Opinion ID: 2971613
Heading Depth: 2
Heading Rank: 3

Heading: The insurance provision of the Agreement

Text: -5- No. 03-4125 Southside River Rail Terminal, Inc. and Royal Indemnity Company v. CSX Transportation, Inc. Whether the provision in the Agreement requiring Southside to purchase insurance coverage relieves CSX from liability for its own negligence is the key issue in this case. CSX contends that the Agreement required Southside to obtain the insurance for their mutual benefit, thereby shielding CSX from liability. Southside argues, however, that the insurance was only for its own benefit and that the insurance provision was not intended to relieve CSX of liability. The district court determined that “under Ohio law a contract agreement to purchase insurance is deemed to be for the mutual benefit of both parties and manifests the intent of the parties to the contract to hold the other harmless in the event that one party incurs liability.” It concluded that “the language in the [Agreement] establishes an agreement to purchase insurance sufficient to absolve Defendant from any liability it incurred pursuant to the misdelivery of the chemicals.” Almost all of the relevant caselaw addressing the effect of contractual agreements to purchase insurance involve lease provisions requiring a landlord to buy coverage for a fire loss. In those cases, the courts generally prohibit a lessor’s insurer from recovering against a negligent lessee unless the lease clearly expresses the parties’ intent that the insurance coverage be limited to the lessor’s own negligence. See, e.g., Safeco Ins. Co v. Capri, 705 P.2d 659, 660-61 (Nev. 1985) (holding that, because the lease did not contain an express provision establishing the negligent tenant’s liability for fires, the tenant was an implied coinsured of the landlord); Cerny-Pickas & Co. v. C.R. Jahn Co., 131 N.E.2d 100, 103 (Ill. 1956) (holding that the lease provision requiring the landlord to pay for fire insurance exonerated the tenant from any liability due to fire damage to the leased premises caused by the tenant’s own negligence). Otherwise, the courts will assume that the parties intended for the insurance to be for their mutual benefit. See Safeco 705 P.2d at 660. -6- No. 03-4125 Southside River Rail Terminal, Inc. and Royal Indemnity Company v. CSX Transportation, Inc. Ohio is among those states recognizing the exculpatory effect of a lessor’s purchase of liability insurance. In United States Fire Ins. Co. v. Phil-Mar Corp., 139 N.E.2d 330 (Ohio 1956), for example, the Ohio Supreme Court evaluated a lease requiring the lessee to pay any additional insurance premiums imposed on the lessor—the actual policyholder—as a result of the lessee’s occupancy. The court concluded that “it was contemplated that the lessor would carry insurance on the property and look to the insurance for compensation for any loss by fire. If the parties had intended otherwise, there would have been no reason for such provision.” Id. at 333. The rationale for assuming that an agreement to purchase insurance is for the mutual benefit of the parties, absent some clearly expressed contrary intent, is largely rooted in public policy. Most important is the desire to effectuate the intent of the parties. Tate v. Trialco Scrap, Inc., 745 F. Supp. 458, 473 (M.D. Tenn. 1989). As the Tate court explained: If the parties agree that one person shall purchase insurance, it is only natural that they assume that the insurance is for their mutual benefit and that the parties will look only to the insurance for loss coverage. Otherwise, there is no reason to put the insurance clause within the lease. It would be mere surplussage. And the natural expectation of the parties is that each lease provision has meaning. Id. If the parties did not intend for an insurance policy to cover both parties, they would presumably each acquire their own coverage, thereby eliminating the need for any contractual duty to obtain coverage. Morsches Lumber, Inc. v. Probst, 388 N.E.2d 284, 287 (Ind. Ct. App. 1979) (acknowledging that, by agreeing to insure, “[n]either party intends to assume a potential liability; rather both are demonstrating ‘normal’ business foresight in avoiding liability and allocating it to an insurer”). -7- No. 03-4125 Southside River Rail Terminal, Inc. and Royal Indemnity Company v. CSX Transportation, Inc. Some courts, however, have taken the minority view by refusing to find that the contractual obligation to purchase insurance indicates an intention to exonerate the other party from his or her negligence in the absence of an express stipulation to that effect. See, e.g., United States Fidelity & Guar. Co. v. Let’s Frame It, 759 P.2d 819 (Colo. Ct. App. 1988) (holding that the landlord did not waive a claim against the lessee by virtue of an insurance provision in the lease); Sears, Roebuck & Co. v. Poling, 81 N.W.2d 462 (Iowa 1957) (holding that the tenant store’s lease did not relieve it from liability to the landlord for a fire loss because the lease did not clearly express such an intention). But this approach is not the law in Ohio. In the present case, the parties dispute whether the Agreement demonstrates a clear intent that Southside’s insurance is not for their mutual benefit. Both have legitimate arguments given that the Agreement contains two provisions that appear to be in conflict with one another. The first is §11.1, which suggests that the parties are responsible for their own negligence by (1) requiring each party to indemnify and hold the other harmless if it is willfully or grossly negligent, solely negligent, or jointly or concurrently negligent with a third party, and (2) requiring the parties to “jointly defend and bear equally all [l]osses arising from their joint or concurring negligence.” Southside argues that this provision makes each party liable for its own negligence, notwithstanding the other’s insurance coverage. The other provision, § 11.2, requires Southside to purchase coverage “insuring liability assumed or contracted under this Agreement.” Because this provision is not explicitly limited to coverage for liability incurred by Southside, CSX counters that it too is covered by the Agricultural policy. -8- No. 03-4125 Southside River Rail Terminal, Inc. and Royal Indemnity Company v. CSX Transportation, Inc. As mentioned earlier and as noted by the district court, in Ohio a contract to purchase insurance insulates both parties from common law liability in the absence of a clearly expressed intent to the contrary. Phil-Mar, 139 N.E.2d at 333. But Phil-Mar is arguably distinguishable from the present case on the basis that the lease in Phil-Mar required the lessee to pay any additional premiums resulting from its high-risk manufacturing activities in the leased building. Under such an arrangement, notions of fairness suggest that the lessee should also receive the benefit of the insurance. The same considerations do not apply here because Southside was fully responsible for the cost of the insurance, with no contribution from CSX. Ohio courts have, however, applied PhilMar to leases in which one party was solely responsible for the acquisition and cost of casualty insurance. See Buckeye Union Ins. Co. v. Consol. Stores Corp., 587 N.E.2d 391, 395 (Ohio Ct. App. 1990) (applying Phil-Mar to a lease requiring the landlord to insure the property against fire or other casualty customarily covered by a fire and extended coverage policy). Thus, the mutual-benefit principle announced in Phil-Mar is applicable to the present case. Also convincing is the decision in Tate v. Trialco Scrap, Inc., 745 F. Supp. 458 (M.D. Tenn. 1989), in which the court considered a contract similar to the Agreement here. In Tate, a lease provision holding the lessee responsible for damage inflicted by him appeared to conflict with a provision requiring the lessor to purchase fire insurance. The court ultimately determined that the general repair and maintenance obligations within the lease were not a sufficient manifestation of an intent to preclude the insurance coverage obtained by the lessor from also applying to the negligent lessee who caused the loss. Id. at 474. -9- No. 03-4125 Southside River Rail Terminal, Inc. and Royal Indemnity Company v. CSX Transportation, Inc. We are persuaded that, in light of Phil-Mar and Tate, the Agreement between Southside and CSX demonstrates an intent that Agricultural’s general liability insurance policy benefit both parties. The policy should therefore cover the liability incurred by both of them relating to the misdelivery of the fatty acid tank car, as the district court determined. Worth noting, however, is an alternative theory that might logically explain why CSX would require Southside to obtain liability insurance without also intending for the insurance to insulate CSX from liability. This alternative theory posits that CSX was concerned that Southside lacked the ability to pay for any damages for which Southside might be held responsible under § 11.1. But such a theory has not been articulated by Southside, the district court, or any of the cases cited earlier that embrace the minority view. Moreover, the record does not suggest any reason for such a concern. The deposition transcript of the general manager of Southside, in fact, reveals that Southside also carried an excess policy in addition to the Agricultural policy. We will, therefore, give no further consideration to this potential explanation that was not raised by either of the parties or by the district court. Finally, the provisions allocating liability in § 11.1 do not, as Southside suggests, evidence a contrary intent. Nor do they render the Agreement ambiguous, which would require that it be construed against CSX. Despite Southside’s claims that §§ 11.1 and 11.2 are inconsistent, the provisions can be read harmoniously. The district court did so when it noted that “§ 11.2 requires a statement of liability assumed or contracted under the Agreement and § 11.1 provides [for] that liability.” - 10 - No. 03-4125 Southside River Rail Terminal, Inc. and Royal Indemnity Company v. CSX Transportation, Inc.