## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it

N o. 10

- 1073 H AYES L EM M ERZ I NT ERNAT I ONAL, I NC ., Plai nt i f f

-Appe l l ant, v . ACE A MERI CAN I NSURANCE C OMPAN Y, D efend a nt-A pp ellee

.

A pp eal from the United S t ates Di strictC our t fo r the N o rthernDi stricto f Indian a, S outh Bend D ivisi on. No . 3:08- cv-288

—Phi li p P. Si mon, Chief Ju dge
.
A RG UE D J UNE 1, 2010

— D ECI DE D A UGUS T 31, 2010

Befo re B AUER, P OSNER, an d F LA UM, Circ uit Ju dg es . P OSNER, Cir cu i tJudg e . Thi s appe alfr o m a j udg m en t dism i ssi ng a dive rs i ty sui t bya disa pp oi nted i nsured aga i n st i ts i nsurance com pany pres ents i ssues o f I n d i a n a i n s u r a n c e l a w. The defe nd ant, A CE I nsuran c e Com pany, had i ssued a “ W or ker s Com pensati on a nd Em plo yer s Li abi l i ty In su ra n c e P olic y” to H ay es L em m er z In t e r n at ion al, a m anufa cture r ofal um i num and ste el w h eels , and to2 N o. 10

- 1073 subsi diar i es ofH LI ( as w e’ l l cal l the pla i nti ff )

. One of th o se s ubs i di ar i es i s H ay es Le m m er z I nt erna ti onal

- H unting to n ( H unt i ng to n)

. A wor k er s co m pen sa ti o n a nd em plo yerl i abi l i ty pol i cy i s a st andard li abi l i ty i nsurance pol i cy desi gned to i nsure an em p l oye r pri m ar i l y f or l i a b i l i t y u nd erwo r k e r s ’ c o mpe ns a t i o n l a ws , b uts e c o nd

ar i l y f orl i ability forworkpl ace acci dents notco ver ed by s u c h l a ws

— f o r e x a mp l e , l i a b i l i t y f o r a c l a i m b y a n e mp loyee’s f am il y m em ber inj ure d by a w orkp lace inj ury t o th e e mp l o y e e ( a s w h e n a n i nj u r y t o a pr e g n a n te mplo yee i nj u re s h erfetus as w el l ) , o r f orcl ai m s forworkpl ac e i nj ur i es no t co ve r ed bywor k er s’ c o m pen sa ti o n, such as i nj uri es to f ar m em plo yee s o r an i nj ury to an em plo yee by a f el l ow em plo yee m oti vate d by s pit e. S ee, e.g ., Pom e rv. Sc hool m an , 875 F.2 d 1262, 12 66- 67 ( 7th C ir. 19 89 ); For um Ins. C o. v. Al l i e d S e cu r i ty, Inc. , 86 6 F

. 2d 8 0 ( 3 d C i r . 1 9 8 9 )

. S uc h i nsur a nc e c o v e r a g e fi l l s g a ps i n w or ker s’ co m pensati on l aw thatsom eti m es al l ow an empl oyee to s ue hi s empl o y eri n t o r t, b y pas singthe lim its on w or ke rs ’ co m p en sa tio n relie f. Schm idt v . S m it h , 7 1 3 A .2d 10 14 , 101 6-1 7 (N .J. 19 98 ); L a Jol l a Be ac h & Te n nis Clu b , Inc . v. Indu s t r i al Inde m ni ty Co. , 88 4 P. 2d 1048 , 10 52 (Ca l. 1994). I n 200 5 a worke r i nj ured i n an ac ci dental expl osi on a t a p l an ti n I nd i a na o wne d b y Hun t i ng t o n, a nd the wi do w an d e st at e o fa no th erw orkerk i l l ed i n the e xpl o si o n, br o ug ht a to r t su i t ag ai ns t bo th H LI, th e par en t, an d H unt in gt on, the s ubsi diar y, i n an I nd i ana s tat e co urt. The c o m pl ai nta l l eg ed th at th e pl an t “was o wned a nd oper ate d by [ H unti ngto n] and/or[ H LI] , ” a nd thatthey ha d f ai l ed to e xe r ci se r ea so nable c ar e to pr ev en t th e acci dent.N o. 10

- 1073 3 The com pla i nt di d not i de n tify ei therco m pany as an “e m p l o y e r ” o f th e a c c i d e n t v i c t i ms a n d o f c o u r s e th e wor k er s ata work si te a r e o fte n n o t empl o y ee s o fthe si te’ s o w ner. The pl ai nti ff s would noth ave w anted to d escribe e i th erde f en dan t as the e m pl o y er, b ec au se the ex cl us i ve r emedy f o r w ork pl ac e i nj ur i es i s us ua l l y a nd i n thi s i nstance a cl ai m under work er s’ co m pensati on l a w, fi l e d wi th a n a d mi n i s t r a t i v e a g e n c y , r a th e r th an a c on v e n t i o n al t or t s u it, w h ich w as th e n at u re of th e s u it aga i nst H LI and Hu nti ngto n. I nd

. Code. § 2 2- 3- 2- 6; Si m s v. U ni t e d S t at e s Fi de l i ty & Guar anty Co. , 78 2 N

. E.2 d 3 4 5 , 3 4 9

- 5 0 (I nd

. 20 0 3 )

. T he p l a i nt i ff s h a d a l r e a dy fi l e d a wor k er s’ co m pen sa ti o n c l ai m , na m i ngb o thHLI a nd H unt i ng to n a s th e empl o y er s o fthe ac ci den t vi ct i m s, a nd had rec ei ved w or ker s’ co m pensati on, though w hether pai d by bo th co m panie s, and i fso i n w hat pr opor ti ons, w e ca nnot deter m i ne. H ad the t or t s uitnam ed them as em plo yer s, the cour t would a t once have dism i sse d them fro m the case . N o do ubtthe pl ai nt i ff s wer e hop ing tha t no t na m i ng e i th e r c o mpa n y a s th e i r e mp l o y e r w o u l d g i v e th e m a sh o t at o bt ai ni ng co m m o n l aw damag es , which are m or e g ener ous than w or ker s’ co m pensati on a w ar ds. Th is w as no t nec essarily a d isrepu table (thou gh as w e’re aboutt o s e e i twa s a n i ne ff e c t i v e ) ma ne uv e r . I fHun t i ng ton w as t h eiro nl y e m plo yer, H LI m i ght no t ( w er e i t no t f o r a q u i r k o f I n d i a n a l a w d i s c u s s e d b e l o w) h a v e t he pr o te ct i o n o f wor k er s’ co m pen sa ti o n l aw and might th er efore be l i ab l e i n t o r t i f, f o r e xa m pl e, i t ha d i nfl uen ce d i ts s ubs i di ar y ’ s ch o i ce ofsa f ety m ea su r es . A pa r en t ( l i k e H LI ) o ro th era ffi l i at e enj oys li m i te d l i ab i l i ty, b ut4 N o. 10

- 1073 th i s j us t m ea ns i t i sn ’ t l i ab l e f or an a ffi l i at e’ s to r ts ( i nc l u d i n gt o r t s c o v e r e d b y wo r k e r s ’ c o mpe n sa ti o n) j ust byvi rtu e of th e r el ati onshi p. I fhoweveri t pl ays a c au sa l role in t h e a ffiliat e’ s n eg lige n c e, it is liab le dir ectl y r atherthan vi car i ousl y t o the v i cti m , and under n o r ma l t o r tl a w r a th e r tha n w o r k e r s ’ c o mpe n s a t i o n l a w, si nce the i nj ured w or ker i s the affi l i ate ’ s e m plo yee ra th er th an t h e p ar en t’s

. Forsyt he v. Clark U SA , Inc. , 86 4 N .E .2d 22 7, 24 0-4 1 (I ll. 20 07 ); G ulfs tream La nd & D eve lopm e ntCorp. v. Wi l ke rs on , 420 So. 2d 587, 588-90 (Fla. 1982); Boggs v. Blu eD i am ond Coal Co. , 5 90 F. 2d 655, 66 2- 63 ( 6th Cir

. 19 79)

. That i s j ust a spec i ali nstance o fthe gener al p rinciple tha t a n one m p loyer can be su ed i n tort for i njury t o a wo r k e r wi th o u tr e g a r d t o wo r k e r s ’ c o mpe n s a t i o n l a w, though the w or ker ’ s re m edy aga i nst hi s em plo yeri s g i ven ex c lu siv ely by th at law . E .g., Turn er v. R ich m o nd P o w er & LightCo. , 7 56 N .E .2d 54 7, 55 2-5 3 (In d . A p p . 200 1); C am pbel l v. E ck m a n/Freem a n & A ssoc ia tes , 6 7 0 N. E. 2 d 9 2 5 , 9 2 9

- 3 0 ( I nd

. A p p . 199 6); Re b oyv . Co zz iIr on & M e t al, Inc. , 9 F. 3d 1303 , 1304 -05, 1308 (7th Cir. 1993) (Ind iana law ). H LI and Hu nti ngto n knew o f cour se th at H unti ngto n w as the e m plo yero f the acci dent vi cti m s a nd that H LI, the parent c or p orati on, was not. But the l aw yer hand l i ng the to rtsui t f orthe tw o com panie s s eem s no t t o hav e know n (m aybe the p lai nt iffs did n’t kn ow either) that i n 200 1 Ind i ana, re acti ng neg ati vel y t o a deci si on by th e I ndi an a S upr eme Co ur t co nfi r m i ngthe unde rst an d in g of a ffili a t e liab ility se t fo rt h ab ov e, M cQuadev. D raw Tit e, Inc. , 65 9 N

. E.2d 1016, 10 20 ( I nd

. 19 95) , had am ended it s work er s’ co m pensati on l aw to pro vi de that “aN o. 10

- 1073 5 parent cor pora ti on a nd it s s ubsi diar i es shal l ea ch be consi dered [ f orp u rpos es ofworke rs ’ co m pensati on l aw ] j oi nt em plo yer s o fthe co rpor ati on’ s, the parent’ s, o r th e sub sidiaries’ em p loyees.” I nd . C o d e § 22-3-6-1( a). H e n c e HL I wa s i n s u l a t e d f r o m t o r t l i a b i l i t y to t he v i c t i ms o fthe e xp l o s i o n: b y v i rt ue o fb e i ngde e med a j o i nte m pl o y er, i ts li ab i l i tyt o the m was g o ve r ne d e xc l usi vel y by w or ker s’ com pensati on l aw eve n if in other st at es i t co ul d ha ve b ee n s ue d a s a to r tf easor ha d i t co ntr ibuted to the i nj uri es to i ts affi l i ate ’ s e m plo yee s. H LI prom ptly noti fi ed A CE o fthe tor t s uitand ask ed i t to ackno w l edge cove ra ge. The i nsurance pol i cy enti tl ed A C E to ta ke co n tr ol of H L I’s d ef e n s e t o t h e s u it, if it w anted to

. S ee P aint Shutt le, Inc. v. Co nti n ental Ca sualty Co ., 73 3 N .E .2d 51 3 , 520 -21 (Ind . A p p . 200 0); Tran spo rt Ins . Co. v. Pos tExpre s s Co. , 138 F.3d 118 9, 1193 (7th Cir. 1998 )

. Evi dentl y i t di dn ’ t w an t to. I nstea d i t a gr eed to payha l fthe c o m bi ne d l i ti g at i o n e xpe ns es o fHLI a nd H unti ngto n. H LI ar gues, and w e a ccept f orpurposes o f th i s a p p e a l, th a t AC E b e l i e v e d th a t Hu n t i n g t o n was t he onl y e m plo yero fthe accid ent v i cti m s, as i nd eed i t was i n t he u s u a l s e n s e ( b o th l e g a l a n d l a y ) o fth e w o r d “ e mpl oyer ”: i t ha d hi r ed th em an d di r ec te d the i r wor ka nd pai d them , tho ugh ( as i s no t uncom m on) theyr ecei ved cer tai n benefi ts und eran ERI SA p l an thatcov er ed em p loy ee s o f ot h er H ay es L em m er z a ffiliat es as w ell. On e mi g htthi nktha tACE wo ul d h a v e k no w n tha tHLI w oul d be deem ed an em ployerunder Ind i ana’ s work er s’ co mpe n s a t i o n l a w; a n d i f s o a n d i t h a d a s s u me d t he defe nse o fbo th defendants it would i fal er t hav e m ove d6 N o. 10

- 1073
to di smi ss the s ui t be ca us e b othwer e empl o y er s o fthe a c c i d e n t v i c t i ms b y v i r t u e o f th e 2 0 0 1 a me n d men t. But the a m endm ent was r ecentand, tho ugh i t s eem s cl ear enough, apparent l y there was som e doubt about i ts m eani ng. Caro l M odesi tt W yat t, “ Recent Sur vey o f W or ker ’ s Com pensati on Law ,” 34 Ind. L. Re v. 11 15, 11 24 ( 2001 )

. I nd eed, the I nd i ana t ri alco u rti ni ti al l y r ule d that H LI w as not an em plo yer of th e a cci dent vi cti m s. I n any eve nt A CE was not hand l i ng the defense. H LI di d t e l l ACE tha ti tdi s a g r e e d wi th ACE’ s de c i si on to p ay on ly h alf t h e c om p an ies ’ litiga tio n co st s, b u t it di d no t pur su e the i ss ue a nd i ns te ad tr i ed f o r the ne xt tw o yea rs to per suade the sta te cour t that i t was notan em plo yero fthe acci dent vic tim s a nd ther ef or e ( though th er e w as n o “t h er efo re ,” sin c e an inj u re r c a n b e lia b le in to rtto s om eo n e e lse ’s e m p loy ee ) it co u ld n ot be liab le to them

. I n the cour se ofthi s futi l e e ff or t i t i ncurr ed att o r n e y s ’ fe e s a n d r e l a t e d l i t i g a t i o n e x p e ns e s o fs o me $2 67, 00 0, whi chACE r efus ed to r ei m bur se, pr ec i pi ta ting thi s s uitto r eco verthem

. H LI w oul d have a vo id ed m ost o fthe e xpense ha d i t m o ve d t o di smi ss the s ui t o n the ba si s o fthe a m en dm en t. Ev entu all y i t di d wak e up a nd as part ofa se tt lem ent was di sm i sse d fr om the sui t with prej ud i ce, o n the gr oun d t h at it w as i nd eed an e m plo yer u n d e r th e a me n d e d wo r k e r s ’ c o mpe n s a t i o n l a w. HL I ’ s b a s i c po s i t i o n i s s i mp l e : b e c a u s e i tw a s a n e mplo yer, A CE was obl i ged by the term s of the insurance pol i cy to defe nd i t e i therdi re ctl y or b y re i m bursi ng i ts defe nse c ost s. A CE r i poste s that HL Iwas not nam ed as an em plo yeri n t h e su i t. But nei therwas H unti ngto n, ye t A CE ag re ed to r ei m burse the com panie s f or hal fthe cos tN o. 10

- 1073 7 ofthei r defe nse; and H LI asked A CE to acknow l edge c o v e r a g e o f b o th c o mpa ni e s . Th e t o r t c l a i ms a g a i nst HLI f el l withi n the scope ofthe i nsurance pol i cy; thatthey had no poss ibl e m er i t, bec ause ofthe am endm ent t o th e wor k er s’ c o m pen sa ti o n l aw, w as i r r el ev an t. “ The i nsured wh o ha s b ou ght a l i abi l i ty pol i cy that enti tl es hi m to defense as w el l as i nd em ni fi cati on wants to be d efe n d ed ag ain st cla im s o f liab ility reg ar d l e ss of th eir m er i t. ” Scotts dale Ins. Co

. v. Subs crip ti on P lus , Inc. , 29 9 F. 3d 618, 62 2- 23 ( 7th Ci r. 20 02) ; se e Tr i s l e rv. Ind ia na Ins. Co. , 5 75 N .E .2d 1 02 1, 10 23 (Ind . A p p . 199 1); N a tio na l Fire & C a sua lty C o . v. No rris ex rel. West, 10 7 F

. 3d 5 31, 53 4- 35 (7th C ir. 1997) (Ind iana law ). Bu t we m ust co nsi der what e x ac tly tr i gge rs the du ty to d efe n d

. A m u c h -c rit iciz ed (b u t ne ve r ov er ru led ) d ec isi on bythe I nd i ana S up re m e Cour t s tat es th at t he “duty t o d e f e n d i s d e t e r mi n e d s o l e l y by th e n a t u r e o fth e c o mpla i nt. ” Tran s am e r i ca Ins . Se r vi ce s v. Kopko , 570 N

. E.2 d 1283 , 12 85 ( In d

. 19 91)

. Thi s co uld be i nter prete d to m ea n tha t th e i ns ur an ce c o m pan y o nl y has to r ea d the com pla i nt. Bu t th at i nter preta ti on i s no t i nevi tabl e; “n ature ofthe c o m pl ai nt ” m i g htr efert o the a l l eg at i o ns ofthe com pla i nt pl us addit i onalf acts kno w n orr easonab l y a scer tai nabl e bythe i nsurer . Thi s i nter preta ti on h as su p p or t in Ind ian a la w , M o n r o e Gu a r a n ty In s . Co

. v. M onroe, 677 N .E .2d 62 0, 62 4 (In d . A p p . 199 7); Indi ana Farm ers M utual Ins. Co

. v. North Ver non D rop Forge, Inc. , 91 7 N .E .2d 12 58 , 126 8-6 9 (In d . A p p . 200 9); c f. A uto -O w ners Ins . Co. v. Har vey, 842 N

. E

. 2d 1279 , 1 2 9 1 ( I nd

. 2006), re fl ecting the “m oder n tr end” i n i nsuranc e l aw . 14 C ouch on Insurance§ 20 0:1 7 (3 d ed , 200 7); se e, e.g ., Sc o ttsda le Ins. Co. v. M V Tran s por t at ion , 115 P.3d 460, 466 (C al. 2005);8 N o. 10

- 1073 Advant ageHom e b ui l di ng, LLC v. M aryl and Casu al ty Co. , 47 0 F.3 d 10 03 , 1 0 0 7 -08 (10 th C ir. 20 06 ) (K an sa s la w ); C olum bia U ni on N at ’ l Bank v

. Har t f ord A cci de nt& Inde m ni ty Co. , 66 9 F .2 d 1 21 0, 12 14 -15 (8t h C ir. 19 82 ) (M iss ou ri law ). A re adi l y a s c e r t a i nab l e f a c t i n thi s c a s e wa s tha t HLIi s a n em p loyer by vi rtu e of th e 2001 am en d m e nt to I nd iana’s wo r k e r s ’ c o mpe n s a t i o n l a w. H L I ad m its it m a d e a d re ad fu l m ist ak e in d en yin g in the t or t s uitthati t was an e m plo yer . I t bl am es i ts l aw fi rm f orthe m i sta ke, and has sued the fi rm f orm al practi ce. W e ca nnot un d ersta nd wh y a ny par t o fthe cos ts ofthatm i sta ke s houl d be s hi fted to A CE

. H LI did not as kACE to ha nd le i ts de f en se a g ai ns t th e to r t su i t, b ut onl y f orr ei m burse m ent o fi ts l ega l expenses . The duty ofr ei m burse m ent i s l i m ite d to re asonableex p en se s, E mpl oye rs Ins . of

Waus au v. Re ct i ce l Fo am Corp. , 71 6 N

. E.2 d 1015 , 10 27 ( I nd

. A pp . 19 99), as o ther w i se the insured woul d ha ve no i nc en ti ve t o e co no m ize; and HLI ’ s ex p en se s w er e u n re as on ab le

— that in d ee d i s the pre m i se of i t s ma l pr acti c e s ui t
. I ti s r e du c e d t o a r g ui ngtha tACE shoul d have t ol d i t th at it s l aw fi rm was m aki ng a du m b defense

— tha ti th a d o nl y t o i nv o k e the 2 0 0 1 a men dm en t to the wor k er s’ c o m pensation l aw t o qua shthe su i t. Buta l i ab i l i tyi ns ur erthat do es no t co nt r o l the defe nse ofthe sui t a gai nst i ts i nsured i s no t o bl i ged to giv e a d vic e t o t h e i n su re d on lega l st ra te gy , w h et h er in th e nam e of “good f aith” or an y ot h e r d octrine of i ns urance l aw . That way m adness l i es ; a ny ti m e a n i nsured l osta tor t s uiti t would ac cuse i ts i nsurerof h avi ng f ai l ed to i nt er ve ne wi thc o r r ec t l eg ala dvice, th us makingthe i ns ur erj o i nt l y l i ab l e wi ththe i ns ur ed’s law fi r m f o r the lat te r’s m alp ra c tic e. W e’r e no t su rp ris ed to fin d n o p re vi-N o. 10

- 1073 9

ous c ase i n w hi ch an i n su re d h as m ade so audaci ous a cl ai m f ordefense cos ts. Bec au se HLI was , b y v i r tu e o fI ndi an a law , a j o i nt e mp l o y e r, A C E w a s c o n t r a c t u a l l y o b l i g a t e d t o r e i mburse the re aso nabl e e xpense ofH LI’ s g ett i ng i tse l fdi sm i sse d from t h e tor t s uit

. But H LI i s no t cl ai m i ng tha t AC E h a s r e fu s e d t o p a y th a tmo d e s ta mo u n t
. I ti s c o mpl aini ngtha t AC E b r ea ch ed i ts duty to de f en d b y f ai l i ng to a dvi se HLI tha t H LI ’ s l aw fi r m was n o t defen di ng the s uitpro perl y. A C E h ad no du ty to provi de i ts i nsured’ s l aw yer s with l ega l advi ce. A FFI RMED
.

8- 31- 10