Travelers Casualty Insurance Company of America v. Blizzard Busters Snowplowing…

Background

Travelers sued Costco Wholesale Corporation, several Blizzard Buster entities, and Norma Reid-Lynch under the Declaratory Judgment Act. Travelers sought a ruling that it had no duty to defend or indemnify the Blizzard Buster entities in an underlying state-court action. The Blizzard Buster entities and Reid-Lynch did not appear, and the court entered a default declaratory judgment against them. The court later granted Costco judgment on the pleadings and dismissed Costco’s original counterclaims, while allowing amended pleadings.

Costco then filed amended counterclaims seeking a declaration that Travelers had a duty to defend and possibly indemnify Costco in the underlying action. Costco also asserted breach-of-contract claims based on Travelers’ alleged failure to defend and indemnify it. Travelers moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a pleading does not state a legally sufficient claim.

The insurance policy covered certain accidental bodily injury and property damage claims and included a supplementary-payments provision. That provision required all listed conditions to be met before Travelers had to defend an insured’s indemnitee. Among other requirements, the provision required that no conflict appear between the insured and the indemnitee, and that both ask Travelers to control the indemnitee’s defense and agree that Travelers could assign the same lawyer to defend both.

Court’s analysis

The court applied New York law and treated the policy language as clear and unambiguous. It concluded that Costco and the Blizzard Buster entities had asserted indemnification, contribution, or related claims against one another in the underlying action. Because the parties were directly asserting claims against each other, their interests conflicted. The court held that this conflict prevented Costco from satisfying the policy’s requirement that no conflict appear between the insured’s interests and the indemnitee’s interests.

The court also concluded that the conflict could not be waived under New York’s professional-conduct rules because the parties were asserting claims against each other in the same litigation. As a result, Costco and the Blizzard Buster entities could not agree to have the same counsel represent them as required by the policy.

Separately, the court held that Costco had not adequately alleged that the Blizzard Buster entities asked Travelers to conduct and control Costco’s defense. The court rejected Costco’s argument that Travelers’ conduct excused this requirement, explaining that Costco had not identified any policy provision requiring Travelers to facilitate Costco’s contact with the Blizzard Buster entities. The court also stated that Costco could not treat itself as an insured that had been denied coverage when the policy’s relevant provision applied to an insured’s indemnitee.

Disposition

The court granted Travelers’ motion to dismiss Costco’s amended counterclaims. Because Costco had already amended its counterclaims after being alerted to their deficiencies, the court denied another opportunity to amend and dismissed Costco’s claims with prejudice. The court stated that it therefore did not need to address Costco’s specific declaratory-relief and breach-of-contract theories further. The Clerk was directed to terminate the motion and close the case.

Classification note

This is classified as a procedural order because the ruling disposed of Costco’s counterclaims under Rule 12(b)(6), even though the court interpreted the insurance policy and discussed the alleged conflict of interest.