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Cay Divers Inc. v. Raven

filed: February 26, 1987.

CAY DIVERS, INC.; DO-IT-FLUID WATERSPORTS, INC.; M/V CAY DIVER; RONALD CUTLER; HOWARD WILSON
v.
FREDERICK CHARLES RAVEN, AS REPRESENTATIVE OF LLOYDS OF LONDON; DO-IT-FLUID WATERSPORTS, INC., APPELLANT



Appeal from the District Court of the Virgin Islands (St. Croix) D.C. Civil No. 84-137.

Author: Rosenn

Before: SLOVITER, STAPLETON, and ROSENN, Circuit Judges.

ROSENN, Circuit Judge.

This appeal presents the dilemma faced by an insured party advised to settle a claim by counsel provided by but not acting in behalf of the liability insurer, who reserves the right to contest coverage. Although the district court declared that there was no coverage for two of the three counts of the underlying action against the insured, because there was a slim possibility of coverage for the third count, the court directed the insurer to defend its insured. The carrier provided counsel under a reservation of rights to contest coverage. When the parties to the primary action entered into an agreement settling all three counts, the insured demanded reimbursement of the entire amount from the insurer. The district court granted the insurer's motion for summary judgment.*fn1 Because we find nothing in the settlement that in any way compromises the insurer's right under its contract of insurance to defend on the ground of noncoverage, we reverse.

I.

Do-It-Fluid Watersports, Inc., the plaintiff in this indemnification action, operated an aquatic sports shop on St. Croix, Virgin Islands. It had purchased a one million dollar liability insurance policy with certain underwriters at Lloyds of London (Lloyds), subject to an exclusion for liability arising from swimming, scuba instruction, or diving. The policy contained a clause labeled "Duties of Insured" which read in part:

The Insured shall not make any admission of liability, either before or after any occurrence which could result in a claim for which the Underwriters may be liable. The Insured shall not interfere in any negotiations of the Underwriters for settlement of any legal proceedings in respect of any occurrence for which the Underwriters may be liable under this Certificate, provided however, that in respect of any occurrence likely to give rise to a claim under this Certificate, the Insured is obligated to and shall take such steps to protect his and/or the Underwriters' interests as would reasonably be taken in the absence of this or similar insurance.

On January 5, 1982, David Wetherhorn, a novice diver, took a scuba "resort course" conducted by Do-It-Fluid. He and three other people completed introductory training and then went for an ocean dive. Once underwater, Wetherhorn apparently panicked and aborted his dive. The Do-It-Fluid instructor followed Wetherhorn to the surface and instructed him to swim back to the nearby boat while he returned to the other divers, who were waiting below. Wetherhorn was last seen alive swimming toward the boat. His body was found in a reef the next day. An autopsy disclosed a forehead would but fixed drowning as the cause of death.

Wetherhorn's widow brought a wrongful death action against Do-It-Fluid and the other defendants in the present action. She asserted a claim for breach of a contract to provide "an introductory scuba diving lesson and supervised open water dive," and a claim in tort for Do-It-Fluid's breach of its affirmative duty "to properly instruct, diligently supervise and otherwise exercise reasonable care during the introductory scuba diving lesson and open water dive." A third count, added by amendment, alleged that Wetherhorn's death resulted from a blow to the head received while attempting to board the boat unassisted and that Do-It-Fluid was negligent in failing to provide boarding assistance. The estate sought one million dollars in damages.

Do-It-Fluid and the other defendants filed this action against Lloyds seeking a declaratory judgment stating that there was coverage under the policy and directing Lloyds to defend the primary action. Both sides moves for summary judgment on the question whether Lloyds had a duty under the policy to defend the primary action. The district court held that there was no coverage for any liability on the first two counts. Although it noted "that coverage under the third theory was at best, slim," it ordered Lloyds to defend, reserving judgment on the question of Lloyds's liability for coverage under its insurance contract with Do-It-Fluid.

Lloyds retained attorney Joel Marsh to defend in the primary action even before the entry of partial summary judgment, under a reservation of the right to contest liability. This acceptance of the defense was based on an exchange of letters between Lloyds's corporate attorney and Joel Holt, the attorney engaged by Do-It-Fluid and the other defendants. Lloyds's attorney's letter stated:

I am prepared to recommend to my client that defense counsel be provided in the underlying wrongful death action on the condition that the provision of counsel will not waive the right of the underwriters to contest the duty of indemnification.

Holt's response was the following:

My client [sic] has no objection to Lloyds' hiring another party to defend this action under a reservation of rights situation. This agreement however must include the express understanding that any lawyer retained by Lloyds to defend the case will in fact be representing ...


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