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Steadfast Insurance Co. v. DBI Services, LLC

Superior Court of Delaware

June 24, 2019

STEADFAST INSURANCE COMPANY, Plaintiff,
v.
DBI SERVICES, LLC, Defendant.

          Submitted: March 7, 2019

         Upon Defendant DBi Services, LLC 's Partial Motion for Summary Judgment, GRANTED.

         Upon Plaintiff Steadfast Insurance Company's Cross-Motion for Summary Judgment, DENIED.

          Thaddeus J. Weaver, Esquire, Dilworth Paxson LLP, Wilmington, Delaware, Adam M. Smith, Esquire (pro hac vice) (argued), Coughlin Duffy LLP, Morristown, New Jersey, Attorneys for Plaintiff, Steadfast Insurance Company.

          Jennifer C. Wasson, Esquire, Carla M. Jones, Esquire, Wilmington, Delaware, Stephen S. Asay, Esquire {pro hac vice) (argued), David L. Beck, Esquire, Pillsbury Winthrop Shaw Pittman LLP, Washington, District of Columbia, Attorneys for Defendant, DBi Services, LLC.

          MEMORANDUM OPINION AND ORDER

          Paul R. Wallace, Judge.

         I. INTRODUCTION

         The issue before the Court is whether Plaintiff Steadfast Insurance Company has a duty to defend and/or indemnify Defendant DBi Services, L.L.C., [1] under a Contractor's Protective Professional Indemnity and Liability Insurance Policy (the "Policy").

         The Policy between Steadfast and DBi insured DBi's business operations from November 1, 2016 to November 1, 2017.[2] During that period, DBi was fulfilling its duties under an asset maintenance contract with the Florida Department of Transportation (the "FDOT Contract").[3] Under the terms of the FDOT Contract, DBi was to maintain lane delineators along the Interstate 95 corridor in Miami-Dade County.[4]

         Flexstake, Inc., and Orafol Americas, Inc., filed separate lawsuits in the Southern District of Florida against DBi (collectively, "Underlying Actions") alleging, among other things, that DBi installed "counterfeit" delineator posts when performing its services for FDOT and passed those delineators off as Flexstake delineators.[5] In pursuit of defense and indemnity, DBi tendered the Underlying Actions to Steadfast who subsequently denied both submissions.[6] DBi then sent Steadfast a letter explaining why the Policy was indeed triggered by the Underlying Actions.[7] In response, Steadfast filed this action against DBi seeking a declaratory judgment that Steadfast has no obligation under the Policy to defend or indemnify DBi in the Underlying Actions.[8] DBi has moved for partial summary judgment as to Steadfast's duty to defend, [9] and Steadfast has moved for summary judgment as to the duty to defend and to indemnify.[10]

         Both parties have moved for summary judgment, asking the Court to declare the extent of Steadfast's obligation to defend the Underlying Actions. Steadfast argues that it has no obligation to defend or indemnify because: (1) the factual allegations of the complaints in the Underlying Actions do not come within the insuring agreement of the Policy; and (2) the Policy "clearly excludes any claims arising out of the design or manufacture of any goods or products which are sold or supplied by DBi."[11] DBi contends that the Underlying Actions trigger Steadfast's duty to defend because they relate to DBi's Professional Services and "do not fall solely and entirely within a policy exclusion."[12]

         II. FACTUAL AND PROCEDURAL BACKGROUND[13]

         A. DBi's Steadfast Insurance Policy

         The Policy contains a section stating, in relevant part, that Steadfast has, "the right and duty to defend . . . any 'Professional Liability Claim' seeking 'Damages' to which Coverage Part A of this insurance applies."[14] A "Professional Liability Claim" includes "any demand received by [DBi] seeking 'Damages' for 'Professional Services' and alleging liability or responsibility on [DBi's] part or on the part of any entity for whom [DBi] is legally responsible."[15] "Damages" is defined as "the monetary amounts for which [DBi] may be held legally liable, including sums paid as judgments, awards, or settlements, and related 'Professional Liability Claim Expenses' . . . ."[16]

         Of particular interest to the parties' motions is the interpretation of three Policy provisions. One of the provisions in dispute defines which services performed by DBi meet the definition of "Professional Services" and thus are covered by the Policy. The Policy defines "Professional Services" as "those services that [DBi] ... is qualified to perform for others in [its] capacity as an architect, engineer, landscape architect, inspector, land surveyor or planner, [or] construction manager. . . ."[17] The other two disputed terms are listed under "Exclusions" within the Policy. The specific language of these sections provides:

This insurance does not apply to "Damages" or "Losses" based upon or arising out of:
the design or manufacture of any goods or products which are sold or supplied by [DBi] ... or others under license from [DBi];
any dishonest, fraudulent, criminal, intentional or malicious act, error or omission or those of a knowingly wrongful nature, except that this exclusion shall not apply to an 'Insured' who did not commit, participate in, or have knowledge of such conduct. . . .[18]

         B. The Underlying Florida Suits Against DBI

         Under the FDOT Contract, DBi was required to maintain all assets-including the service or replacement of damaged or missing delineators-within FDOT's right-of-way in Miami-Dade County along I-95.[19] The particular delineator relevant to this action is manufactured by Flexstake and consists of a base, a vertical plastic post affixed with retroreflective sheeting material manufactured by Orafol ("Flexstake Post"), and a hinge to connect the post to the base (collectively, "Flexstake Delineator").[20] Flexstake Delineators were installed on I-95 at the start of the FDOT Contract.[21] But they regularly failed shortly after installation and required frequent replacement.[22] Due to the significant expense and hazard occasioned by these frequent replacements, FDOT began to look for more appropriate delineators for use in the 1-95 express lane.[23] Through research and testing, FDOT identified new durability specifications for a delineator to qualify for its Approved Product List ("APL").[24] As a result, Flexstake Delineators were no longer on FDOT's APL as they did not meet the new FDOT specifications.[25]

         In August of 2016, the new specifications were incorporated into a supplement to the FDOT Contract with DBi ("FDOT Supplement").[26] While the FDOT Supplement provided a more detailed explanation of what replacement delineators should be used, neither the FDOT Contract nor the FDOT Supplement named a specific manufacturer to provide a particular delineator.[27] Seeing as the Flexstake Delineators were unavailable for further use on 1-95, DBi replaced the failed Flexstake Posts with posts manufactured by a third party ("Generic Posts").[28] The Underlying Actions allege that the Generic Posts contained features designed to replicate Flexstake Posts and Orafol Sheeting and that DBi installed the Generic Posts onto existing Flexstake Delineator bases and hinges.[29] The Underlying Actions seek damages against DBi for producing and installing the allegedly counterfeit Flexstake Delineators with the aid of a supply chain.[30]

         i. The Flexstake Action

         Flexstake manufacturers highway safety products; the Flexstake Delineator is one of its products.[31] In its complaint, Flexstake asserted three separate causes of action against DBi ("Flexstake Complaint"). The Flexstake Complaint contended that "DBI began producing counterfeit posts, with some containing counterfeit sheeting, and having them installed as part of scheduled replacements of the high performance delineators required under the [FDOT Contract]."[32] The Flexstake Complaint asserted that DBi provided a Flexstake Post as a model to a third-party manufacturer that produced the Generic Posts. DBi then purchased and installed those Generic Posts to meet its duties under the FDOT Contract.[33] The Flexstake Complaint further alleged that these "counterfeit posts" were "falsely billed to the State of Florida under guise of being [Flexstake Posts] when they were not" and were subsequently used for the testing that led to FDOT's updated delineator specifications.[34] Flexstake contended that this misrepresentation of Flexstake Posts resulted in the State of Florida disqualifying the Flexstake Posts for use on Florida express lane highway projects, and that the Generic Posts are a misappropriation of Flexstake's intellectual property.[35] Flexstake claimed to have suffered damages that "include, but are not limited to, loss of future business/contracts from the State of Florida, dilution and/or diminution of the value of its trademark and patented materials, loss in reputation, and business income."[36]

         In November 2018, the Flexstake Actions after the federal court granted DBi's motion for summary judgment.

         ii. The Orafol Action

         Orafol manufactures graphic products, reflective materials and adhesive tape systems for use in various traffic projects throughout the country.[37] One of its products is Orafol Sheeting, a proprietary retroreflective material placed on flexible delineator posts commonly used in highway maintenance projects.[38]

         Orafol asserted nine separate causes of action against DBi and four other defendants; all are largely based on the same set of facts recited in the Flexstake Complaint. The Orafol Complaint alleged that DBi provided a sample Flexstake Post affixed with Orafol Sheeting to a third party. Supposedly, that manufacturer then, along with other named entities, produced "counterfeit delineators" with "counterfeit" Orafol Sheeting. And DBi purchased and began installing those counterfeits on I-95.[39] The Orafol Complaint claimed that these acts violated federal and state trademark laws associated with the procurement, distribution, and sale of counterfeit versions of a proprietary reflective sheeting product.[40]

         Orafol believed that "DBi as the procuring party and installer knew or should have known of the product's status as a knock-off and of the infringement of ORAFOL's intellectual property."[41] Orafol requested relief including: "the costs of appropriate corrective advertising"; "the amount of actual, consequential and/or compensatory damages proved by [Orafol]"; "statutory damages"; and "augmented and exemplary damages."[42] All claims against DBi by Orafol were settled in August 2018.[43]

         III. STANDARD OF REVIEW

         Summary judgment is warranted upon a showing "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."[44] Where cross-motions for summary judgment are filed on a particular issue and neither party argues the existence of a genuine issue of material fact thereon, "the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[45] So "upon cross motions for summary judgment [on that issue], this Court will grant summary judgment to one of the moving parties."[46] And on that issue, "the questions before this Court are questions of law not of fact, and the parties by filing cross motions for summary judgement have in effect stipulated that the issue[] raised by the motions [is] ripe for a decision on the merits."[47]

         Not so on a unilateral summary judgment motion. There, on the issue raised, the burden is on the moving party to demonstrate its prayer for summary judgment is supported by undisputed facts or an otherwise adequate factual record to support a legal judgment.[48] "If the motion is properly supported, then the burden shifts to the non-moving party to demonstrate that there are material issues of fact for resolution by the ultimate fact-finder."[49]

         The Court may grant a motion for summary judgment when: "(1) the record establishes that, viewing the facts in the light most favorable to the nonmoving party, there is no genuine issue of material fact, and (2) in light of the relevant law and those facts, the moving party is legally entitled to judgment."[50] The Court cannot grant a motion for summary judgment "[i]f... the record reveals that material facts are in dispute, or if the factual record has not been developed thoroughly enough to allow the Court to apply the law to the factual record"[51] But, at bottom, a claim "should be disposed of by summary judgment whenever an issue of law is involved and a trial is unnecessary."[52]

         Steadfast and DBi agree that New York law governs their relationship due to the Policy's choice-of-law clause.[53] Under New York law, the duty to defend is determined at the outset of an action and is conditioned on potential coverage under an insurance policy, while the duty to indemnify is determined at the conclusion of the action and is conditioned on legal liability.[54] In determining whether the duty to defend exists, the allegations of the complaint are compared against the provisions of the insured's policy.[55] The duty to defend is conditioned on the possibility of recovery by the policy - not on the probability of recovery.[56] If the insurer has a duty to defend with regard to any aspect of the lawsuit, it has a duty to defend every aspect of the lawsuit.[57] When the allegations in the complaint are ambiguous and do not clearly state a claim that is within the coverage of the policy, all doubts are resolved in favor of the insured resulting in the insurer having a duty to defend.[58] In construing insurance policy provisions, courts will resolve any ambiguities in policy wording in favor of the insured.[59]

         IV. DISCUSSION

         A. The Underlying Actions Contain Claims That Potentially Bring the Complaint within the Protection of the Policy.

         An insurer's duty to defend arises "when it has actual knowledge of facts establishing a reasonable possibility of coverage."[60] And so, the Court must compare the language of the complaints in the Underlying Actions and the language of the policy.[61]

         If any of the claims against the insured arguably arise from covered occurrences or activities, the insurer is required to defend the entire action.[62] "An insurer is relieved of the duty to defend only if 'there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy."'[63]

         The Policy provides for a duty to defend only where a claimant seeks damages from DBi for a "Professional Liability Claim" that arises out of an actual or alleged negligent act, error or omission with respect to DBi's rendering or failure to render "Professional Services," which is defined to include services that DBi is "qualified to perform for others in [its] capacity as an architect, engineer, landscape architect, inspector, land surveyor or planner, [or] construction manager . . . . ."[64] Thus, to trigger the duty to defend under the Policy, DBi must first establish that the claims within the Underlying Actions relate to DBi's "Professional Services."

         The Flexstake Complaint described DBi as "a company that provides highway operations and maintenance management worldwide" and alleged DBi's wrongful acts were engaged when carrying out DBi's duty to "maintain the highway delineator posts, and replace as necessary" under the FDOT Contract.[65] The Flexstake Complaint, in relevant part, contained the following:

• [A]t some point, DBI began producing counterfeit posts, with some containing counterfeit [Orafol] sheeting, and having them installed as part of scheduled replacements of the high performance delineators required under the [FDOT Contract].
• The counterfeit posts were manufactured by at least two different sources.
• These counterfeit posts were falsely billed to the State of Florida under guise of being [Flexstake Posts] when they were not.
• DBi has falsely represented . . . that the counterfeit posts that it installed in connection with the [FDOT Contract] met FDOT specifications.
• [T]he sale and installation of the counterfeit post has created confusion in the minds of consumers as to the manufacturer of the posts[66]

         The Orafol Complaint's allegations were drawn in much the same way.[67] It stated that Orafol "initiated this action when it discovered that DBi, aided by a supply chain that included the other Defendants, had been selling to the State of Florida and installing on the public highways, delineation posts with counterfeit [Orafol Sheeting] that reproduces and infringes upon ORAFOL trademarks."[68] Orafol's Complaint recognized that under the FDOT Contract, "DBi is responsible for overall highway maintenance including installing and, as necessary, replacing these delineators."[69]And the Orafol Complaint accused the several defendants "worked, in some instances in active concert, to procure, distribute, and sell knock-offs of [Orafol Sheeting]" and specifically alleged that DBi "provided a sample post or posts and commissioned the process of producing lower-cost posts and sheeting" which "ultimately resulted in the production of the counterfeit [Orafol Sheeting]."[70]

         The "Scope of Services" stated within the FDOT Contract details the following:

This performance-based contract requires the inspection, management and performance of the maintenance of all components of the transportation facility as identified herein. . . . Rather than [FDOT] directing specific work as in most traditional maintenance contracts, this performance-based contact requires [DBi] to continually produce a quality product. . . . [FDOT] is entrusting [DBi] to care for and maintain select roadways, structures, and facilities of Florida's state roads . . . .[71]

         The scope of DBi's particular duties under the FDOT Contract included, in relevant part:

Management of all assets w/in [FDOT's] Right-of-Way ....
Inspect, manage and maintain all assets within the project limits ....
Inspect, manage and maintain the roadways, structures, and facilities as identified in the Scope ....
Continually monitor all [FDOT] policies, procedures, specifications, and other Contract Documents for changes and updates [and] [b]e prepared to comply with any revisions ....
Manage the maintenance of all assets identified in this scope. Tasks include work needs assessment; resource management; work activity planning and execution; and quality control performance to ensure work complies with contractual requirements. Develop an annual work plan to ensure the designed maintenance is performed.
Manage and coordinate existing [FDOT] contracts within the limits of this contract until expiration of the [FDOT] contracts.[72]

         DBi contends that Underlying Actions relate to its professional services as an inspector and construction manager under the FDOT Contract.[73] Steadfast argues that it has no duty to defend because the Underlying Actions' factual allegations involve installation activity and routine, periodic maintenance and that those do not qualify as "Professional Services"-that is, in Steadfast's view, those are not duties of an inspector or construction manager.[74] So, Steadfast says, because "the claim does not arise out of the Professional Services, no coverage arises under the policy."[75] But the authority Steadfast invokes to cabin the professional services definition here aren't of much assistance.[76]

         For example, in Burkhart, Wexler & Hirschberg, LLP v. Liberty Ins. Underwriters, a New York appellate court affirmed a lower court's holding that defendant insurer was not obligated to defend and indemnify plaintiffs, a law firm, against an action alleging, inter alia, breach of fiduciary duty for misappropriating confidential information and trade secrets.[77] In Burkhart, plaintiffs sought defense and indemnity from their insurer in an underlying action alleging plaintiffs pursued interests in competition with a client using information gathered from the client.[78] The coverage provision of the insurance policy limited that coverage to claims caused by "any actual or alleged act, error, omission or personal injury which arises out of the rendering or failure to render professional legal services."[79] In its reasoning, the Burkhart trial court explained:

A self-dealing complaint against a lawyer based on the lawyer's alleged scheme to assist a business affiliated with the law firm in setting up a competing business against the client in order to further the lawyer's own business interests hardly constitutes "professional" negligence. Rather, such a breach of fiduciary duty claim is based on a conflict of interest that does not involve professional negligence and does not state a claim sounding in legal malpractice. . . . Inasmuch as there is no allegation of negligence or malpractice arising out of the Burkhart Firm's performance, or failure to perform, legal services, the claim in the underlying action does not fall within the ambit of the policy.[80]

         That Burkhart holding suggests merely that a breach-of-fiduciary-duty claim based on a conflict of interest arising not in the firm's rendering of legal services to the wronged client but instead in the firm's acts furthering its own affiliated business interests is not an act of professional negligence as defined in the insurance contract.

         Steadfast also cites George Muhhtock & Co. v. Am. Home Assurance Co.[81] In George Muhlstock & Co., an insurer refused to defend an insured accounting firm under a profession liability policy when the subject suit was brought against the firm in its capacity as a broker.[82] The George Muhlstock & Co. court dismissed the insured's claim against the insurer, observing that the insured's legal duties and liabilities arose from selling securities and not from performing professional accounting services. So, the court held, those acts fell entirely outside of the scope of the insurance policy which "plainly covered only liability for breach of duty as an accountant.[83]

         An insurance agreement is subject to principles of contract interpretation, and general contract interpretation requires that unambiguous provisions of an insurance contract must be given their plain and ordinary meaning.[84] The threshold determination of ambiguity and the interpretation of contact provisions-ambiguous or not-are questions of law for the Court.[85] A provision is ambiguous when it is subject to more than one reasonable interpretation.[86] "Professional services" is defined in the Policy. And that definition in this specific context is ambiguous as there are varied reasonable constructions of the definition regarding the scope and type of activities that might comprise DBi's performance as an "architect, engineer, inspector, land surveyor or planner, [or] construction manager" through which DBi was to "inspect, manage and maintain all assets" of the transportation facility.[87] When faced with ambiguous provisions of an insurance policy "any doubt as to the existence of coverage must be resolved in favor of the insured and against the insurer, as drafter of the agreement."[88]

         Both the Flexstake Complaint and the Orafol Complaint allege that DBi's inspection/planning/construction management activities that brought about the installation of the delineators resulted in the purported violations described in the underlying complaints. From this, one could here easily view DBi's "legal duties and liabilities" described in the Flexstake and Orafol Complaints as arising from its professional services rendered under the FDOT Contract. As recounted by Flexstake and Orafol, the complained-of activities, if nothing else, derived from DBi's professional duties to oversee the selection and installation of the materials used for to maintain the 1-95 corridor. In turn, there is a reasonable possibility that those allegations set forth in the Underlying Actions relate to DBi's professional services as, at very least, inspector or construction manager under the FDOT Contract.[89]

         B. The Underlying Actions' Claims Do Not Fall Within Any Policy Exclusion

         But even if so, Steadfast argues, it has no duty to defend or indemnify DBi against the Underlying Actions because the allegations in each of those underlying complaints fall entirely within one or more Policy exclusions.[90] DBi says they do not.[91]

         i. Exclusion I

         Exclusion I of the Policy precludes '"damages' or 'losses' based upon or arising out of . . . the design or manufacture of any goods or products which are sold or supplied by [DBi] ... or by others under license from [DBi] . . . ."[92] When an exclusion clause is relied upon to deny coverage, the burden rests upon the insurance company to demonstrate that the allegations of the complaint can be interpreted only to exclude coverage.[93]

         Steadfast argues that the Underlying Actions are precluded by Exclusion I because the claims "allege that DBi either designed, manufactured, sold or supplied" the imitation delineators.[94] So then, Steadfast contends, the nine causes of action in the Orafol Complaint and the three causes of action in the Flexstake Complaint cast actions "squarely within" this exclusion.[95] But DBi reads Exclusion I to apply only to products liability-type claims.[96] Under this construction, DBi says, the Underlying Actions do not fall "wholly within the exclusion."[97]

         The Court first notes that many of the cases cited by the parties, because of their significant factual dissimilarities, are not particularly persuasive here.[98]

         The Flexstake Complaint contended that the imitation posts were manufactured by at least two different sources.[99] Orafol initiated legal action after Orafol "discovered that DBi, aided by a supply chain that included the other Defendants [named in that action], had been selling to the State of Florida and installing on the public highway, delineation posts with counterfeit [Orafol] sheeting."[100] The Orafol Complaint alleged that DBi "provided a sample post or posts and commissioned the process" that ultimately resulted in the imitation delineators.[101] It further referred to DBi as "the procuring party and installer . . ."[102]

         Under New York law, "whenever an insurer wishes to exclude certain coverage from its policy language, it must do so in clear and unmistakable language."[103] It is fundamental that ambiguities in an insurance policy be construed against the insurer, particularly where ambiguities are found in an exclusionary clause.[104] Given the setting in which the Policy was written-i.e., for professional services liability-it is hard to imagine that an ordinary construction company insurer would agree to anything but exclusion of damages or losses arising out of DBi's or others' design or manufacture defects in goods sold or supplied by DBi when carrying out its maintenance obligation to FDOT. It is equally hard to imagine an ordinary construction contractor when reading the exclusion's language would not have thought itself covered precisely against claims arising from the use (or oversight of the use) of goods in carrying out its duties while understanding it would not be covered for the goods' manufacturer's design flaws or manufacturing defects. The very nature of a construction management company requires, at a minimum, it to use others' manufactured goods and certainly that company's insurer would insist on not shouldering the potential products liability of those others when it was insuring profession services liabilities of its client. That is the most natural read of Exclusion I and if Steadfast suggests otherwise, it introduced an intolerable ambiguity to the exclusion that works to its disadvantage here.[105] As such, the Court finds that Steadfast has failed to satisfy its heavy burden of establishing that the allegations of the Underlying Actions fall entirely within Policy Exclusion I.[106]

         ii. ...


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