The Peerless Insurance Company, a Corporation, Appellant, v. Travelers Insurance Company, a Corporation, Appellee, 393 F.2d 636 (9th Cir. 1968)

The Peerless Insurance Company, a corporation, appellant herein, filed an action in the Superior Court of the State of Arizona against Travelers Insurance Company, a corporation, appellee herein, for a declaratory judgment adjudging and declaring the appellee was obligated under its insurance policy theretofore issued to the Shell Oil Company to pay any judgment which might be affirmed or rendered against Shell in an action theretofore brought against Shell by one Jean Collar. By reason of diversity the action was properly transferred to the United States District Court for the District of Arizona. The action was there tried by the court without a jury upon stipulated facts and exhibits. The district court made findings of fact and conclusions of law, and rendered judgment in favor of the appellee. A timely appeal was taken to this court which has jurisdiction under 28 U.S.C. § 1291. We affirm.

We shall set out certain pertinent facts which have been agreed to by the parties. Jean Collar was injured and damaged as a result of the ignition of liquid petroleum gas manufactured by Shell Oil Company. The gas was sold and distributed by Shell to Butane Corporation (Butane), and sold at retail by Tate & Hobart Gas & Equipment Company (Tate) to Jean Collar. Prior thereto Butane had entered into a purchasing agreement with Shell in which they had agreed to purchase from Shell certain quantities of liquefied petroleum gas. The following clause was part of that agreement:

11. Indemnity: Buyer shall indemnify and hold Shell harmless from and against any and all liability for loss of or damage to property of whatsoever kind or for injury to or death of any person or persons arising out of or in any way connected with the storage, handling, distribution, sale or use of gas hereunder.

Jean Collar filed a complaint for damages in the Arizona Superior Court naming as defendants Shell, Butane, and Tate. The complaint alleged that Tate had negligently delivered the gas to her residence, thereby causing a gas leak which resulted in an explosion causing injury to both her person and her property. It also alleged that Shell and Butane had been negligent in the selection, supervision and training of the distributor of the gas (Tate). When service was made upon Shell, it, through its insurer, Travelers (appellee herein), tendered the defense of the suit to Butane in accord with the above set out agreement of indemnity. Pertinent portions of this letter are set out in the margin.¹ 

Butane turned this letter over to Peerless, its insurer (appellant herein), who forwarded it, together with a copy of the complaint and summons served on Butane and Tate, to its attorneys. Peerless also requested an opinion from its attorneys as to the effect of the indemnity agreement on this litigation. In response thereto, these attorneys, on December 17, 1958, sent a letter to Peerless in which, after setting out the provision of the indemnity agreement, stated, "It is our conclusion that under such paragraph it is the duty of and obligation of Butane Corporation to defend such action." In this letter the attorneys also advised Peerless that they would answer for Shell in the Collar litigation.

On January 13, 1959, the Peerless attorneys wrote to Travelers advising it that they had entered an appearance in the action on behalf of Shell Oil Company, and that they had notified Peerless of this action. Some time thereafter — the record does not show exactly when — the Peerless attorneys took the deposition of Jean Collar and forwarded a copy of that deposition to Travelers. On February 25, 1959, Travelers returned the deposition with a letter which contained the following statement:

"Inasmuch as the defense of this matter, on behalf of Shell Oil Company, is being handled under the Hold Harmless agreement by Peerless Insurance Company, we feel that any comments as to the deposition itself, or any possible settlement, would have to come from that source."

Thereafter, the Peerless attorneys were successful in having the complaint dismissed as to Shell and Butane. On March 13, 1959, the attorneys wrote a letter to Peerless advising of this action. A copy of this letter was also sent to Travelers.

After this dismissal Jean Collar filed an amended complaint, naming the same parties as defendants. On March 27, 1959, the attorneys for Peerless wrote a letter to Peerless, and sent a copy to Travelers, advising that this amended complaint had been filed by Jean Collar. This letter, copy of which is set out in the margin,²  called attention to the fact that in the amended complaint an additional element of negligence had been introduced, to wit, the failure to odorize the gas. On March 31, 1959, Travelers advised Shell of the receipt of this letter and of its contents.

There was no further correspondence between the parties for over a year and a half, when, on November 14, 1960, the Peerless attorneys again wrote Travelers. This letter, a copy of which is set out in the margin,³  advised Travelers that the case had been tried commencing September 26, 1960; that the court had directed a verdict for Tate and Butane; that the sole issue presented to the jury was the question of the negligence of Shell in failing to odorize the liquid petroleum gas; that the jury had rendered a verdict against Shell in the amount of $30,000. The letter further advised that, in the opinion of the Peerless attorneys, the indemnity agreement did not cover this liability since it was predicated on the sole negligence of Shell. This was the first time that Peerless had indicated the possibility of non-coverage.

Travelers wrote back stating that it did not believe Shell was liable, and ordering Peerless to take whatever steps were necessary to protect Shell's interests. Peerless and Travelers then entered into an agreement in which the status quo would be maintained even though Peerless would prosecute the appeal for Shell. Peerless did so, lost the appeal, and paid the judgment of $30,000.00 to Collar.

Peerless then brought this action for declaratory judgment against Travelers. Peerless sought a judicial interpretation of the indemnity agreement between Shell and Butane which would show that it did not cover this situation, and that therefore Travelers must reimburse Peerless the monies paid over to Collar. Travelers answered that Peerless was estopped from now denying coverage under the indemnity agreement by reason of its assumption of the defense of the Collar litigation without any reservation of rights.

The district court did not give Peerless the judicial interpretation it sought, but rather held that Peerless was estopped from denying coverage because it had unconditionally accepted the tender of defense made by Shell and Travelers. The court relied upon the rule of estoppel in insurance cases such as Pendleton v. Pan American Fire and Casualty Co., 317 F.2d 96 (10th Cir. 1963), where the court stated:

" [W]e think this case is controlled by the long established rule that a liability insurance carrier, which assumes and conducts the defense of an action brought against its insured with knowledge of a ground of forfeiture or noncoverage under the policy, and without disclaiming liability or giving notice of a reservation of its right to deny coverage, is thereafter precluded in an action upon the policy from setting up the ground of forfeiture or noncoverage as a defense. In other words, the insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert the defense of noncoverage. [citations omitted]" 317 F.2d at 99.

We appreciate that an indemnity provision is in some instances viewed in a different light than an insurance contract. E. g., Union Pacific R.R. v. Bridal Veil Lumber Co., 219 F.2d 825, 833 (9th Cir. 1955). However, under the circumstances of this case we feel that the principle of estoppel established in the insurance cases should apply.

In Pendleton, supra, the court, after pointing out that the insurance contract there in question did not provide coverage for the accident which occurred, stated —

"The insurer, after making a thorough investigation of the explosion and with full knowledge of the contents of the insurance policy, including the endorsements attached thereto, and of the charges of negligence against Pendleton in the state court suits, undertook to, and did, assume complete control of his defense in those suits. It did not at any time notify appellant that it was reserving the right to later contest coverage and it made no attempt to make a non-waiver agreement with him." 317 F.2d at 100.

In the instant case Peerless assumed complete defense of the action with knowledge of the claims of the plaintiff therein as to the alleged negligence of Shell, made no claim of a reservation of rights, proceeded to prepare the case for trial and tried it. There was no correspondence between Peerless and Travelers which indicated any possibility of non-coverage until some six weeks after the trial when Peerless informed Travelers that the two parties to the action which it insured had been exonerated, and that the entire liability had been placed on Shell. We think this is a clear case where the doctrine of estoppel should prevent any recovery by Peerless.

Judgment affirmed.