Paternostro et al v. Choice Hotels International Services Corp. et al

Filing 569

ORDER AND REASONS: ORDERED that Choice and CWI's 479 and 482 motions for joinder are GRANTED in that they adopt the arguments of Century Surety's motion for partial summary judgment. FURTHER ORDERED that Century Surety's 475 and 528 motions for partial summary judgment are DENIED. FURTHER ORDERED that AIG's 476 motion for summary judgment regarding the First AIG Policy is GRANTED. Signed by Judge Eldon E. Fallon on 6/3/2015.(Reference: ALL CASES)(blg)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

ANGELA PATERNOSTRO, ET AL.

CIVIL ACTION

VERSUS

NO. 13-0662

CHOICE HOTEL INTERNATIONAL SERVICES CORP.,
D/B/A/ CLARION INN AND SUITES, ET AL.

SECTION "L" (5)

THIS DOCUMENT RELATES TO:

ALL CASES

ORDER AND REASONS
Before the Court are three substantive motions: (1) Century Surety Company’s motion
for partial summary judgment to compel Merchants to reimburse and participate in the defense of
Century Wilshire (“CWI”)1 and Choice Hotels International (“Choice”). (Rec. Doc. 475); (2)
AIG Specialty Insurance Company’s (“AIG”)2 motion for summary judgment regarding
coverage (Rec. Doc. 476); and (3) Century Surety’s newest motion for partial summary
judgment regarding Choice Hotels’ status as an “additional insured” under the Century Surety
Policy. (Rec. Doc. 528). Having considered the parties’ briefs, the applicable law, and oral
argument on Century Surety’s “additional insured” motion, the Court now issues this Order and
Reasons.
I.

BACKGROUND
A.

Procedural Background

This action arises out of the alleged presence of Legionella and Pseudomonas aeruginosa
(that is, the causative agent of Legionnaires' disease) at the Clarion Inn and Suites Hotel (“the
Hotel”) in Covington, Louisiana. Plaintiffs allege that Defendant Choice was the franchisor of
1

For the sake of clarity, any reference to “CWI” in this Order encompasses its sole shareholder, Theordora Mallick,
who was brought into the litigation by Choice, which filed a third party complaint against Ms. Mallick individually,
jointly, and severally. (Rec. Doc. 182).
2
AIG was formerly known as Chartis Specialty Insurance Company, as noted on the pertinent insurance policies.

the Hotel, and Defendant CWI was the franchisee, owner, and operator of the Hotel. Initially,
several Plaintiffs brought this action in state court, both as individuals and as surviving heirs,
alleging that on December 4, 2012, decedent Russell Paternostro was exposed to Legionella
while attending a Rotary Club meeting at the Clarion Inn and Suites Conference Center
("Clarion"). CWI removed to this Court on the basis of diversity jurisdiction. Thereafter, this
Court consolidated the case with several other related cases which alleged similar factual
allegations. Plaintiffs then filed an amended complaint against the original Defendants and
various insurers, incorporating therein class allegations, (Rec. Doc. 94). Defendants filed
amended answers (Rec. Docs. 95, 98, 110, 140, 165, 177, 179, 200). Choice also filed
crossclaims against CWI and various insurers. (Rec. Docs. 182, 183, 185, 331). CWI filed a
crossclaim of its own against an insurer. (Rec. Doc. 293). Several insurers filed crossclaims of
their own. (Rec. Doc. 208, 291, 292).
B.

Factual Background

Plaintiffs include: (1) surviving relatives of the decedent, Russell Paternostro, specifically
his widow Angela Paternostro, and his children Robyn Ortego and Mercedes Paternostro; (2)
Gwen Newberry and Robert Newberry; (3) Marie Heeser; and (4) Jason Beleto. (Rec. Doc. 94).
Plaintiffs, individually and as class representatives, allege that they suffered injury because of
negligence of Defendants between December 1, 2011 and January 28, 2013. Putative class
representatives allege that they were registered guests and/or invitees at the Hotel between
January 2011 and December 2012 and that Defendants’ negligence caused Plaintiffs personal
injuries and medical treatment. Plaintiffs further alleged that this negligence caused or
substantially contributed to the death of Russell Paternostro.
According to Plaintiffs, Choice entered into a plan with CWI in December 2010 to
provide a proper dehumidification system to the Hotel’s hot tub and spa area. However, Plaintiffs
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say that Choice granted continuous waivers to CWI so that the dehumidification requirement
went unsatisfied, in spite of multiple inspections. Plaintiffs also allege that Choice and CWI
failed to properly disinfect the hot tub/spa system with a biocide. According to Plaintiffs, this
negligent maintenance and operation resulted in the amplified presence of Legionella and
Pseudomonas aeruginosa in the Hotel’s hot tub/spa system and thereafter spread through the
Hotel, causing injury to Plaintiffs and putative class members. Plaintiffs allege that Louisiana
state public health officials on January 22, 2013 warned Defendants that hot tub samples from
the Hotel demonstrated a high risk of Legionnaires disease.
Choice and CWI deny liability, including causation. (Rec. Docs. 95, 110). Choice further
argues, inter alia, that it was the franchisor only for the Clarion Inn & Suites brand and did not
own or operate the Hotel. It also states that it had no involvement in the use, opening, or closing
of the hot tub/spa. Choice moved for dismissal of all claims against it on the grounds of
insufficient control. After oral argument, the Court dismissed Plaintiffs’ vicarious liability and
apparent agency claims against Choice but denied summary judgment on the issue of Choice’s
independent liability. (Rec. Doc. 471).
As part of this litigation, Plaintiffs sued various insurers of Choice and CWI, pursuant to
the Louisiana Direct Action Statute. Both primary and excess liability insurers have been made a
part of this litigation.
C.

November 17, 2014 Order and Reasons on Preliminary, Dispositive Motions

On November 17, 2014, the Court issued its Order and Reasons on twenty preliminary
dispositive motions. (Rec. Doc. 422). In pertinent part, the Court ruled that (1) at this stage, it
would not dismiss the Beleto claims for prescription; (2) some of the insurance policies
unambiguously excluded coverage for bacteria such as Legionella and Pseudomonas aeruginosa,
while other policies, at this stage, did not unambiguously exclude coverage; (3) the
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communicable disease exclusion of the Merchants Policy did not, at this stage, unambiguously
exclude coverage; and (4) Louisiana law generally recognizes a broad duty to defend and the
Court declined to dismiss crossclaims against Allied World based on Allied’s duty to defend
arguments.
D.

Choice Hotels – Control

In January 2015, the Court heard oral argument on Choice Hotels’ motion for summary
judgment on the issue of control. Specifically, Choice argued that (1) it could not be held
vicariously liable for the actions of its independent contractor, CWI, and (2) it could not be found
independently liable under the facts presented. The Court granted Choice’s motion in part, as to
the claims of vicarious liability, but otherwise denied the motion, ruling that Plaintiffs’ claims of
independent negligence were plausible at this stage in the litigation.
E.

February 4, 2015 Order and Reasons

In a February 4, 2015 Order and Reasons, the Court next considered a number of motions
related to the November 2014 Order and Reasons, some of which requested clarification on
several points. First, the Court clarified the scope of its ruling on the duty to defend: the Court’s
November 2014 Order and Reasons only considered the “duty to defend” issue in the specific
context of Allied World’s crossclaims. As the Court stated in its February 2015 Order and
Reasons: “the Court declined to dismiss crossclaims against Allied World, concluding that at this
stage in the litigation it was premature to make a final determination on the scope of Allied
World’s duty to defend.” The Court’s discussion on the duty to defend did not establish, or
preclude, any ruling on the issue as applied to other insurers in this litigation.
Second, the February Order and Reasons denied motions to reconsider from other parties,
who largely were rehashing prior arguments. Third, the Court denied several motions on policy
exclusionary provisions because those motions were rendered moot by the November 17 Order
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and Reasons. Fourth, the Court denied motions for partial 54(b) judgments, which had been filed
by parties dismissed from the litigation. The Court ruled that “it would be inefficient for the
Court of Appeals to consider such substantially similar coverage issues in a piecemeal fashion.”
II.

PRESENT MOTIONS
The following motions are presently before the Court:
1.
Century Surety’s motion for partial summary judgment to compel
Merchants
Century Surety again moves for partial summary judgment to compel Merchants to

reimburse and participate in the defense of CWI and Choice. (Rec. Doc. 475). Choice and CWI
support Century Surety’s motion. (Rec. Docs. 479, 482). In support of the motion, movants argue
that the Court’s November 2014 ruling, which in pertinent part denied Merchant’s motion to
dismiss, indicates that Merchants has a duty to defend pursuant to the Merchants Policy. Century
Surety argues that the Court’s November 2014 ruling indicates that the Merchants Policy
provides coverage. The parties thus argue that Merchants is obligated to participate in the
defense of Choice.
Merchants opposes, asserting that Century Surety’s motion is ambiguous as to the relief it
seeks and that the Court has not found that Merchants has a duty to defend. (Rec. Doc. 480).
Merchants argues that there is a genuine issue of material fact on the issue because the Court has
ruled that it is unclear whether the Merchants Policy provides coverage. Therefore, Merchants
argues, Century Surety’s motion should be denied.
Century Surety replies, by leave of Court. (Rec. Doc. 487).
2.

AIG’s motion for summary judgment

AIG moves for summary judgment regarding coverage on its Choice Hotels policy with a
Policy Period from January 1, 2010 to January 1, 2013, (“the First AIG Policy”). (Rec. Doc. 476-

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6).3 AIG argues that Choice did not meet the notice provisions of the First AIG Policy.
Specifically, AIG argues that under the “Acquired Properties Endorsement” of the First AIG
Policy, coverage is excluded for any loss at any property of which Choice first entered a
franchise agreement after policy inception, unless Choice provides notice within one year of
execution of the franchise agreement. According to AIG, Choice did not provide notice of the
execution of the Franchise Agreement with CWI (“the Franchise Agreement”) until August 2014
– three and a half years after execution. Therefore, AIG argues, the Court should dismiss all
Plaintiffs’ claims asserted against the First AIG Policy.
Choice opposes. (Rec. Doc. 499). First, it argues that the Choice Hotels policy with a
Policy Period from January 1, 2013 to January 1, 2016 (“the Second AIG Policy”) clearly
provides coverage here, thus dismissal of all claims against AIG would be inappropriate. Choice
asserts that the language of the Acquired Properties Endorsement in the Second AIG Policy is
less restrictive than the exclusion in the First AIG Policy and provides coverage. Second, Choice
argues that the First AIG Policy also provides coverage. Specifically, Choice argues that AIG
waived any coverage defense under the Acquired Properties Endorsement because AIG failed to
notify Choice of its coverage position and failed to obtain information about franchise properties.
Choice notes that AIG sent its reservation of rights letter well beyond a “reasonable time.”
Because AIG waived the coverage defense, Choice argues, the First AIG Policy provides
coverage and AIG’s motion should be denied.
Plaintiffs also oppose AIG’s motion. (Rec. Doc. 503). First, they adopt Choice’s
opposition. Second, Plaintiffs argue that there was a continuation of coverage from the First AIG
Policy, extending the end of the First AIG Policy from January 1, 2013 to June 1, 2013 and
3

In its reply brief, AIG clarifies that this motion for summary judgment only addresses the First AIG Policy and
does not seeks dismissal of any claims asserted against the Second AIG Policy. AIG reserves its right to later
address claims asserted against the Second AIG Policy.

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retroactive endorsements dating back to January 1, 2010, one of which expressly provided
coverage for franchisees of Choice. At the very least, Plaintiffs argue, these are genuine issues of
material fact that preclude granting AIG’s motion for summary judgment.
AIG replies, by leave of Court. (Rec. Doc. 509). First, AIG clarifies that its motion only
seeks dismissal of claims sought under the First AIG Policy and that any arguments surrounding
the Second AIG Policy are irrelevant. Second, AIG rejects Plaintiffs’ continuation argument,
asserting that the “continuation” endorsements cited by Plaintiffs are actually part of the separate
and distinct Second AIG Policy. Third, AIG argues that it did not waive any coverage defenses.
3.
Century Surety’s motion for partial summary judgment regarding
Choice’s status as an “additional insured”
Century Surety again moves for partial summary judgment, seeking a dismissal of
Choice’s crossclaim against Century Surety and seeking a declaration that Choice does not
qualify as an “additional insured” under the Century Surety Policy, notwithstanding that Choice
is named as an “additional insured” in the Policy. (Rec. Doc. 528). Century Surety notes that the
only remaining claims against Choice are solely for Choice’s independent liability, thus under
the policy language – that Choice is an insured “with respect to [its] liability as grantor of a
franchise to [CWI]” – Choice cannot be an additional insured for such claims.
CWI, Choice, and AIG oppose, arguing that that the phrase “with respect to [its] liability
as grantor of a franchise to [CWI]” encompasses all potential liability of Choice, including
Choice’s independent liability. (Rec. Docs. 540, 541, 544). Thus, they argue, Century Surety’s
motion should be denied.

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III.

ANALYSIS
The Court will discuss the present motions in turn.
A.
Century Surety’s motion for partial summary judgment to compel
Merchants
The Court will deny Century Surety’s motion for partial summary judgment to compel

Merchants to reimburse and participate in the defense of Defendants. A ruling in Century
Surety’s favor on this issue would be premature considering that the Court’s November 2014
Order and Reasons does not constitute a ruling that the Merchants Policy provides coverage.
Rather, as the Court took pains to explain in its November 2014 Order and Reason and again in
its February 2015 Order and Reasons, the Court’s denials of the motions to dismiss on the basis
of coverage do not constitute a definitive ruling that the policies in question provide coverage.
Just as the Court ruled that it would be premature to make a final determination as to Allied
World’s duty to defend where it could not yet make a final determination regarding coverage
under Allied World’s policies, the Court likewise concludes that it cannot rule on Merchant’s
duty to defend where the question of coverage under the Merchants Policy is still unclear. The
questions of reimbursement and contribution are thus unclear at this stage of the litigation. The
Court will address those questions at the appropriate time. As there are genuine issues of material
fact surrounding coverage, Century Surety’s motion for partial summary judgment will be
denied.
B.

AIG’s motion for summary judgment
1.

Governing contractual provisions

To assess AIG’s motion that the First AIG Policy does not provide coverage here, the
Court must first determine which contractual provision governs. The Acquired Properties
Endorsement of the First AIG Policy reads:

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It is hereby agreed that Section III. EXCLUSIONS, Paragraph K. ACQUIRED
PROPERTIES is deleted in its entirety and replaced with the following:
[This insurance does not apply to Loss . . .]
K. ACQUIRED PROPERTIES:
Arising from Pollution Conditions at any property the Insured first acquires,
leases, manages, rents, maintains a franchise agreement or occupies after the
Inception Date, unless such coverage for such property is specifically scheduled
on this Policy by endorsement.
However, this Exclusion shall not apply to:
Any real property newly owned, leased, rented, franchised or occupied by the
Insured during the Policy Period and after the Inception Date, provided:
...
b. Before or within one calendar year from the execution of the franchise
agreement for such property(s), the Named Insured provides notice of the
execution of the franchise agreement in writing to the Company’s underwriter for
all newly franchised locations . . .
(Rec. Doc. 476-6 at 32) (italics added). The parties agree that the Acquired Properties
Endorsement, with the above-noted language, is part of the First AIG Policy. The parties dispute,
however, whether the later “Broad Named Insured Endorsement,” effective June 1, 2013,
effectively supersedes the above-mentioned Acquired Properties Endorsement. (Rec. Doc. 503-2
at 46). The Broad Named Insured Endorsement specifically provides coverage to Choice
franchisees without the same notice requirements of the above-mentioned Acquired Properties
Endorsement. Although the parties do not contest the language of the Broad Named Insured
Endorsement, they dispute which policy it is a part of. AIG contends that the Broad Named
Insured Endorsement is not part of the First AIG Policy but rather is part of the Second AIG
Policy. Thus, AIG argues, it does not supersede the Acquired Properties Endorsement of the First
Policy, but rather is part of the Second AIG Policy. In contrast, Plaintiffs argue that the Broad
Named Insured Endorsement is a continuation of the First Policy.
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To determine whether the Broad Named Insured Endorsement supersedes the abovementioned Acquired Properties Endorsement, the Court turns to the policy language. Under
Louisiana law, the terms of the parties’ contract, including an insurance contract, form the law
governing their dispute. La. Civ. Code arts. 1901, 1912. On the one hand, the First and Second
AIG Polices have the same Policy Number: 15450516. Even so, the Declarations Page of the
Second AIG Policy lists the “Policy Period” as June 1, 2013 to June 1, 2016. The Second AIG
Policy later contains a “Retroactive Date Endorsement.” (Rec. Doc. 503-2 at 40). In pertinent
part the Retroactive Date Endorsement reads:
[AIG agrees] [t]o pay on behalf of the Insured, Loss that the Insured is legally
obligated to pay as a result of Claims for Bodily Injury, Property Damage or
Clean-Up Costs resulting from Pollution Conditions that commenced on or after
the Retroactive Date [January 1, 2010], provided such Claims are first made
against the Insured and reported to the Company, in writing, during the Policy
Period, or during the Extended Reporting Period if applicable. (emphasis added).
Notably, although this Endorsement extends the Retroactive Date for an injury dating back to
January 1, 2010, it does not does make retroactive the Policy Period of the Second AIG Policy,
but rather specifically requires that the demand be made during the listed Policy Period, which is
June 1, 2013 to June 1, 2016. As this Policy Period is distinct from that in the First AIG Policy,
and both Policies have different contractual language, the Court concludes that the First and
Second AIG Policies are indeed separate and distinct contracts. The Court rejects Plaintiffs’
“continuation” arguments regarding the January 1, 2013 to June 1, 2013 extension. The Broad
Named Insured Endorsement does not constitute “continuation” of coverage, as Plaintiffs argue.
Under the unambiguous policy language of the Second AIG Policy, it does not follow that the
Broad Named Insured Endorsement, which is part of the Second AIG Policy, supersedes the First
AIG Policy. Accordingly, the language of the Acquired Properties Endorsement of the First AIG
Policy governs the instant dispute.
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2.

Waiver of the First AIG Policy’s notice requirement

Having determined the governing policy language, the Court now turns to the question of
whether Choice failed to comply with the terms of the Acquired Properties Endorsement such
that the First AIG Policy does not provide coverage to a Loss at the Hotel. Under the plain
language of the Acquired Properties Endorsement, Choice must give notice within one year of
execution of any new franchise agreement in order for the franchised property to have insurance
coverage. Although it is undisputed that Choice (1) had not executed the Franchise Agreement
until after the inception date of the First AIG Policy and (2) did not notify AIG of the Franchise
Agreement with CWI until after the one-year deadline, the parties vigorously dispute whether
AIG waived this notification requirement.
The issue of waiver under the First AIG Policy does not involve any genuine issue of
material fact. Rather, the plain language of the First AIG Policy resolves the issue. It is
undisputed that the First AIG Policy imposes a one-year notice requirement and that Choice did
not comply with that one-year deadline. Although Choice and Plaintiffs argue that AIG waived
this coverage defense by waiting more than a reasonable time to assert it, the plain language of
the First AIG Policy disposes of this argument. The First AIG Policy does not contain any such
waiver provision, nor does it impose any duty upon AIG to affirmatively inquire about such a
Franchise Agreement. Rather, the First AIG Policy imposes upon Choice the duty of notifying
AIG within one of any Franchise Agreement in order to assert coverage for that Franchise
Agreement. It is undisputed that Choice did not timely comply with the notice provision.
Therefore, summary judgment is appropriate regarding the First AIG Policy. The First AIG
Policy does not provide coverage to a Loss at the Hotel.

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C.
Century Surety’s motion for partial summary judgment regarding Choice’s
status as an “additional insured”
The Court will deny Century Surety’s motion which seeks a declaration that Choice does
not qualify as an “additional insured” under its Policy. The policy language reads:
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT
CAREFULLY.
ADDITIONAL INSURED – GRANTOR OF FRANCHISE
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART
SCHEDULE
Name Of Person or Organization
CHOICE HOTELS INTERNATIONAL, INC.
C/O MARSH, A SERVICE OF SEABURY & SMITH INC
PO BOX 14404
DES MOINES, IA 50306-3404
(If no entry appears above, information required to complete this endorsement
will be
shown in the Declarations as applicable to this endorsement.)
WHO IS AN INSURED (Section II) is amended to include as an insured the
person(s) or organization(s) shown in the Schedule, but only with respect to their
liability as grantor of a franchise to you. [italics added].
The contract language cited by Century Surety does not unambiguously exclude Choice
as being an “additional insured” for claims of its independent liability as a franchisor. Plaintiffs’
claims against Choice allege that Choice is liable for Choice’s independent responsibilities as a
grantor of a franchisor. For example, Plaintiffs claim that Choice was negligent in failing to
comply with Choice’s responsibilities under the Franchise Agreement, such as Choice’s failure
to ensure compliance with the Product Improvement Plan. Such an allegations falls within the
“grantor of a franchise” language. Hypothetically, Century Surety’s motion might be grantable if
the allegations were entirely outside the scope of the Choice’s role as franchisor. For example, if
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a Choice employee injured a hotel patron with a vehicle while the Choice employee was out to
lunch, perhaps Century Surety’s motion would have merit. But here, the allegations assert
Choice’s liability as a franchisor, including Choice’s independent liability as a franchisor.
Nothing in the policy language distinguishes between vicarious liability and independent
liability, as Century Surety argues. Therefore, the Policy language does not unambiguously
exclude coverage for claims of independent franchisor liability.
The case law cited by Century Surety bolsters this reasoning. For instance, in Edwards v.
Brambles Equipment Servs., 75 Fed.App’x 929, 932 (E.D. La. Sept. 16, 2003) (Fallon, J.), the
Court ruled that a party was not covered as an “additional insured” for independent negligence
because the policy language specifically excluded coverage for liability of the party’s
“independent acts or omissions.” Here, there is no evidence of any such exclusion. For these
reasons, the Court will deny Century Surety’s motion.
IV.

CONCLUSION
For the foregoing reasons, accordingly,
IT IS ORDERED that Choice and CWI’s motions for joinder, (Rec. Docs. 479, 482) are

GRANTED in that they adopt the arguments of Century Surety’s motion for partial summary
judgment.
IT IS FURTHER ORDERED that Century Surety’s motions for partial summary
judgment, (Rec. Doc. 475, 528), are DENIED.
IT IS FURTHER ORDERED that AIG’s motion for summary judgment regarding the
First AIG Policy, (Rec. Doc. 476), is GRANTED.
New Orleans, Louisiana, this 3rd day of June, 2015.

________________________________
UNITED STATES DISTRICT JUDGE
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