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TEXACO, INC. v. EAST COAST MGMT.

August 15, 1989

TEXACO, INC., Plaintiff,
v.
EAST COAST MANAGEMENT, Defendant



The opinion of the court was delivered by: COHEN

OPINION

MITCHELL H. COHEN, SENIOR UNITED STATES DISTRICT JUDGE

 Before us, in this breach of contract action, is a cross-motion by defendant, East Coast Management ("ECM"), for partial summary judgment on Counts I and II of the Complaint filed by plaintiff, Texaco, Inc. ("Texaco"). This cross-motion was initiated as a response to a motion for summary judgment by Texaco filed on March 16, 1989. On May 17, 1989 Texaco filed a request with this Court that its motion for summary judgment be voluntarily withdrawn without prejudice. For the reasons that follow, Texaco's request to voluntarily withdraw its motion without prejudice shall be GRANTED, and ECM's cross-motion for summary judgment shall be DENIED.

 I. FACTS

 On December 12, 1983, Texaco and ECM contracted for ECM to perform repair work on certain compressors at Texaco's Eagle Point Refinery in Westville, New Jersey. Under the terms of this contract, ECM was required to "fully defend, protect, indemnify, hold harmless and render [Texaco] whole" as to any and all claims connected with or arising out of ECM's performance, regardless of whether a resulting personal injury, death or property damage was caused by ECM's sole negligence, the concurrent negligence of ECM and Texaco, strict liability, or even the sole negligence of Texaco. See Contract Between Texaco and ECM Dated December 12, 1983 ("Contract") at 10. The Contract also required ECM to maintain, at its sole cost, insurance coverage with policy limits as specified therein. *fn1" Contract at para. 11. This insurance provision required that Texaco be named as co-insured, and that ECM deliver a "certificate" to Texaco "prior to commencement of the work," as evidence of its compliance with the terms of its insurance obligations. Id. Like the indemnification clause, the insurance terms covered any and all claims connected with or arising out of ECM's performance, regardless of whether the resulting personal injury, death or property damage was caused by ECM's sole negligence, the concurrent negligence of ECM and Texaco, strict liability, or the sole negligence of Texaco. Id. Pursuant to the Contract, the "certificate" naming Texaco as co-insured and evidencing acquisition of the enumerated coverages was required to "specifically quote" the Contract's indemnification provision. Id. The comprehensive general liability insurance stipulation reiterated that general liability coverage "shall cover, among other risks, the contractual liability assumed under the indemnification provision." Id. It is important to note that the text of the Contract does not specifically address the question of Texaco's rights and/or remedies should ECM fail to so deliver a "certificate." The Contract does provide, however, that:

 Failure of [ECM] to keep the required insurance policies in full force and effect during the work covered by this Agreement. . . . shall constitute a breach of this Agreement and [Texaco] shall have the right, in addition to any other rights, to immediately cancel and terminate this Agreement. . . .

 Id.

 ECM commenced work pursuant to the Contract, and on December 23, 1983, Jerry Andrew Johnson, an employee of ECM, slipped and injured himself while working at the Eagle Point Refinery. Johnson filed a tort action against Texaco for his injuries in 1985, Johnson v. Texaco, No. 85-4124 (E.D. Pa. 1985), and in 1986, his lawsuit was settled for $ 270,000. According to the Settlement Agreement, $ 135,000 was contributed on behalf of Texaco by its insurance carrier, the Insurance Company of North America ("INA") and $ 135,000 was contributed by INA on behalf of ECM (both Texaco and ECM used the same insurance carrier). Texaco maintains that it fully reimbursed INA for the settlement amount made on its behalf (plus defense costs), as required by Texaco's reinsurance agreement with INA.

 On May 20, 1988, Texaco filed the within action alleging, inter alia, that ECM breached the subject Contract in two material ways: (1) by failing to either defend or indemnify Texaco in the Johnson suit as required by Contract para. 10; and (2) by failing to obtain insurance naming Texaco as co-insured as required by Contract para. 11. Although Texaco's Complaint contains three Counts, only the first two are at issue at this time. In Count I, Texaco seeks damages in the amount of $ 135,000 plus interest, as well as attorney's fees and costs incurred in the within action and Johnson, supra, on the ground that all of these damages flow from ECM's failure to defend and indemnify Texaco as required by Contract para. 10. In Count II, Texaco seeks the same damages, but on the ground that ECM failed to provide comprehensive general liability insurance naming Texaco as co-insured as required by Contract II.

 II. DISCUSSION

 ECM avers that the indemnification clause contained in Contract para. 10 is void in its entirety, since it purports to indemnify Texaco for its sole negligence - a result that is explicitly prohibited by N.J.S.A. 2A:40A-1. ECM also maintains that Contract para. 11, although articulated in terms of insurance, is for all practical purposes another attempt by Texaco to achieve the statutorily proscribed goal of complete indemnification for its sole negligence. Finally, ECM advances the notion that Texaco waived any requirement of co-insurance by permitting ECM to commence work without first tendering a certificate of insurance, as required under the Contract, and by failing to mitigate its damages by obtaining insurance itself. We shall now discuss each of ECM's arguments in support of its motion for summary judgment ad seriatim.

 A. The Validity of the Indemnification Clause

 ECM avers that under N.J.S.A. 2A:40A-1 and the New Jersey cases which discuss it, the law is crystal clear that a contract clause that tries to indemnify a party for its sole negligence is void in its entirety. N.J.S.A. 2A:40A-1 provides in relevant part that:

 A covenant, promise, agreement or understanding in, or in connection with or collateral to a contract, agreement or purchase order relative to the . . . repair . . . of a building [or] appurtenance . . . purporting to indemnity or hold harmless the promisee against liability for damages arising out of bodily injury to persons . . . caused by or resulting from the sole negligence of the promisee, his agents, or employees, is against public policy and is void and unenforceable; provided that this section shall not affect the validity of any insurance contract . . . issued by an authorized insurer.

 Id. As a matter of public policy, ECM explains, the reason for such a rule is a simple one; discouraging "moral hazard." Should a party to a construction contract be able to completely insulate himself from negligence liability, "it has no motivation to maintain a safe working area, to encourage safe working practices or to actively endeavor to prevent accidents." ECM's Brief at 11. By prohibiting indemnification for sole negligence, ECM explains, the statute ensures that an indemnified party still has an interest in avoiding accidents. Id.

 ECM believes that the indemnification clause at issue here reflects the relative unequal bargaining position of the parties, because the clause was not fully negotiated and accounted for in the contract price, but rather, was standard "take it or leave it" boilerplate verbiage muscled upon them by an international business giant. ECM submits that it is precisely this type of casual shifting of liability that the New Jersey Legislature sought to address with N.J.S.A. ...


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