Allied Property and Casualty Insurance Company et al v. Bed Bath & Beyond, Inc. et al

Filing 113

ORDER: The parties are ORDERED to confer and attempt to agree upon a schedule for proceeding with this case. If the parties are unable to agree upon a schedule within 14 days of the entry of this Order, they shall request a conference with the Court. If limited discovery is needed, the Court will allow it. Ultimately, the Court expects the parties to submit for decision only those fees for which Plaintiffs have specific objections. Signed by Judge Richard W. Story on 11/4/2014. (cem)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
ALLIED PROPERTY AND
CASUALTY INSURANCE
COMPANY, et al.,
Plaintiffs,
v.
BED BATH & BEYOND, INC.
et al.,
Defendants.

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CIVIL ACTION NO.
1:12-CV-1265-RWS

ORDER
On March 31, 2014, the Court entered an Order [97] concluding that any
covered defense costs of Bed Bath & Beyond, Inc. (“BBB”) or Arch Insurance
Company (“Arch”) prior to the exhaustion of the policy limits under Plaintiffs’
policies would be split between the parties on a pro rata basis. The Court
allowed the parties to engage in negotiations in an effort to resolve the amount
of defense costs owed pursuant to the ruling, but the parties were unable to
reach agreement. The parties submitted a proposed briefing schedule [99] to the
Court based on their conclusion that “legal rulings from the Court are necessary

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to resolve the amount of defense costs owed.” (Request for Scheduling Order
[99] at 1.) The parties have briefed the legal issues, and the case is before the
Court for consideration. The Court will address all of the issues raised by the
parties. However, based on these rulings, the Court is unable, at this time, to
finally resolve the amount of defense costs owed. Because further development
of the record may be necessary, the Court has endeavored to provide as much
direction to the parties as possible. The hope is that these rulings will provide
sufficient direction to allow the parties to resolve the ultimate issue by
agreement.
Friedenberg Declaration
In support of its Initial Brief Regarding Defense Costs [104], Arch
submitted the Declaration of Michael R. Friedenberg (“Friedenberg”) [104-1].
Plaintiffs filed an objection [106] to the declaration. In his declaration,
Friedenberg states that he is employed by Arch as a Claims Account Manager.
His job duties include reviewing and evaluating payments to law firms retained
to defend insureds under Arch’s policies. In his capacity as a Claims Account
Manager, he has reviewed the legal bills of attorneys defending BBB and

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opines that all payments for the attorneys’ services were reasonable and
necessary.
Plaintiffs object to Friedenberg’s testimony as inadmissible hearsay.
Friedenberg relies on documents that are not in evidence to support his opinion.
Apparently, the actual bills are in the custody of a third-party administrator.
Plaintiffs assert that Friedenberg is offering testimony about the content of
those documents to prove the truth of the matter asserted in them. As such, the
testimony is hearsay. Because, he is not the custodian of the records,
Friedenberg cannot satisfy the conditions for qualifying the records as “records
of a regularly conducted activity.” Moreover, Friedenberg’s testimony involves
expert opinions, and he was never disclosed as an expert at any point during the
discovery process. Even if Friedenberg were qualified as an expert, he has
failed to provide the data on which he relies for his opinions.
In its response, Arch asserts that Friedenberg’s testimony is not hearsay
because he is simply testifying as to the total paid out as defense costs, and this
amount is within his personal knowledge. According to Arch, Friedenberg does
not purport to offer testimony about the truth of any matter asserted in the bills.
Also, Arch points out that inadmissible hearsay may be considered at the
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summary judgment stage if the court is satisfied that the statement can be
reduced to admissible form. Arch argues that Friedenberg’s opinions were not
offered as an expert, but are proper under Federal Rule of Evidence 701.
The Court does not doubt that Arch could reduce the evidence of
expenditures for defense costs to an admissible form. However, Friedenberg’s
opinion that the defense costs were reasonable and necessary is not admissible.
His opinion is based on his experience as a Claims Account Manager.
Experience and knowledge acquired in his field are necessary to qualify him to
offer that opinion. His opinion is not a “lay opinion” as contemplated by Rule
701. Friedenberg was not identified as an expert and has not been subjected to
an inquiry regarding his qualifications or the bases for his opinion. Thus,
Plaintiffs’ objection is SUSTAINED to the extent it challenges Friedenberg’s
opinion as to the defense costs being reasonable and necessary.
Arch bears the burden of proving that the expenses were reasonable and
necessary. Plaintiffs are not liable for all expenses paid, only those that are
reasonable and necessary. See St. Paul Fire and Marine Ins. Co. v. Valley Forge
Ins. Co., Case No. 1:06-CV-2074-JOF, 2009 WL 789612, at *11 (N.D.Ga.
March 23, 2009); Mutual Service Ins. Co. v. Frit Indus., Inc., 358 F.3d 1312,
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1323 (11th Cir. 2004); Avondale Shipyards, Inc. v. Emp’rs Mut. Liab. Ins. Co.,
458 F.2d 900, 902 (5th Cir. 1972). Without Friedenberg’s opinion testimony,
Arch is unable to establish the amount it is entitled to recover. Thus, while Arch
has established that it is entitled to recover defense costs from Plaintiffs, the
Court is unable to calculate those damages on the present record.
Legal Questions Posed by Parties
Though the Court is unable to calculate the damages on the present
record, the Court will address the legal questions posed by the parties to assist
them in trying to resolve this issue by agreement. The parties identified the
following as questions that the Court must resolve in order for the defense cost
issue to be decided:
(1) whether Plaintiffs are liable for defense costs that fall
within the deductible applicable under the Arch policy;
(2) when BBB elected coverage so as to make Plaintiffs
liable for defense costs;
(3) whether the fees of BBB’s coordinating counsel, SNR
Denton, constitute defense costs;

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(4) whether fees incurred in investigating a claim prior to suit
being filed are covered; and
(5) whether defense costs paid by Plaintiffs should be paid to
Arch or to BBB.
The Court will address each of these questions, in turn.
(1) Are Plaintiffs liable for defense costs that fall within the deductible
applicable under the Arch policy?
Allied Property and Casualty Insurance Company (“Allied”) takes the
position that it is not liable for any of BBB’s defense costs incurred as of May
3, 2012 that fall within the deductible applicable under the Arch policy. Allied’s
position is based on its contention that an “other insurance” clause in the Allied
policy “provides that it is excess to ‘valid and collectable insurance’ that is
‘issued by another insurer.’” (Reply Br. [111] at 4.) However, the Court has
already determined that the parties’ “other insurance” clauses cancel each other
out. (March 31 Order [97] at 26-30.)
“The method for allocation between insurers must be determined by the
provisions of the contracts they have made.” St. Paul Fire and Marine Ins. Co.
v. Valley Forge Ins. Co., Case No. 1:06-CV-2074-JOF, 2009 kWL 789612, at

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*12 (N.D. Ga. March 23, 2009). Under the terms of Plaintiffs’ contract, Allied
had the duty to defend its insureds and has not identified any deductible
applicable to that obligation under the terms of the contract. (Policy No. ACP
BPWC 7113714050 (“Subject Policy”) [75-3], at 58.) Therefore, Allied is liable
for defense costs incurred prior to BBB exhausting its deductible under the
Arch policy.
(2) When did BBB elect coverage so as to make Plaintiffs liable for defense
costs?
The Court is also required to determine when BBB elected coverage so as
to make Allied liable for defense costs. Allied asserts that “BBB did not
affirmatively elect coverage as an additional insured until December 14, 2011,
when it tendered the Price, Hubbard, Pariano, and Stone lawsuits to Plaintiffs
for coverage as an additional insured.” (Pls.’ Initial Br. [103] at 8.) Allied
asserts that prior to that time, “BBB asserted a contractual indemnity claim
against Napa only.” (Id. (emphasis in original).) BBB and Arch contend that
BBB elected coverage through its July 18, 2011 letter tendering the defense of
BBB to Napa Home & Garden, Inc. (“Napa”), which letter was provided to
Allied.

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The Court finds that this issue is governed by the holding in BBLMcCarthey, LLC v. Baldwin Paving Co., 285 Ga. App. 494, 499 (2007), in
which the Court of Appeals held that insurers had a duty to defend additional
insureds, even though the additional insureds failed to elect coverage by
forwarding a copy of the complaint to the insurers. The insurers had actual
notice of the underlying actions and had not demonstrated that they were
prejudiced by any alleged lateness of additional insureds’ election of coverage.
In the present case, Allied was on notice of the claims for which BBB seeks
coverage, and Allied has shown no prejudice arising from late notice of the
election of coverage. Therefore, the Court finds that Plaintiffs owe defense
costs incurred from July 18, 2011.
(3) Do the fees of BBB’s coordinating counsel, SNR Denton, constitute
defense costs?
SNR Denton was retained by BBB to serve as national coordinating
counsel based on the numerous lawsuits and claims filed around the country.
Plaintiffs oppose awarding fees billed by SNR Deaton because it never
appeared as counsel for BBB in any of the underlying lawsuits and its fees
include advice on matters other than the underlying suits. In response, Arch
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relies on the opinion of Friedenberg that the fees of SNR Denton were
reasonable and necessary to defend BBB. BBB relies on the holding in
Caterpillar, Inc. v. Century Indemnity Co., 2011 WL 488935 (Ill. App. 3rd
Dist., Feb. 1, 2011) in support of an award of fees for the work of national
coordinating counsel.
Recognizing that Defendants bear the burden of proof regarding the
reasonableness of the fees they seek to recover, the Court concludes that they
have failed to carry that burden. Based on the ruling on Plaintiffs’ Objection to
the Friedenberg, supra, his opinion is not sufficient to prove the reasonableness
of the fees. The Caterpillar decision is not binding authority, but even if it were,
it is distinguishable from the present case. In Caterpillar, the insurer had not
objected to the fees associated with the national coordinating counsel (“NCC”)
in the trial court. The trial court had only required the insurer to pay defense
costs that were approved by its own expert. The insurer challenged the fees
“because they were not ‘incurred’ in defense of an underlying action.” Id. at
*11. However, the insured offered testimony that the “NCC activities were
applicable to each and every case and they were legitimate defense costs
incurred . . . in the defense of the underlying [] claims.” Id. (internal quotations
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omitted).The insurer’s expert did “not indicate that he found NCC costs were
not viable expenses incurred in defense of the [] actions.” Id. In the present
case, Plaintiffs have objected to the fees of SNR Denton as a national
coordinating counsel and assert that SNR Denton did not defend the lawsuits.
Thus, SNR Denton is not in the same position as the NCC in Caterpillar.
Plaintiffs also question SNR Denton’s fees because fees are included for
“such wide-ranging matters as Napa’s bankruptcy case, BBB’s coverage claims,
non-litigated fuel gel claims, and other items not related to the defense of
liability suits involving fuel gel.” (Pls.’ Br. [103] at 10.) Fees related to Napa’s
bankruptcy case and BBB’s coverage claims are likely not recoverable.
Depending upon the actual work performed by SNR Denton, their fees
may or may not be recoverable, in whole or in part. The determination of this
issue will be based on the evidence concerning the actual work that was done.
At this point, the Court does not have sufficient evidence from which to make
this determination.
(4) Are covered costs limited to litigated claims?
The Allied Policy provides a “duty to defend the insured against any
‘suit,’” which is defined as “a civil proceeding in which damages because of . . .
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injury . . . to which this insurance applies” and includes “an arbitration” and
“any other alternative dispute resolution” in which covered damages are
alleged. (Subject Policy [75-3] at 66, 80.) Based on this policy language,
Plaintiffs assert that Defendants cannot recover any defense costs as to a claim
unless and until a lawsuit is filed as to that claim.
BBB relies on the holding in Liberty Mut. Ins. Co. v. Continental
Casualty Co., 771 F.2d 579, 586 (1st Cir. 1985) to support its claim of
entitlement to costs associated with investigating regardless of whether suit is
filed on the claim. Underlying the Liberty Mutual decision is the recognition
that the pre-suit work that was performed related to services that would have
had to be performed after suit was filed. Id. at 586. Also, the insurer had
wrongfully denied coverage. Id. at 580-81. Plaintiffs distinguish Liberty Mutual
based on the fact that it involved a wrongful denial of coverage and an existing
hazardous condition that needed to be addressed.
Acknowledging that Liberty Mutual can be distinguished on these
grounds, the Court is not convinced that Defendants’ claims should be limited
to services occurring after suit is filed. This approach ignores the reality of the
typical defense of claims, particularly claims that are based on a product that is
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likely to affect a number of potential plaintiffs. Allied’s own policy requires an
insured to notify it “as soon as practicable of an ‘occurrence’ or offense that
may result in a claim.” (Subject Policy [75-3] at 75.) The obvious purpose of
notification is so that Allied may move promptly to gather evidence and prepare
a defense in the event suit is filed. Work performed, even though no suit has
been filed, may well be reasonable and necessary. Further, as Arch points out,
“civil proceeding” is not defined in the Subject Policy. (Arch Brief [107] at7-8.)
The Court is unwilling to declare that fees for such services are, in all instances,
unrecoverable.
(5) Should recovered costs be paid to BBB or to Archer?
Allied had a duty to defend BBB as an additional insured under the
Subject Policy. (Subject Policy [75-3] at 58.) This obligation was not subject to
any deductible. On the other hand, BBB was subject to a deductible under the
Arch policy, and Arch incurred no expenses for defending BBB before May 3,
2012, because the deductible was not exhausted by that time. Arch asserts that
costs recovered pursuant to this action should be paid to it because BBB is not
entitled to recover its deductible prior to Arch recovering its expenditures.

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In support of its argument that the Arch policy does not require that the
deductible be paid by the insured and not a third party, BBB relies on cases
holding that unless a policy clearly states that the insured itself must satisfy a
self-insured retention limit (“SIR”), amounts obtained from third parties may
satisfy the SIR. See Nat’l Fire Ins. Co. of Hartford v. Federal Ins. Co., 843 F.
Supp.2d 1011, 1017 (N.D.Cal. 2012) (holding that when the “policy does not
clearly require the [insured] to satisfy the SIR out of its own pocket,” the SIR
can be satisfied by payments by others on its behalf); Continental Cas. Co. v. N.
Am. Capacity Ins. Co., 683 F.3d 79 (5th Cir. 2012) (holding SIR may be
satisfied by a third party on insured’s behalf).
In response, Arch notes that the authorities relied upon by BBB involve
SIRs and not deductibles. Citing Fireman’s Fund Ins. Co. v. TD Banknorth Ins.
Agency, Inc., 309 Conn. 449, 79 A.3d 36 (2013), Arch argues that an insured is
not entitled to recover its deductible payment before the insurer recovers any
sums. In Fireman’s Fund, the court addressed certified questions from the
Second Circuit Court of Appeals concerning the applicability of the make
whole doctrine to deductibles. The question arose in connection with a recovery
by an insurer and its insured in a subrogation action. The court concluded that
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to allow an insured to recover its deductible payment before the insurer is made
whole would result in a windfall to the insured. The court analogized to the
situation when there is a primary and an excess policy. If there is a recovery, the
excess level of insurance is entitled to recover before the lower level of
insurance can recover. By analogy, the court held thta the deductible, like the
lower level of insurance, can not be recovered until the insurer recovers.
The Court finds the present case is distinguishable from Fireman’s Fund.
The underlying claim in the present case was not a subrogation claim. BBB was
an additional insured under the Subject Policy, and Allied was obligated to
provide BBB a defense, at no cost to BBB. To allow BBB to recover a portion
of its deductible will not result in a windfall for BBB. BBB will simply receive
the benefit of its bargain with Napa that BBB be held harmless for any claims
for bodily injury arising out of the use of Napa’s Fuel Gel Products. Even if
BBB recovers, it will only be reimbursed half of its expenses. If Arch does not
recover, its obligations are not altered. It still receives the benefit of BBB’s full
deductible. Allowing Arch to recover rather than BBB would result in a
windfall for Arch. Under these circumstances, the Court finds that the equities
weigh in favor of BBB recovering any defense costs that are ultimately
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awarded. BBB will be entitled to one-half of the defense costs that the Court
finds to be reasonable and necessary from July 18, 2011 through May 3, 2012.
Conclusion
The parties are ORDERED to confer and attempt to agree upon a
schedule for proceeding with this case. If the parties are unable to agree upon a
schedule within 14 days of the entry of this Order, they shall request a
conference with the Court. If limited discovery is needed, the Court will allow
it. Ultimately, the Court expects the parties to submit for decision only those
fees for which Plaintiffs have specific objections.
SO ORDERED, this 4th day of November, 2014.

_______________________________
RICHARD W. STORY
UNITED STATES DISTRICT JUDGE

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