and facilitates cargo transport, but does not itself transport cargo.) To formalize their contract for carriage, ICC issued a bill of lading to Kirby (ICC bill). The bill designates Sydney, Australia, as the port of loading, Savannah, Georgia, as the port of discharge, and Huntsville as the ultimate destination for delivery.

In negotiating the ICC bill, Kirby had the opportunity to declare the full value of the machinery and to have ICC assume liability for that value. Cf. New York, N.H. & H.R. Co. v. Nothnagle, 346 U.S. 128, 135, 73 S.Ct. 986, 97 L.Ed. 1500 (1953) (a carrier must provide a shipper with a fair opportunity to declare value). Instead, and as is common in the industry, see Sturley, Carriage of Goods by Sea, 31 J. Mar. L. & Com. 241, 244 (2000), Kirby accepted a contractual liability limitation for ICC below the machinery’s true value, resulting, presumably, in lower shipping rates. The ICC bill sets various liability limitations for the journey from Sydney to Huntsville. For the sea leg, the ICC bill invokes the default liability rule set forth in the Carriage of Goods by Sea Act. The COGSA “package limitation” provides:

“Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package lawful money of the United States … unless the nature and value of such goods have been declared by the shipper before shipment and inserted into the bill of lading.” 46 U.S.C.App. § 1304(5).

For the land leg, in turn, the bill limits the carrier’s liability to a higher amount. [FN1] So that other downstream parties expected to take part in the contract’s execution could benefit from the liability limitations, the bill also contains a so-called “Himalaya Clause.” [FN2] It provides:

FN1. The bill provides that “the Freight Forwarder shall in no event be or become liable for any loss of or damage to the goods in an amount exceeding the equivalent of 666.67 SDR per package or unit or 2 SDR per kilogramme of gross weight of the goods lost or damaged, whichever is the higher, unless the nature and value of the goods shall have been declared by the Consignor.” App. to Pet. for Cert. 57a, cl. 8.3. An SDR, or Special Drawing Right, is a unit of account created by the International Monetary Fund and calculated daily on the basis of a basket of currencies. Liability computed per package for the 10 containers, for example, was approximately $17,373 when the bill of lading issued in June 1997, $17,231 when the goods were damaged on October 9, 1997, and $9,763 when the case was argued. See International Monetary Fund Exchange Rate Archives, http:// www.imf.org/external/np/fin/rates/param_rms_mth.cfm (as visited Nov. 5, 2004, and available in Clerk of Court’s case file). Respondents claim that liability computed by weight is higher. The machinery’s weight is not in the record. In any case, because we conclude that Norfolk is also protected by the $500 per package limit in the second bill of lading at issue here, see Part III-B, infra, and thus cannot be liable for more than $5,000 for the 10 containers, each holding one machine, the precise liability under the ICC bill of lading does not matter.

FN2. Clauses extending liability limitations take their name from an English case involving a steamship called Himalaya. See Adler v. Dickson, [1955] 1 Q.B. 158 (C.A.).

“These conditions [for limitations on liability] apply whenever claims relating to the performance of the contract evidenced by this [bill of lading] are made against any servant, agent or other person (including any independent contractor) whose services have been used in order to perform the contract.” App. to Pet. for Cert. 59a, cl. 10.1.

Meanwhile, Kirby separately insured the cargo for its true value with its co-respondent in this case, Allianz Australia Insurance Ltd. (formerly MMI General Insurance, Ltd.).

Having been hired by Kirby, and because it does not itself actually transport cargo, ICC then hired Hamburg Südamerikanische Dampfschiflahrts-Gesellschafft Eggert & Amsinck (Hamburg Süd), a German ocean shipping company, to transport the containers. To formalize their contract for carriage, Hamburg Süd issued its own bill of lading to ICC (Hamburg Süd bill). That bill designates Sydney as the port of loading, Savannah as the port of discharge, and Huntsville as the ultimate destination for delivery. It adopts COGSA’s default rule in limiting the liability of Hamburg Süd, the bill’s designated carrier, to $500 per package. See 46 U.S.C.App. § 1304(5). It also contains a clause extending that liability limitation beyond the “tackles”–that is, to potential damage on land as well as on sea. Finally, it too contains a Himalaya Clause extending the benefit of its liability limitation to “all agents … (including inland) carriers … and all independent contractors whatsoever.” App. 63, cl. 5(b).

Acting through a subsidiary, Hamburg Süd hired Petitioner Norfolk Southern Railroad (Norfolk) to transport the machinery from the Savannah port to Huntsville. Delivery failed. The Norfolk train carrying the machinery derailed en route, causing an alleged $1.5 million in damages. Kirby’s insurance company reimbursed Kirby for the loss. Kirby and its insurer then sued Norfolk in the United States District Court for the Northern District of Georgia, asserting diversity jurisdiction and alleging tort and contract claims. In its answer, Norfolk argued, among other things, that Kirby’s potential recovery could not exceed the amounts set forth in the liability limitations contained in the bills of lading for the machinery’s carriage.

The District Court granted Norfolk’s motion for partial summary judgment, holding that Norfolk’s liability was limited to $500 per container. Upon a joint motion from Norfolk and Kirby, the District Court certified its decision for interlocutory review pursuant to 28 U.S.C. § 1292(b).

A divided panel of the Eleventh Circuit reversed. It held that Norfolk could not claim protection under the Himalaya Clause in the first contract, the ICC bill. It construed the language of the clause to exclude parties, like Norfolk, that had not been in privity with ICC when ICC issued the bill. 300 F.3d 1300, 1308-1309 (2002). The majority also suggested that “a special degree of linguistic specificity is required to extend the benefits of a Himalaya clause to an inland carrier.” Id., at 1310. As for the Hamburg Süd bill, the court held that Kirby could be bound by the bill’s liability limitation “only if ICC was acting as Kirby’s agent when it received Hamburg Süd’s bill.” Id., at 1305. And, applying basic agency law principles, the Court of Appeals concluded that ICC had not been acting as Kirby’s agent when it received the bill. Ibid. Based on its opinion that Norfolk was not entitled to benefit from the liability limitation in either bill of lading, the Eleventh Circuit reversed the District Court’s grant of summary judgment for the railroad. We granted certiorari to decide whether Norfolk could take shelter in the liability limitations of either bill, 540 U.S. 1099, 124 S.Ct. 981, 157 L.Ed.2d 811 (2004), and now reverse.

II

The courts below appear to have decided this case on an assumption, shared by the parties, that federal rather than state law governs the interpretation of the two bills of lading. Respondents now object. They emphasize that, at bottom, this is a diversity case involving tort and contract claims arising out of a rail accident somewhere between Savannah and Huntsville. We think, however, borrowing from Justice Harlan, that “the situation presented here has a more genuinely salty flavor than that.” Kossick v. United Fruit Co., 365 U.S. 731, 742, 81 S.Ct. 886, 6 L.Ed.2d 56 (1961). When a contract is a maritime one, and the dispute is not inherently local, federal law controls the contract interpretation. Id., at 735, 81 S.Ct. 886.

Our authority to make decisional law for the interpretation of maritime contracts stems from the Constitution’s grant of admiralty jurisdiction to federal courts. See Art. III, § 2, cl. 1 (providing that the federal judicial power shall extend to “all Cases of admiralty and maritime Jurisdiction”). See 28 U.S.C. § 1333(1) (granting federal district courts original jurisdiction over “[a]ny civil case of admiralty or maritime jurisdiction”); R. Fallon, D. Meltzer, & D. Shapiro, Hart and Wechsler’s The Federal Courts and the Federal System 733-738 (5th ed.2003). This suit was properly brought in diversity, but it could also be sustained under the admiralty jurisdiction by virtue of the maritime contracts involved. See Pope & Talbot, Inc. v. Hawn, 346 U.S. 406, 411, 74 S.Ct. 202, 98 L.Ed. 143 (1953) (“[S]ubstantial rights … are not to be determined differently whether [a] case is labelled ‘law side’ or ‘admiralty side’ on a district court’s docket”). Indeed, for federal common law to apply in these circumstances, this suit must also be sustainable under the admiralty jurisdiction. See Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 28, 108 S.Ct. 2239, 101 L.Ed.2d 22 (1988). Because the grant of admiralty jurisdiction and the power to make admiralty law are mutually dependent, the two are often intertwined in our cases.

Applying the two-step analysis from Kossick, we find that federal law governs this contract dispute. Our cases do not draw clean lines between maritime and non-maritime contracts. We have recognized that “[t]he boundaries of admiralty jurisdiction over contracts–as opposed to torts or crimes–being conceptual rather than spatial, have always been difficult to draw.” 365 U.S., at 735, 81 S.Ct. 886. To ascertain whether a contract is a maritime one, we cannot look to whether a ship or other vessel was involved in the dispute, as we would in a putative maritime tort case. Cf. Admiralty Extension Act, 46 U.S.C.App. § 740 (“The admiralty and maritime jurisdiction of the United States shall extend to and include all cases of damage or injury … caused by a vessel on navigable water, notwithstanding that such damage or injury be done or consummated on land”); R. Force & M. Norris, 1 The Law of Seamen § 1:15 (5th ed.2003). Nor can we simply look to the place of the contract’s formation or performance. Instead, the answer “depends upon … the nature and character of the contract,” and the true criterion is whether it has “reference to maritime service or maritime transactions.” North Pacific S.S. Co. v. Hall Brothers Marine Railway & Shipbuilding Co., 249 U.S. 119, 125, 39 S.Ct. 221, 63 L.Ed. 510 (1919) (citing Insurance Co. v. Dunham, 11 Wall. 1, 26, 20 L.Ed. 90 (1871)). See also Exxon Corp. v. Central Gulf Lines, Inc., 500 U.S. 603, 611, 111 S.Ct. 2071, 114 L.Ed.2d 649 (1991) (“[T]he trend in modern admiralty case law … is to focus the jurisdictional inquiry upon whether the nature of the transaction was maritime”).

The ICC and Hamburg Süd bills are maritime contracts because their primary objective is to accomplish the transportation of goods by sea from Australia to the eastern coast of the United States. See G. Gilmore & C. Black, Law of Admiralty 31 (2d ed.1975) (“Ideally, the [admiralty] jurisdiction [over contracts ought] to include those and only those things principally connected with maritime transportation” (emphasis deleted)). To be sure, the two bills call for some performance on land; the final leg of the machinery’s journey to Huntsville was by rail. But under a conceptual rather than spatial approach, this fact does not alter the essentially maritime nature of the contracts.

In Kossick, for example, we held that a shipowner’s promise to assume responsibility for any improper treatment his seaman might receive at a New York hospital was a maritime contract. The seaman had asked the shipowner to pay for treatment by a private physician, but the shipowner, preferring the cheaper public hospital, offered to cover the costs of any complications that might arise from treatment there. We characterized his promise as a “fringe benefit” to a shipowner’s duty in maritime law to provide ” ‘maintenance and cure.’ ” 365 U.S., at 736-737, 81 S.Ct. 886. Because the promise was in furtherance of a “peculiarly maritime concer[n],” id., at 738, 81 S.Ct. 886, it folded into federal maritime law. It did not matter that the site of the inadequate treatment–which gave rise to the contract dispute–was in a hospital on land. Likewise, Norfolk’s rail journey from Savannah to Huntsville was a “fringe” portion of the intercontinental journey promised in the ICC and Hamburg Süd bills.

We have reiterated that the ” ‘fundamental interest giving rise to maritime jurisdiction is “the protection of maritime commerce.” ‘ ” Exxon, supra, at 608, 111 S.Ct. 2071 (emphasis added) (quoting Sisson v. Ruby, 497 U.S. 358, 367, 110 S.Ct. 2892, 111 L.Ed.2d 292 (1990), in turn quoting Foremost Ins. Co. v. Richardson, 457 U.S. 668, 674, 102 S.Ct. 2654, 73 L.Ed.2d 300 (1982)). The conceptual approach vindicates that interest by focusing our inquiry on whether the principal objective of a contract is maritime commerce. While it may once have seemed natural to think that only contracts embodying commercial obligations between the “tackles” (i.e., from port to port) have maritime objectives, the shore is now an artificial place to draw a line. Maritime commerce has evolved along with the nature of transportation and is often inseparable from some land-based obligations. The international transportation industry “clearly has moved into a new era–the age of multimodalism, door-to-door transport based on efficient use of all available modes of transportation by air, water, and land.” 1 Schoenbaum 589 (4th ed.2004). The cause is technological change: Because goods can now be packaged in standardized containers, cargo can move easily from one mode of transport to another. Ibid. See also NLRB v. Longshoremen, 447 U.S. 490, 494, 100 S.Ct. 2305, 65 L.Ed.2d 289 (1980) (” ‘[C]ontainerization may be said to constitute the single most important innovation in ocean transport since the steamship displaced the schooner’ ” (citation omitted)); G. Muller, Intermodal Freight Transportation 15-24 (3d ed.1995).

Contracts reflect the new technology, hence the popularity of “through” bills of lading, in which cargo owners can contract for transportation across oceans and to inland destinations in a single transaction. See 1 Schoenbaum 595. Put simply, it is to Kirby’s advantage to arrange for transport from Sydney to Huntsville in one bill of lading, rather than to negotiate a separate contract–and to find an American railroad itself–for the land leg. The popularity of that efficient choice, to assimilate land legs into international ocean bills of lading, should not render bills for ocean carriage nonmaritime contracts.

Some lower federal courts appear to have taken a spatial approach when deciding whether intermodal transportation contracts for intercontinental shipping are maritime in nature. They have held that admiralty jurisdiction does not extend to contracts which require maritime and nonmaritime transportation, unless the nonmaritime transportation is merely incidental–and that long-distance land travel is not incidental. See, e.g., Hartford Fire Ins. Co. v. Orient Overseas Containers Lines, 230 F.3d 549, 555-556 (C.A.2 2000) (“[T]ransport by land under a bill of lading is not ‘incidental’ to transport by sea if the land segment involves great and substantial distances,” and land transport of over 850 miles across four countries is more than incidental); Sea-Land Serv., Inc. v. Danzig, 211 F.3d 1373, 1378 (C.A.Fed.2000) (holding that intermodal transport contracts were not maritime contracts because they called for “substantial transportation between inland locations and ports both in this country and the Middle East” that was not incidental to the transportation by sea); Kuehne & Nagel (AG & Co.) v. Geosource, Inc., 874 F.2d 283, 290 (C.A.5 1989) (holding that a through bill of lading calling for land transportation up to 1,000 miles was not a traditional maritime contract because such “extensive land-based operations cannot be viewed as merely incidental to the maritime operations”). As a preliminary matter, it seems to us imprecise to describe the land carriage required by an intermodal transportation contract as “incidental”; realistically, each leg of the journey is essential to accomplishing the contract’s purpose. In this case, for example, the bills of lading required delivery to Huntsville; the Savannah port would not do.

Furthermore, to the extent that these lower court decisions fashion a rule for identifying maritime contracts that depends solely on geography, they are inconsistent with the conceptual approach our precedent requires. See Kossick, 365 U.S., at 735, 81 S.Ct. 886. Conceptually, so long as a bill of lading requires substantial carriage of goods by sea, its purpose is to effectuate maritime commerce–and thus it is a maritime contract. Its character as a maritime contract is not defeated simply because it also provides for some land carriage. Geography, then, is useful in a conceptual inquiry only in a limited sense: If a bill’s sea components are insubstantial, then the bill is not a maritime contract.

Having established that the ICC and Hamburg Süd bills are maritime contracts, then, we must clear a second hurdle before applying federal law in their interpretation. Is this case inherently local? For not “every term in every maritime contract can only be controlled by some federally defined admiralty rule.” Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 313, 75 S.Ct. 368, 99 L.Ed. 337 (1955) (applying state law to maritime contract for marine insurance because of state regulatory power over insurance industry). A maritime contract’s interpretation may so implicate local interests as to beckon interpretation by state law. See Kossick, supra, at 735, 81 S.Ct. 886. Respondents have not articulated any specific Australian or state interest at stake, though some are surely implicated. But when state interests cannot be accommodated without defeating a federal interest, as is the case here, then federal substantive law should govern. See Kossick, supra, at 739, 81 S.Ct. 886 (the process of deciding whether federal law applies “is surely … one of accommodation, entirely familiar in many areas of overlapping state and federal concern, or a process somewhat analogous to the normal conflict of laws situation where two sovereignties assert divergent interests in a transaction”); 2 Schoenbaum 61 (“Bills of lading issued outside the United States are governed by the general maritime law, considering relevant choice of law rules”).

Here, our touchstone is a concern for the uniform meaning of maritime contracts like the ICC and Hamburg Süd bills. We have explained that Article III’s grant of admiralty jurisdiction ” ‘must have referred to a system of law coextensive with, and operating uniformly in, the whole country. It certainly could not have been the intention to place the rules and limits of maritime law under the disposal and regulation of the several States, as that would have defeated the uniformity and consistency at which the Constitution aimed on all subjects of a commercial character affecting the intercourse of the States with each other or with foreign states.’ ” American Dredging Co. v. Miller, 510 U.S. 443, 451, 114 S.Ct. 981, 127 L.Ed.2d 285 (1994) (quoting The Lottawanna, 21 Wall. 558, 575, 22 L.Ed. 654 (1875)). See also Yamaha Motor Corp., U.S.A. v. Calhoun, 516 U.S. 199, 210, 116 S.Ct. 619, 133 L.Ed.2d 578 (1996) (“[I]n several contexts, we have recognized that vindication of maritime policies demanded uniform adherence to a federal rule of decision” (citing Kossick, supra, at 742, 81 S.Ct. 886; Pope & Talbot, 346 U.S., at 409, 74 S.Ct. 202; Garrett v. Moore-McCormack Co., 317 U.S. 239, 248-249, 63 S.Ct. 246, 87 L.Ed. 239 (1942))); Romero v. International Terminal Operating Co., 358 U.S. 354, 373, 79 S.Ct. 468, 3 L.Ed.2d 368 (1959) (“[S]tate law must yield to the needs of a uniform federal maritime law when this Court finds inroads on a harmonious system[,] [b]ut this limitation still leaves the States a wide scope”).

Applying state law to cases like this one would undermine the uniformity of general maritime law. The same liability limitation in a single bill of lading for international intermodal transportation often applies both to sea and to land, as is true of the Hamburg Süd bill. Such liability clauses are regularly executed around the world. See 1 Schoenbaum 595; Wood, Multimodal Transportation: An American Perspective on Carrier Liability and Bill of Lading Issues, 46 Am. J. Comp. L. 403, 407 (Supp.1998). See also 46 U.S.C.App. § 1307 (permitting parties to extend the COGSA default liability limit to damage done “prior to the loading on and subsequent to the discharge from the ship”). Likewise, a single Himalaya Clause can cover both sea and land carriers downstream, as is true of the ICC bill. See Part III-A, infra. Confusion and inefficiency will inevitably result if more than one body of law governs a given contract’s meaning. As we said in Kossick, when “a [maritime] contract … may well have been made anywhere in the world,” it “should be judged by one law wherever it was made.” 365 U.S., at 741, 81 S.Ct. 886. Here, that one law is federal.

In protecting the uniformity of federal maritime law, we also reinforce the liability regime Congress established in COGSA. By its terms, COGSA governs bills of lading for the carriage of goods “from the time when the goods are loaded on to the time when they are discharged from the ship.” 46 U.S.C.App. § 1301(e). For that period, COGSA’s “package limitation” operates as a default rule. § 1304(5). But COGSA also gives the option of extending its rule by contract. See § 1307 (“Nothing contained in this chapter shall prevent a carrier or a shipper from entering into any agreement, stipulation, condition, reservation, or exemption as to the responsibility and liability of the carrier or the ship for the loss or damage to or in connection with the custody and care and handling of goods prior to the loading on and subsequent to the discharge from the ship on which the goods are carried by sea”). As COGSA permits, Hamburg Süd in its bill of lading chose to extend the default rule to the entire period in which the machinery would be under its responsibility, including the period of the inland transport. Hamburg Süd would not enjoy the efficiencies of the default rule if the liability limitation it chose did not apply equally to all legs of the journey for which it undertook responsibility. And the apparent purpose of COGSA, to facilitate efficient contracting in contracts for carriage by sea, would be defeated.

III

A

Turning to the merits, we begin with the ICC bill of lading, the first of the contracts at issue. Kirby and ICC made a contract for the carriage of machinery from Sydney to Huntsville, and agreed to limit the liability of ICC and other parties who would participate in transporting the machinery. The bill’s Himalaya Clause states:

“These conditions [for limitations on liability] apply whenever claims relating to the performance of the contract evidenced by this [bill of lading] are made against any servant, agent or other person (including any independent contractor) whose services have been used in order to perform the contract.” App. to Pet. for Cert. 59a, cl. 10.1 (emphasis added).

The question presented is whether the liability limitation in Kirby’s and ICC’s contract extends to Norfolk, which is ICC’s sub-subcontractor. The Circuits have split in answering this question. Compare, e.g., Akiyama Corp. of America v. M.V. Hanjin Marseilles, 162 F.3d 571, 574 (C.A.9 1998) (privity of contract is not required in order to benefit from a Himalaya Clause), with Mikinberg v. Baltic S.S. Co., 988 F.2d 327, 332 (C.A.2 1993) (a contractual relationship is required).

This is a simple question of contract interpretation. It turns only on whether the Eleventh Circuit correctly applied this Court’s decision in Robert C. Herd & Co. v. Krawill Machinery Corp., 359 U.S. 297, 79 S.Ct. 766, 3 L.Ed.2d 820 (1959). We conclude that it did not. In Herd, the bill of lading between a cargo owner and carrier said that, consistent with COGSA, ” ‘the Carrier’s liability, if any, shall be determined on the basis of $500 per package.’ ” Id., at 302, 79 S.Ct. 766. The carrier then hired a stevedoring company to load the cargo onto the ship, and the stevedoring company damaged the goods. The Court held that the stevedoring company was not a beneficiary of the bill’s liability limitation. Because it found no evidence in COGSA or its legislative history that Congress meant COGSA’s liability limitation to extend automatically to a carrier’s agents, like stevedores, the Court looked to the language of the bill of lading itself. It reasoned that a clause limiting ” ‘the Carrier’s liability’ ” did not “indicate that the contracting parties intended to limit the liability of stevedores or other agents…. If such had been a purpose of the contracting parties it must be presumed that they would in some way have expressed it in the contract.” Ibid. The Court added that liability limitations must be “strictly construed and limited to intended beneficiaries.” Id., at 305, 79 S.Ct. 766.

The Eleventh Circuit, like respondents, made much of the Herd decision. Deriving a principle of narrow construction from Herd, the Court of Appeals concluded that the language of the ICC bill’s Himalaya Clause is too vague to clearly include Norfolk. 300 F.3d, at 1308. Moreover, the lower court interpreted Herd to require privity between the carrier and the party seeking shelter under a Himalaya Clause. Id., at 1308. But nothing in Herd requires the linguistic specificity or privity rules that the Eleventh Circuit attributes to it. The decision simply says that contracts for carriage of goods by sea must be construed like any other contracts: by their terms and consistent with the intent of the parties. If anything, Herd stands for the proposition that there is no special rule for Himalaya Clauses.

The Court of Appeals’ ruling is not true to the contract language or to the intent of the parties. The plain language of the Himalaya Clause indicates an intent to extend the liability limitation broadly–to “any servant, agent or other person (including any independent contractor)” whose services contribute to performing the contract. App. to Pet. for Cert. 59a, cl. 10.1 (emphasis added). “Read naturally, the word ‘any’ has an expansive meaning, that is, ‘one or some indiscriminately of whatever kind.’ ” United States v. Gonzales, 520 U.S. 1, 5, 117 S.Ct. 1032, 137 L.Ed.2d 132 (1997) (quoting Webster’s Third New International Dictionary 97 (1976)). There is no reason to contravene the clause’s obvious meaning. See Green v. Biddle, 8 Wheat. 1, 89-90, 5 L.Ed. 547 (1823) (“[W]here the words of a law, treaty, or contract, have a plain and obvious meaning, all construction, in hostility with such meaning, is excluded”). The expansive contract language corresponds to the fact that various modes of transportation would be involved in performing the contract. Kirby and ICC contracted for the transportation of machinery from Australia to Huntsville, Alabama, and, as the crow flies, Huntsville is some 366 miles inland from the port of discharge. See G. Fitzpatrick & M. Modlin, Direct-Line Distances 168 (1986). Thus, the parties must have anticipated that a land carrier’s services would be necessary for the contract’s performance. It is clear to us that a railroad like Norfolk was an intended beneficiary of the ICC bill’s broadly written Himalaya Clause. Accordingly, Norfolk’s liability is limited by the terms of that clause.

B

The question arising from the Hamburg Süd bill of lading is more difficult. It requires us to set an efficient default rule for certain shipping contracts, a task that has been a challenge for courts for centuries. See, e.g., Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854). ICC and Hamburg Süd agreed that Hamburg Süd would transport the machinery from Sydney to Huntsville, and agreed to the COGSA “package limitation” on the liability of Hamburg Süd, its agents, and its independent contractors. The second question presented is whether that liability limitation, which ICC negotiated, prevents Kirby from suing Norfolk (Hamburg Süd’s independent contractor) for more. As we have explained, the liability limitation in the ICC bill, the first contract, sets liability for a land accident higher than this bill does. See n. 1, supra. Because Norfolk’s liability will be lower if it is protected by the Hamburg Süd bill too, we must reach this second question in order to give Norfolk the full relief for which it petitioned.

To interpret the Hamburg Süd bill, we turn to a rule drawn from our precedent about common carriage: When an intermediary contracts with a carrier to transport goods, the cargo owner’s recovery against the carrier is limited by the liability limitation to which the intermediary and carrier agreed. The intermediary is certainly not automatically empowered to be the cargo owner’s agent in every sense. That would be unsustainable. But when it comes to liability limitations for negligence resulting in damage, an intermediary can negotiate reliable and enforceable agreements with the carriers it engages.

We derive this rule from our decision about common carriage in Great Northern R. Co. v. O’Connor, 232 U.S. 508, 34 S.Ct. 380, 58 L.Ed. 703 (1914). In Great Northern, an owner hired a transfer company to arrange for the shipment of her goods. Without the owner’s express authority, the transfer company arranged for rail transport at a tariff rate that limited the railroad’s liability to less than the true value of the goods. The goods were lost en route, and the owner sued the railroad. The Court held that the railroad must be able to rely on the liability limitation in its tariff agreement with the transfer company. The railroad “had the right to assume that the Transfer Company could agree upon the terms of the shipment”; it could not be expected to know if the transfer company had any outstanding, conflicting obligation to another party. Id., at 514, 34 S.Ct. 380. The owner’s remedy, if necessary, was against the transfer company. Id., at 515, 34 S.Ct. 380.

Respondents object to our reading of Great Northern, and argue that this Court should fashion the federal rule of decision from general agency law principles. Like the Eleventh Circuit, respondents reason that Kirby cannot be bound by the bill of lading that ICC negotiated with Hamburg Süd unless ICC was then acting as Kirby’s agent. Other Courts of Appeals have also applied agency law to cases similar to this one. See, e.g., Kukje Hwajae Ins. Co. v. The M/V Hyundai Liberty, 294 F.3d 1171, 1175-1177 (C.A.9 2002) (an intermediary acted as a cargo owner’s agent when negotiating a bill of lading with a downstream carrier).

We think reliance on agency law is misplaced here. It is undeniable that the traditional indicia of agency, a fiduciary relationship and effective control by the principal, did not exist between Kirby and ICC. See Restatement (Second) of Agency § 1 (1957). But that is of no moment. The principle derived from Great Northern does not require treating ICC as Kirby’s agent in the classic sense. It only requires treating ICC as Kirby’s agent for a single, limited purpose: when ICC contracts with subsequent carriers for limitation on liability. In holding that an intermediary binds a cargo owner to the liability limitations it negotiates with downstream carriers, we do not infringe on traditional agency principles. We merely ensure the reliability of downstream contracts for liability limitations. In Great Northern, because the intermediary had been “entrusted with goods to be shipped by railway, and, nothing to the contrary appearing, the carrier had the right to assume that [the intermediary] could agree upon the terms of the shipment.” 232 U.S., at 514, 34 S.Ct. 380. Likewise, here we hold that intermediaries, entrusted with goods, are “agents” only in their ability to contract for liability limitations with carriers downstream.

Respondents also contend that any decision binding Kirby to the Hamburg Süd bill’s liability limitation will be disastrous for the international shipping industry. Various participants in the industry have weighed in as amici on both sides in this case, and we must make a close call. It would be idle to pretend that the industry can easily be characterized, or that efficient default rules can easily be discerned. In the final balance, however, we disagree with respondents for three reasons.

First, we believe that a limited agency rule tracks industry practices. In intercontinental ocean shipping, carriers may not know if they are dealing with an intermediary, rather than with a cargo owner. Even if knowingly dealing with an intermediary, they may not know how many other intermediaries came before, or what obligations may be outstanding among them. If the Eleventh Circuit’s rule were the law, carriers would have to seek out more information before contracting, so as to assure themselves that their contractual liability limitations provide true protection. That task of information gathering might be very costly or even impossible, given that goods often change hands many times in the course of intermodal transportation. See 1 Schoenbaum 589; Wood, 46 Am. J. Comp. L., at 404.

Second, if liability limitations negotiated with cargo owners were reliable while limitations negotiated with intermediaries were not, carriers would likely want to charge the latter higher rates. A rule prompting downstream carriers to distinguish between cargo owners and intermediary shippers might interfere with statutory and decisional law promoting nondiscrimination in common carriage. Cf. ICC v. Delaware, L. & W.R. Co., 220 U.S. 235, 251-256, 31 S.Ct. 392, 55 L.Ed. 448 (1911) (common carrier cannot “sit in judgment on the title of the prospective shipper”); Shipping Act, 46 U.S.C.App. § 1709 (nondiscrimination rules). It would also, as we have intimated, undermine COGSA’s liability regime.

Finally, as in Great Northern, our decision produces an equitable result. See 232 U.S., at 515, 34 S.Ct. 380. Kirby retains the option to sue ICC, the carrier, for any loss that exceeds the liability limitation to which they agreed. And indeed, Kirby has sued ICC in an Australian court for damages arising from the Norfolk derailment. It seems logical that ICC–the only party that definitely knew about and was party to both of the bills of lading at issue here–should bear responsibility for any gap between the liability limitations in the bills. Meanwhile, Norfolk enjoys the benefit of the Hamburg Süd bill’s liability limitation.

IV

We hold that Norfolk is entitled to the protection of the liability limitations in the two bills of lading. Having undertaken this analysis, we recognize that our decision does no more than provide a legal backdrop against which future bills of lading will be negotiated. It is not, of course, this Court’s task to structure the international shipping industry. Future parties remain free to adapt their contracts to the rules set forth here, only now with the benefit of greater predictability concerning the rules for which their contracts might compensate.

The judgment of the United States Court of Appeals for the Eleventh Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

C.H. Robinson v. Zurich

United States District Court,

D. Minnesota.

C.H. ROBINSON COMPANY, a Delaware corporation, Plaintiff,

v.

ZURICH AMERICAN INSURANCE COMPANY, a New York corporation; and United States

Fire Insurance Company, a New York corporation, Defendants.

Nov. 5, 2004.

 

MEMORANDUM AND ORDER

 

MAGNUSON, J.

This matter is before the Court on several Motions for Summary Judgment. Plaintiff C.H. Robinson Company (“C.H.Robinson”) seeks partial summary judgment against both Defendants regarding the insurers’ obligation to pay defense costs. Defendant United States Fire Insurance Company (“U.S.Fire”) seeks summary judgment that it is not responsible for reimbursing C.H. Robinson for a $4.25 million settlement payment. Defendant Zurich American Insurance Company (“Zurich”) seeks summary judgment that it is not responsible for costs incurred by C.H. Robinson’s independent defense counsel. For the reasons that follow, the Court grants in part and denies in part C.H. Robinson’s Motion, denies U.S. Fire’s Motion, and grants Zurich’s Motion.

BACKGROUND

The primary dispute at issue is who is responsible for the payment of $4.25 million used to settle Hylla v. T-J Transport, Inc., a personal injury action venued in an Illinois state court. Hylla arose from an automobile accident on September 13, 1999, which occurred when Isaac Stewart collided with a vehicle, ultimately causing a sixteen-car pile-up. Stewart was transporting a load for International Paper in a semi-tractor trailer owned by T-J Transport. C.H. Robinson brokered the load between International Paper and T-J Transport. The brokerage agreement required C.H. Robinson to indemnify and defend International Paper for all liability, including reasonable attorneys’ fees, arising from the brokerage agreement.

At the time of the accident, Zurich insured C.H. Robinson under a commercial automobile policy with a limit of $1 million per occurrence. U.S. Fire provided the next layer of insurance under a commercial umbrella policy, which had a limit of $25 million per occurrence. Both policies were duty to defend policies, and both included punitive damages exclusions. The U.S. Fire policy required C.H. Robinson to cooperate with U.S. Fire in the settlement and defense of litigation arising from an occurrence.

As a result of the collision, three wrongful death actions were filed in Illinois state court against C.H. Robinson, International Paper, and others: Hylla, Trout v. C.H. Robinson et al., and Ficke v. C.H. Robinson et al. International Paper looked to C.H. Robinson to defend the cases. In turn, C.H. Robinson tendered the defense to its insurance carriers. Zurich accepted the tender and appointed attorney Mark Cero to defend C.H. Robinson. Zurich also acknowledged the obligation to provide International Paper with separate defense counsel, and therefore retained the law firm of Pugh, Jones, Johnson & Quandt to represent International Paper.

The cases did not proceed well for the defendants. The plaintiffs in all three actions prevailed on the theory that C.H. Robinson was vicariously liable for damages caused by Stewart. Because Stewart had pled guilty to manslaughter charges, C.H. Robinson believed that a finding of liability was inevitable. U.S. Fire believed that these liabilities would exhaust the Zurich policy, and that Zurich would bear the majority of the potential verdict. As a result, U.S. Fire appointed attorneys Patterson Gloor and Michael Mullen to join the defense.

The plaintiffs in all three actions later amended the complaints to assert additional allegations against C.H. Robinson to obtain punitive damages. In response, U.S. Fire sent C.H. Robinson a letter on August 29, 2002, in which U.S. Fire purported to reserve its rights to deny coverage for punitive damages, as well as coverage for compensatory damages if C.H. Robinson knew there “was a substantial probability that the conduct would cause injury.” (Preus Aff. Ex. L.) Zurich also reserved its right to deny coverage for punitive damages, but tendered its $1 million policy toward settlement on September 9, 2002.

On September 16, 2002, C.H. Robinson inquired as to the breadth of U.S. Fire’s reservation of rights. In addition, C.H. Robinson claimed that the insurers’ reservations of rights created a conflict of interest, and therefore requested that C.H. Robinson appoint its own attorney to control the defense. U.S. Fire agreed to the substitution and withdrew Gloor as counsel. However, Zurich denied that a conflict of interest existed and refused to accede. C.H. Robinson nevertheless appointed its own defense counsel, Thomas Marrinson and Thomas Mulroy of the law firm of Scandaglia, Marrinson & Ryan.

The parties unsuccessfully attempted to settle the underlying suits several times, and disagree about the conduct of settlement negotiations. C.H. Robinson describes the insurers’ conduct as dilatory and dubious, contending that the insurers repeatedly promised to make final offers but continually reneged on those promises. U.S. Fire asserts that C.H. Robinson engaged in secret negotiations with the plaintiffs’ counsel in Hylla without informing U.S. Fire.

On November 7, 2002, U.S. Fire informed C.H. Robinson that U.S. Fire had the right to control the settlement negotiations in Hylla and demanded that C.H. Robinson cease any further unilateral settlement negotiations in the matter. Four days later, while Mullen was attempting to convince the plaintiffs’ counsel in Hylla that a $1 million settlement offer previously made was reasonable, he learned that the plaintiffs’ counsel had already rejected the offer in a letter to Marrinson. C.H. Robinson had not informed U.S. Fire of the rejection. Soon thereafter, Marrinson proposed a hypothetical settlement offer of $2.75 million. [FN1]

FN1. The parties dispute whether U.S. Fire sanctioned this offer. C.H. Robinson contends that U.S. Fire suggested making the offer, while U.S. Fire claims that it neither knew of nor authorized the offer.

On November 12, 2002, Mullen informed Marrinson that U.S. Fire was negotiating with other defendants’ insurers to provide a global settlement fund for the purpose of resolving the underlying suits on behalf of C.H. Robinson and other defendants. Mullen also advised Marrinson that if a global settlement proved unattainable, U.S. Fire would explore an individual settlement solely on behalf of C.H. Robinson. On November 14, 2002, the defendants’ insurance carriers discussed the creation of a $20 million global settlement fund. The next day, C.H. Robinson informed U.S. Fire that it would not agree to U.S. Fire’s control over the settlement process unless U.S. Fire rescinded its reservation of rights and acknowledged coverage for punitive damages.

Nevertheless, Mullen continued settlement efforts. On November 26, 2002, he offered $2.5 million to settle Hylla. The plaintiffs’ counsel scoffed at the offer, as Marrinson had previously offered $2.75 million. Mullen then continued to negotiate a settlement, offering $4 million on November 27, 2002, and $4.5 million on November 29, 2002.

Trial in Hylla began with no resolution and a demand of $12 million. Mullen countered with an offer of $5 million. On December 3, 2002, C.H. Robinson informed Mullen that it was willing to offer $2.5 million of its own funds, in excess of the pending $5 million carrier offer, to push the settlement offer to $7.5 million. Mullen offered the $7.5 million, but was rejected.

During a break in the trial proceedings, Marrinson and the plaintiffs’ counsel discussed settlement in the absence of Mullen. On December 3, 2003, the Hylla plaintiffs accepted a $9.25 million settlement offer. The settlement was consummated without the knowledge or authority of U.S. Fire. C.H. Robinson acknowledges that the $9.25 million offer was contingent on the insurers’ paying $5 million. [FN2] U.S. Fire refused to pay more than $5 million, leaving C.H. Robinson to pay the remaining $4.25 million. U.S. Fire contends that C.H. Robinson’s counsel secretly negotiated with the Hylla plaintiffs and unilaterally settled the case. It therefore argues that it is not responsible for reimbursing C.H. Robinson the $4.25 million as a matter of law.

FN2. The other two wrongful death lawsuits against C.H. Robinson also settled. Trout settled for $8.25 million and Ficke settled for $9.5 million. It is notable that U.S. Fire settled both of these matters without any contribution from C.H. Robinson.

DISCUSSION

A. Standard of Review

Summary judgment is proper if no reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Thus, only disputes of facts that might affect the outcome of the suit under the governing substantive law will preclude summary judgment. Id. The moving party bears the burden of showing that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The nonmoving party is entitled to all inferences that may be reasonably drawn from the underlying facts in the record. Kiemele v. Soo Line R.R. Co., 93 F.3d 472, 474 (8th Cir.1996). However, the nonmoving party may not merely rest upon allegations or denials in its pleadings–it must set forth specific facts showing that there is a genuine issue for trial. Anderson, 477 U.S. at 256.

B. Hylla Settlement Payment

C.H. Robinson commenced this action, seeking a declaration that U.S. Fire and Zurich must reimburse C.H. Robinson the $4.25 million C.H. Robinson paid to the Hylla plaintiffs. U.S. Fire counterclaimed, alleging that C.H. Robinson breached three provisions of its insurance policy by unilaterally settling Hylla. U.S. Fire now seeks summary judgment, arguing C.H. Robinson breached its duty to cooperate, thereby vitiating U.S. Fire’s obligation to reimburse C.H. Robinson the $4.25 million.

In determining whether the settlement agreement is binding on U.S. Fire, the Court must determine whether C.H. Robinson violated its duty to cooperate with U.S. Fire. [FN3] An insured does not violate its duty to cooperate when it settles a claim while insurance coverage is in doubt. Miller v. Schugart, 316 N.W.2d 729, 732-34 (Minn.1982); see also S.G. v. St. Paul Fire & Marine Ins. Co., 460 N.W.2d 639, 643 (Minn.Ct.App.1990) (an insurer’s denial of coverage nullifies the duty to cooperate).

FN3. Whether the settlement agreement is binding also turns on whether the settlement agreement is reasonable and prudent, and not the product of fraud or collusion. Miller v. Schugart, 316 N.W.2d 729, 732- 35 (Minn.1982). Because a genuine issue of material fact exists as to whether C.H. Robinson breached its duty to cooperate, the Court need not address those issues.

However, once the insurer acknowledges coverage, the insured may not settle the claim without authority from the insurer. S.G., 460 N.W.2d at 643. Thus, an insured violates its duty to cooperate by settling a claim when a dispute exists only about the applicable limits of liability–and not whether part of the claim is covered. Buysse v. Baumann-Furrie & Co., 448 N.W.2d 865, 872- 74 (Minn.1989); see also Sargent v. Johnson, 551 F.2d 221, 231 (8th Cir.1977). Likewise, it violates its duty to cooperate when the insurer does not contest coverage entirely, but merely reserves its rights to defend against some claims. Steen v. Lloyds of London, 442 N.W.2d 158, 161-62 (Minn.Ct.App.1989).

A genuine issue of material fact remains as to whether U.S. Fire denied coverage for some or all claims against C.H. Robinson when C.H. Robinson unilaterally settled Hylla. The August 29, 2002, reservation of rights letter clearly begins with a partial reservation of rights by advising C.H. Robinson that U.S. Fire will not cover a punitive damages award. However, the letter also invokes an intentional acts exclusion, stating that U.S. Fire would not cover any damages that arose from C.H. Robinson’s conduct that “occurred with the knowledge that there was a substantial probability that the conduct would cause injury.” (Preus Aff. Ex. L .)

Thereafter, C.H. Robinson requested clarification from U.S. Fire as to whether the letter was a complete reservation of rights. U.S. Fire never responded, even though C.H. Robinson and U.S. Fire disagreed throughout the settlement process about who should control settlement negotiations in light of the letter. In addition, U.S. Fire’s conduct conveyed a message that it was gambling to see if a jury would return a verdict that would afford an excuse for invoking the intentional acts exclusion. For example, U.S. Fire indicated that any punitive damages award would be tantamount to a finding of intentional conduct, thereby excluding the entire verdict from coverage. [FN4] In this way, this case is similar to S.G., where the insured entered into a settlement without the insurer’s consent because the insurer continually avoided acknowledgment of full coverage. 460 N.W.2d at 641-44.

FN4. Insurers often seek to exclude coverage under intentional act exclusions, regardless of whether the insured’s actual liability is couched in terms of negligence. See, e.g., Haarstad v. Graff, 517 N.W.2d 582 (Minn.1994) (denying coverage under intentional acts exclusion for negligence and careless conduct claims).

On the other hand, U.S. Fire was present with authority to settle Hylla during most negotiations sessions, offered millions of dollars in settlement, and helped to pool a global settlement fund. Most importantly, C.H. Robinson used $5 million of insurance carrier money in the ultimate settlement offer. These actions indicate that U.S. Fire merely reserved its right to deny some claims– but not coverage entirely. See Steen, 442 N.W.2d at 160-62.

Viewing these facts in a light most favorable to C.H. Robinson, the Court finds that U.S. Fire gave mixed signals that create a genuine issue as to whether U.S. Fire reserved its rights to deny all coverage in Hylla. Thus, U.S. Fire’s Motion for Summary Judgment is denied.

C. Independent Defense Costs

1. Zurich

C.H. Robinson has brought a partial Motion for Summary Judgment, contending that it was entitled to select its own defense counsel and require the insurers to pay its defense costs after the insurers reserved their rights to deny coverage for punitive damages. It seeks $364,936.22 from Zurich for the cost of independent defense counsel incurred before Zurich paid its policy limit on January 22, 2003. Zurich has cross-filed a Motion for Summary Judgment, arguing that it is not required to reimburse C.H. Robinson for the costs of the independent defense counsel.

a. Choice of Law

The parties dispute whether Illinois or Minnesota law should apply to this issue. “In a diversity case, a federal court applies the choice of law rules of the forum state.” Northwest Airlines, Inc. v. Astraea Aviation Servs., Inc., 111 F.3d 1386, 1393 (8th Cir.1997). Under Minnesota law, the Court must first address whether an actual dispute exists between the laws of the different states and whether constitutional problems arise with application of either law. Jepson v. General Cas. Co. of Wis., 513 N.W.2d 467, 469 (Minn.1994). If an actual conflict exists and both laws can be constitutionally applied, then the Court must examine five factors to determine which state’s law should be applied: predictability of result, maintenance of interstate order, simplification of the judicial task, advancement of the forum’s governmental interests, and the better rule of law. Id. at 470.

Under the laws of both Minnesota and Illinois, an insured is entitled to choose counsel and obtain reimbursement from the insurer when an “actual conflict” exists between the insured and the insurer. Cf. Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 391 (Minn.1979) with Ill. Mun. League Risk Mgmt. Ass’n v. Seibert, 585 N.E.2d 1130, 1135 (Ill.App.Ct.1992). However, Illinois defines “actual conflict” more broadly than Minnesota.

Under Minnesota law, an actual conflict exists when the insurer denies coverage, but is still required to defend the suit. See Prahm, 277 N.W.2d at 391. [FN5] The conflict of interest does not relieve the insurer of its duty to defend, but requires the insurer to reimburse the insured for reasonable attorneys’ fees. Id. Minnesota courts have not addressed whether a reservation of rights relating to punitive damages creates an actual conflict. However, in Mutual Service Casualty Insurance Co. v. Luetmer, 474 N.W.2d 365, 368-69 (Minn.Ct.App.1991), the Minnesota Court of Appeals declined to adopt a rule that assumes a conflict of interest arises when an insurer defends under a general reservation of rights. Rather, Luetmer requires substantial evidence that an actual conflict exists, such as actions that demonstrate a greater concern for the insurer’s interest than the insured’s interests. Id. Accordingly, the mere reservation of rights by itself does not create a sufficient conflict under Minnesota law.

FN5. In Prahm, the insurer both denied coverage and refused to defend the insured, arguing that an exclusion in the insurance policy applied. The Minnesota Supreme Court recognized that requiring the insurer to defend the insured in an underlying suit created a conflict of interest because the insurer would be required to take opposing positions at trial to defend the insured while at the same time defending itself on the coverage question. 277 N.W.2d at 391.

Conversely, Illinois courts have expressly recognized that a punitive damages reservation of rights is an actual conflict vesting the insured with the right to select independent counsel at the cost of the insurer. Nandorf, Inc. v. CNA Ins. Co., 479 N.E.2d 988, 992 (Ill.App.Ct.1985); see also Seibert, 585 N.E.2d at 1135 (general rule is that an insurer has the right to control the insured’s defense, but an exception exists when the proof of certain facts would shift liability from the insurer to the insured). Because Illinois explicitly provides that a punitive damages reservation of rights creates an actual conflict, whereas Minnesota does not, the Court must assume a conflict of law exists and engage in a choice of law analysis. Med. Graphics Corp. v. Hartford Fire Ins. Co., 171 F.R.D. 254, 260 (D.Minn.1997) (Erickson, Mag. J.).

Whether the laws of a state can be applied constitutionally depends on whether sufficient contacts create state interests so that application of the state’s law is neither arbitrary nor fundamentally unfair. Jepson, 513 N.W.2d at 469. The parties do not dispute that Minnesota has sufficient contacts with the case. Illinois also has sufficient contacts, as the alleged conflict of interest arose in Illinois state court between Illinois defense counsel.

The question then is which state law should be applied under the Minnesota choice of law factors. Most relevant to this case are three factors: predictability of results, maintenance of interstate order, and advancement of the forum’s interests. [FN6] “The first factor, predictability of results, is most relevant when parties have expectations about the applicable law, such as in consensual transactions where people should know in advance what law will govern their act, but has less relevance in cases such as accidents when the parties could not reasonably have such expectations.” Northwest Airlines, Inc., 111 F.3d at 1394 (internal quotations and citations omitted). C.H. Robinson argues that the parties expected to apply Minnesota law, as this case involves the interpretation of an insurance policy brokered and executed by Minnesota companies in Minnesota. Although the present action is based on an insurance contract, it was foreseeable that C.H. Robinson might incur liability outside Minnesota. Thus, the fact that the insurance contract arose in Minnesota is not determinative, and predictability of result is not advanced by applying Minnesota law. See Am. States Ins. Co. v. Mankato Iron & Metal, Inc., 848 F.Supp. 1436, 1443 (D.Minn.1993) (Kyle, J.).

FN6. The simplification of the judicial task factor is usually inconsequential, as the Court has no difficulty applying the laws of either state. Northwest Airlines, Inc., 111 F.3d at 1394. Likewise, the better rule of law factor only applies when the first four factors do not clearly resolve the choice of law question. Id . at 1395. Because the Court finds that the application of Minnesota law is most appropriate, it need not address the last factor.

Maintenance of interstate order is satisfied if applying Minnesota law would not show disrespect for the sovereignty of Illinois or impede interstate commerce. Northwest Airlines, Inc., 111 F.3d at 1394. When examining this factor, the Court must determine whether Minnesota has sufficient contacts with the litigation to meet the requirements of due process, and whether the application of Minnesota law encourages forum shopping. Id. Minnesota clearly has sufficient contacts to justify application of its law. C.H. Robinson is a Minnesota corporation, and the contract at issue was executed in Minnesota through a Minnesota broker. Moreover, C.H. Robinson has commenced this action based on that contract in the District of Minnesota, and has requested that the Court apply Minnesota law to its claim. Thus, this factor weighs in favor of applying Minnesota law. [FN7]

FN7. Notably, the court in the underlying suits applied Missouri law, not Illinois law, to the claims.

Advancement of the forum’s interest considers both Minnesota’s governmental interests and the relative interests of Illinois. Northwest Airlines, Inc., 111 F.3d at 1394. According to C.H. Robinson, Illinois has a greater interest in this case because only Illinois is interested in enforcing its rules of professional responsibility. However, the underlying concern is not the enforcement of ethical rules, but rather the protection of the insured when its interests conflict with those of its insurer. See N. Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353, 1359 (9th Cir.1992); see also Golotrade Shipping & Chartering v. Travelers Indem. Co., 706 F.Supp. 214, 218 (S.D.N.Y.1989) (when determining whether the insured was entitled to independent defense counsel, the main legal issues concern the rights and obligations of the parties to an insurance contract–and not where the underlying action was litigated). Minnesota has a strong interest in seeing its law applied to protect a Minnesota insured and to a contract negotiated and executed in Minnesota. See American States Ins. Co., 848 F.Supp. at 1444 (“Application of contrary or uncertain law from other states would be inconsistent with Minnesota’s interest in policing the issuance and terms of insurance contracts in the state.”). Moreover, applying Minnesota law does not harm Illinois’s interest, as attorneys practicing in Illinois still must abide by local ethics rules and may be sanctioned for failing to do so. Accordingly, the Court finds that this factor weighs in favor of applying Minnesota law.

b. Application of Minnesota Law

Under Minnesota law, a potential conflict of interest arises when an insurer reserves its right to deny coverage. As the Luetmer court explained:

Problems can arise when an insurer defends under a reservation of rights. While the insured seeks to avoid liability on all claims and the insurer shares that desire, the insurer has an additional interest that if liability is found, that it be found on claims for which there is no coverage…. A further concern is that counsel selected by the insurer will have a compelling interest in protecting the rights of the insurer rather than the rights of the insured because of counsel’s closer ties with the insurer.

474 N.W.2d at 368; see also United States Fidelity & Guaranty Co. v. Louis A. Roser Co., Inc., 585 F.2d 932, 938 (8th Cir.1978) (when insurer denies coverage of one count in the complaint, “[c]ommon logic dictates that … [the insurer] would be inclined, albeit acting in good faith, to bend his efforts, however unconsciously, to establishing that any recovery by” the plaintiff would be grounded in the uncovered theory). When an insurer reserves its right to deny coverage for punitive damages, a risk exists that the insurer will be less motivated to achieve the best possible result if it believes that the loss will result from punitive damages. Furthermore, it may be tempted to devote more effort into the non-coverage issue than into defending the insured.

The Court therefore recognizes that Zurich’s reservation of rights regarding punitive damages may have entitled C.H. Robinson to independent counsel albeit one fact: Zurich offered its $1 million policy limit immediately after reserving its rights. When Zurich offered to exhaust its limits under the policy, its reservation of rights relating to punitive damages became moot. Thus, when C.H. Robinson identified the potential conflict of interest and requested independent defense counsel, no possibility existed to shift liability from Zurich to C.H. Robinson. Merely because C.H. Robinson faced substantial exposure beyond Zurich’s limits does not create an actual conflict of interest between C.H. Robinson and Zurich.

C.H. Robinson contends that the tendering of the policy limit in and of itself created a conflict of interest, as Zurich thereafter had no economic incentive to defend aggressively. However, C.H. Robinson presents no evidence that Zurich afforded a less vigorous defense after it tendered its policy limits. Luetmer requires substantial evidence of an actual conflict, such as actions demonstrating that Zurich was more concerned with its interests than with C.H. Robinson’s interest. C.H. Robinson has not presented any evidence of such dereliction on the part of Zurich.

Under the facts of this case, the Court finds that no actual conflict of interest existed between C.H. Robinson and Zurich because Zurich had already tendered its policy limit when the potential conflict of interest arose. Accordingly, Zurich is not required to reimburse C.H. Robinson for independent defense counsel costs. Zurich’s Motion for Summary Judgment is therefore granted, and C.H. Robinson’s partial Motion for Summary Judgment on this point is denied.

2. U.S. Fire

U.S. Fire acknowledges that its broad reservation of rights requires it to pay C.H. Robinson’s independent defense costs incurred once all primary insurance limits were exhausted. C.H. Robinson seeks summary judgment that U.S. Fire must pay $148,418.06 for the independent defense counsel costs. U.S. Fire argues that summary judgment is inappropriate because genuine issues of material fact exist as to the amount due.

U.S. Fire first claims that C.H. Robinson has not presented evidence establishing exhaustion of all primary insurance policies covering the underlying litigation or evidence that C.H. Robinson incurred any defense costs after such exhaustion. [FN8] C.H. Robinson counters that U.S. Fire knew that all primary policies were exhausted as of January 31, 2003. The Zurich policy was exhausted on January 22, 2003, with the $1 million payment toward the Hylla settlement. On January 31, 2003, Continental Western Insurance Company, the other primary insurer, informed U.S. Fire that it had $206,557 remaining on its policy limits toward satisfaction of the underlying suits. (McKinney Aff. Ex. C.) On that day, the $8.25 million settlement in Trout was reached, thereby exhausting the primary insurance policy limits. Indeed, in May 2004, U.S. Fire explicitly promised to reimburse C.H. Robinson for reasonable attorneys’ fees incurred by C.H. Robinson since the Trout settlement. (Id.; see also Campbell Aff. Ex. 1.) U.S. Fire fails to dispute this acknowledgment and merely asserts that it is unaware of when the primary policies were exhausted. Because U.S. Fire fails to set forth specific facts showing there is a genuine issue for trial, the Court finds as a matter of law that U.S. Fire was required to pay for C.H. Robinson’s independent defense counsel fees as of January 31, 2003.

FN8. The U.S. Fire umbrella policy provides that U.S. Fire has a duty to defend when damages sought were not covered by the terms and conditions of underlying or other insurance. Accordingly, U.S. Fire was not required to pay defense costs until all available primary insurance was exhausted.

U.S. Fire also contests the reasonableness of the independent defense counsel fees. U.S. Fire asserts that C.H. Robinson failed to disclose several documents on which it now bases its calculation of fees, and that the defense counsel invoices provided during discovery contain several billing entries that do not relate to C.H. Robinson’s defense in the underlying litigation. [FN9] In May 2004, C.H. Robinson provided U.S. Fire with invoices from its independent defense counsel totaling $166,078.12. After reviewing the invoices, U.S. Fire objected to some of the charges, and now claims that other entries relate to billings unconnected to the underlying litigation. As the moving party, C.H. Robinson must demonstrate that no genuine issue of material fact remains. Because the record reflects a dispute in the amount of fees incurred since January 31, 2003, the Court denies C.H. Robinson’s Motion on this point.

FN9. U.S. Fire identifies several invoices upon which C.H. Robinson bases its Motion, but did not produce during discovery. U.S. Fire asks the Court to bar C.H. Robinson from further using the previously undisclosed documents in this litigation. Because the Court denies C.H. Robinson’s Motion for partial Summary Judgment, and because U.S. Fire now possesses all documents on which C.H. Robinson bases its claim, the Court finds that U.S. Fire is not prejudiced by the untimely disclosure. Thus, the Court denies U.S. Fire’s request.

D. Defense Costs for International Paper

In its Motion for partial Summary Judgment, C.H. Robinson seeks an order that Zurich pay International Paper’s defense costs for the underlying suits that were incurred before Zurich paid its policy limit on January 22, 2003, and that U.S. Fire pay for International Paper’s defense costs incurred since January 31, 2003. On June 16, 2004, International Paper issued a formal demand for payment of its legal fees, claiming that over $550,000 remains unpaid for defense costs relating to the underlying suits. While this Motion was pending, C.H. Robinson informed the Court that C.H. Robinson and International Paper have agreed to mediate disputes regarding the reimbursement of attorneys’ fees, and requested that the Court order Zurich to participate in the mediation session.

Neither insurer disputes its responsibility for International Paper’s defense costs. Indeed, Zurich expressly recognized its obligation to provide International Paper with a separate defense on April 23, 2002, and claims that it has already paid over $403,000 to International Paper’s defense counsel. U.S. Fire argues that C.H. Robinson has not disclosed the costs International Paper incurred after all of its primary insurance was exhausted.

Because C.H. Robinson seeks declaratory relief, a dispute as to the exact amount due will not preclude summary judgment. See, e.g., Employers Mutual Casualty Co. v. Wendland & Utz. Ltd., 351 F.3d 890 (8th Cir.2003) (summary judgment granted to insurer who sought declaration as to coverage of insurance policy). No genuine issue of material fact exists, as Defendants do not dispute their obligation to pay for International Paper’s defense costs. [FN10] The Court therefore grants C.H. Robinson’s Motion as it relates to its request for declaratory relief. It similarly grants C.H. Robinson’s request that Zurich be ordered to participate in mediation sessions involving International Paper with full settlement authority to resolve the outstanding defense cost dispute. Finally, if parties cannot resolve the disputes as to the reasonableness of independent defense costs incurred by C.H. Robinson and International Paper, the Court strongly encourages the parties to consent to the appointment of a Special Master to decide the outstanding amounts due.

FN10. Zurich’s argument that C.H. Robinson is ambushing Zurich with its request for declaratory relief is unfounded. In its Complaint, C.H. Robinson requests a declaration that it is entitled to all defense fees and costs incurred as a result of the underlying suits. (Compl. at 8.) The parties do not dispute that C.H. Robinson was required to pay for International Paper’s defense costs. Moreover, Zurich has acknowledged responsibility for payment of International Paper defense costs since April 2002.

CONCLUSION

For the foregoing reasons, and upon all of the files, records, and proceedings herein, IT IS HEREBY ORDERED that:

1. Defendant Zurich American Insurance Company’s Motion for Summary Judgment (Clerk Docket No. 84) is GRANTED;

2. Defendant U.S. Fire’s Motion for Summary Judgment (Clerk Doc. No. 107) is DENIED; and

3. Plaintiff C.H. Robinson’s Motion for Partial Summary Judgment (Clerk Doc. No. 93) is GRANTED in part and DENIED in part.

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