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November 7, 1991


The opinion of the court was delivered by: Wolin, District Judge.


The parties have cross-moved for summary judgment. For the reasons set forth herein, defendants' motion is granted and plaintiffs' motion is denied.


The factual basis of this case is set forth in detail in First Jersey Nat'l Bank v. Dome Petroleum Ltd., 723 F.2d 335 (3d Cir. 1983) ("Dome I"), and in Dome Petroleum Ltd. v. Employers Mutual Ins. Co. of Wisconsin, 767 F.2d 43 (3d Cir. 1985) ("Dome II"). The Court will rely on and refer to the statements of facts in those opinions rather than repeat them here. The procedural posture of this case is, however, relevant to the legal issues that remain.

In Dome I, the Third Circuit held that the Depositary Agreement required Dome Petroleum Limited and Dome Energy Limited (collectively, "Dome") to indemnify The First Jersey National Bank ("First Jersey") for the $3.5 million loss that the State Street Group suffered and that First Jersey made good. 723 F.2d at 341-42. However, the Depositary Agreement gave Dome a right of subrogation. Id. at 343. Therefore, the court stated, "[i]t is at least arguable that the parties intended Dome to indemnify First Jersey only against losses not covered by First Jersey's insurance policy. Id. The effect of the subrogation clause was left unresolved in Dome I. Id.

After Dome I, Dome paid the judgment with interest and then sought subrogation from First jersey's insurer, Employers Mutual Liability Insurance Company ("Employers"), under First Jersey's errors and omissions policy. Dome II, 767 F.2d at 44. Dome also asserted a claim against First Jersey for interference with Dome's subrogation rights. Id. at 45. These claims appeared as Counts I and IV, respectively, of Dome's complaint, and are at issue in the present cross-motions. Judge Stern of this Court granted summary judgment on defendants' behalf on both of these claims on the ground that Dome assumed ultimate liability for First Jersey's loss under the terms of the Depositary Agreement. The Third Circuit reversed and remanded.*fn1 It held that the subrogation clause in the Depositary Agreement manifested Dome's intent to assume the ultimate risk of loss "only in the event that there is no third party that might be liable to First Jersey." Id. at. 47.

The Third Circuit's Dome II opinion furnishes a measure of direction to this Court on remand. The Court of Appeals stated that either the operation of law or the agreement of the parties could allocate the ultimate responsibility for the risk of loss. 767 F.2d at 46. There is no mandatory public policy that requires the risk of loss to fall on a contractual indemnitor rather than on an insurer. Id. (citing A. & B. Auto Stores of Jones Street, Inc. v. City of Newark, 59 N.J. 5, 279 A.2d 693 (1971); Manzo v. City of Plainfield, 59 N.J. 30, 279 A.2d 706, 708 (1971)). Cases holding that responsibility falls on the contractual indemnitor depend on operation of contract and not on public policy. Id. (citing Bater v. Cleaver, 114 N.J.L. 346, 176 A. 889 (1935)). The court remanded for a construction of the Employers insurance policy to determine whether Employers assumed the ultimate risk of loss. Id. at 47. In the event that Employers and Dome intended to shift the risk to each other,

  the district court should look to suppletive rules of law to
  determine who the ultimate risk-bearer should be. Finally, even
  if Dome may be subrogated to First Jersey's claim against
  Employers, Employers may have substantive defenses under its
  policy or equitable defenses against Dome. We hold only that
  Dome did not bear the ultimate risk of loss by virtue of
  mandatory public policy or solely because of its agreement to
  indemnify First Jersey.

Id. at 47-48. The Court of Appeals also remanded Count IV, Dome's claim that First Jersey interfered with its subrogation rights. Id. at 48.

On remand, defendants again moved for summary judgment. They raised the following arguments that Dome, instead of Employers, assumed the risk: first, that Employers promised to indemnify First Jersey for "loss," and First Jersey never would have suffered a loss had Dome honored its obligation to indemnify First Jersey; second, that the subrogation clauses in the Depositary Agreement and the Policy cancel each other out and that therefore the loss should remain with Dome; third, that the Policy's "other insurance" clause encompasses Dome's obligation to indemnify; fourth, that Dome's indemnity should be treated as primary insurance and the Policy as excess insurance; fifth, that the indemnity was unlimited in coverage, whereas the Policy was limited to $5 million; sixth, that a contractual indemnitor should bear the risk instead of an insurer; and seventh, that a different indemnification provision, ¶ 12.7 of the Depositary Agreement, covers First Jersey's error and does not contain a subrogation clause. Judge Stern briefly rejected each of these arguments in a published opinion, 635 F. Supp. 1397, 1399-1401 (D.N.J. 1986). Judge Stern likewise disposed of Employers' defenses, i.e., that Dome was timebarred from bringing suit against defendants and that Dome acted inequitably by initially refusing to cover First Jersey's mistake and then by litigating the applicability of the indemnity. Id. at 1401. Finally, Judge Stern refused to dismiss plaintiffs' derivative claim of interference with subrogation rights. Id. at 1401-02. After Judge Stern issued his opinion, the parties pursued discovery, which is now complete.


This Court approaches the issue before it constrained by the Third Circuit's teachings in Dome II and cognizant of Judge Stern's application of those teachings on remand. Absent unusual circumstances, once an issue is decided, it is law of the case and will not be relitigated. Hayman Cash Register Co. v. Sarokin, 669 F.2d 162, 165 (3d Cir. 1982). Among the circumstances in which relitigation of an issue is permissible is when the previous decision is "clearly erroneous and would work a manifest injustice." Schultz v. Onan Corp., 737 F.2d 339, 345 (3d Cir. 1984) (quoting California v. Arizona, 460 U.S. 605, 618, 103 S.Ct. 1382, 1391, 75 L.Ed.2d 318 (1983)). In his 1985 opinion, Judge Stern made a series of rulings on many of the sophisticated questions of law presented by this case. Judge Stern disposed of all of them with only the briefest of discussion. With respect to several of these rulings — they will be addressed as they arise — the Court is left with the firm conviction that they are incorrect either as a matter of substantive law or as a matter of interpretation of the scope of the remand ordered in Dome II. The Court will correct these errors but will leave undisturbed the balance of Judge Stern's rulings.

Although I am reluctant to review the rulings of the distinguished judge who preceded me on this case, the procedural posture of this case compels me to do so. Defendants have not advanced any grounds for summary judgment other than those rejected by Judge Stern. If I did not reconsider defendants' arguments, I would be constrained to rule for Dome. I do not consider the mandate of the Dome II remand to require this result. The grounds on which Dome argues it should be granted summary judgment — none of which were before Judge Stern — are appreciably weaker than defendants' arguments. Thus, the determination of this case requires a comparison of the competing theories advanced by the parties. Such a comparison requires that all the cards be on the table, which, at long last, they are. Finally, in order to attempt to avoid yet another remand, I have considered all of the arguments advanced as to liability. Because I will grant summary judgment to defendants, I have not, however, considered the issue of prejudgment interest.

A. Dome's Proposed Mandatory Rule

Dome argues that the approach handed down by the Third Circuit leads to a holding that, as a mandatory rule, an insurer bears the ultimate risk because it charges premiums to offset that risk. Opening Brief at 27-28. In support of the premise that this Court should concern itself with mandatory rules, Dome quotes the following language from Dome II: "In this case, we examine first whether there are any mandatory rules of risk allocation, and if there are not, what the parties intended. If that intent is unclear or conflicting, then the court will apply suppletive rules to allocate the risk." 767 F.2d at 46 n. 2, quoted in Dome's Opening Brief at 27. Dome also points out that while the Third Circuit expressly ruled out mandatory allocation of risk to Dome, Dome II, 767 F.2d at 46, it did not do so as to Employers. Dome's Reply Brief at 3.

The Third Circuit, albeit implicity, did foreclose a holding that mandatory rules of public policy allocate the risk to Employers. This holding is implicit in the passage quoted above by Dome: if a mandatory rule allocated the risk to Employers, then remand for the purpose of discerning Employers' intent would have been unnecessary; the Third Circuit would have simply applied that rule. Instead, the Third Circuit directed this Court to consider Employers' policy to analyze its intent and then, in the event that Employers sought to shift its responsibility to Dome, to apply suppletive rules. Id. at 47. Thus, the Third Circuit's statement that "we examine first whether there are any mandatory rules of risk allocation," id. at 46 n. 2 (emphasis added), is directed to itself and not to this Court.

The rule Dome proposes — that an insurer must cover a loss even if the insured has a collateral remedy — is inapposite here. The rule derives from a line of fire insurance cases in which the insured was permitted to recover insurance on the destroyed property even though a third party also compensated the insured for the property under a separate transaction. E.g., P.R. De Bellis Enterprises, Inc. v. Lumbermen's Mutual Casualty Co., 77 N.J. 428, 437, 390 A.2d 1171 (1978) (insured had a right to insurance proceeds as well as tax redemption); Wolf v. Home Ins. Co., 100 N.J. Super. 27, 49, 241 A.2d 28 (L.Div.), aff'd per curiam, 103 N.J. Super. 357, 247 A.2d 345 (App. Div. 1968) (insurance coverage as well as purchase price of property); Board of Trustees of First Congregational Church v. Cream City Mutual Ins. Co., 255 Minn. 347, 96 N.W.2d 690, 696 (1959) (same); Alexandra Restaurant, Inc. v. New Hampshire Ins. Co., 272 App. Div. 346, 71 N.Y.S.2d 515, 522 (1947), aff'd, 297 N.Y. 858, 79 N.E.2d 268 (1948) (right to insurance proceeds even though landlord, under the lease, had rebuilt destroyed property). The rationale of these cases is that the insurer charges premiums to offset a risk of loss without knowledge of the existence of any collateral remedy. Wolf, 100 N.J.Super. at 49, 241 A.2d 28; Board of Trustees, 96 N.W.2d at 696. To deny recovery to the insured would create a windfall for the insurer and ignore the reasonable expectations of the insurer and the insured. De Bellis, 77 N.J. at 437-38, 390 A.2d 1171; Board of Trustees, 96 N.W.2d at 696.

Dome urges that this line of fire insurance cases is especially applicable here, where there is no danger of double recovery if the insurer is held to bear the risk. Opening Brief at 35. One of the arguments against holding the insurer liable in the event of a collateral recovery is that the insured would profit from the insurance. Board of Trustees, 96 N.W.2d at 696, Wolf, 100 N.J.Super. at 46, 241 A.2d 28. Because that countervailing argument is not present in this case, Dome contends, the holding of the fire insurance cases is especially appropriate here.

The lack of potential for double recovery here illustrates that this line of fire insurance cases is distinguishable from this case. The fire insurance cases proceed on the assumption that the collateral obligors will be liable on their obligations. See De Bellis, 77 N.J. at 437, 390 A.2d 1171 (tax redemption had already occurred); Wolf, 100 N.J.Super. at 32-33, 241 A.2d 28 (insured received full purchase price); Board of Trustees, 96 N.W.2d at 695, 697 (court assumed that insured would receive balance of contract, which was not before it); Alexandra Restaurant, 71 N.Y.S.2d at 517 (landlord fully repaired improvements). Therefore, these cases cannot serve, as Dome asserts, to remove it, as the collateral obligor here, from its obligation. The issue here is whether Dome or Employers should bear the risk, not whether Employers, as well as Dome, should bear it. The teaching of the fire insurance cases provides no guidance here.

B. The Subrogation Clause in the Policy

The proper point of departure on remand is the fact that the Policy contains a subrogation clause: "In the event of any payment under this Policy, the Company shall be subrogated to all the Insured's rights of recovery therefor against any person or organization and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. . . ." Exhibit B to Declaration of Joseph Fleischman ("Fleischman Declaration"), at 2008.*fn2

The absence of a subrogation clause would have meant that Employers intended to assume the ultimate risk. See Dome II, 767 F.2d at 47 (in absence of subrogation clause in indemnity, Dome would have assumed ultimate risk). The broad language of the subrogation clause appears to cover this case. Dome does not deny that the Policy's subrogation clause expresses Employers' intent to be subrogated to First Jersey's rights.

Dome does advance the argument, however, that other terms in the Policy manifest Employers' intent to bear the ultimate risk of loss. Specifically, Dome points to the fact that Employers inquired in its application from whether First Jersey's trust agreements for ERISA accounts "include an indemnity provision to protect the Bank." Exhibit J to Certification of Morrill Cole ("Cole Cert.") at 3833. Employers also asked whether First Jersey had other insurance. Id. at 3801. Because the application did not ask whether a contractual indemnity clause protected First Jersey in its work as a depositary or as a transfer or paying agent, Dome argues, the terms of the Policy and the premiums charged reflect an indifference to such protection. Dome's Opening Brief at 38-39.*fn3

The Third Circuit expressly rejected the parallel argument made by defendants in Dome II. Dome's subrogation clause encompassed "any claim which [First Jersey] may have against any third party with respect to any items reimbursed to [First Jersey] hereunder by [Dome]." 767 F.2d at 47 (citing Depositary Agreement ¶ 16.1; bracketed language added by Third Circuit). The undisputed fact that "Dome never inquired about insurance during the negotiation of the depository agreement or immediately after the loss was discovered" was held insufficient to bar Dome's subrogation claim. Id. Employers was held to be a "third party" within the terms of the subrogation clause. Id.

Likewise, the terms of the Policy's subrogation clause are relevant here, not the lack of pre-contractual negotiations related to possible indemnification. The terms of the Policy's subrogation clause are triggered by "any payment" and may be asserted against "any person or organization." Those terms encompass Employers' claims against Dome following Employers' payment to First Jersey.*fn4 The Policy's subrogation clause manifests Employers' intent not to assume the ultimate risk of loss. See Dome II 767 F.2d at 47 (subrogation clause in Depositary Agreement reserved Dome's right to shift ultimate loss to third party liable to First Jersey; construction of the Policy may indicate that Employers also intended to shift ultimate loss to third party).

C. Indemnification for Liability Versus Indemnification for

Before looking to suppletive rules of risk allocation, the Court will address defendants' argument that Dome bears the ultimake risk of loss because it promised to indemnify against liability or loss*fn5 whereas Employers promised to indemnify solely against loss.*fn6 Defendants urge that because Dome had a duty to indemnify First Jersey for liability, First Jersey never should have incurred a loss, and therefore Employers never should have incurred an obligation to pay First Jersey; consequently, there was no loss to First Jersey such that Dome became subrogated to First Jersey's rights against Employers. Defendants' Opening Brief at 30.

At first glance, this argument appears to contradict Dome II, since it urges that Dome did not intend to shift ultimate responsibility for the risk of loss to Employers. See 767 F.2d at 47 (subrogation clause shows Dome's intent to shift ultimate responsibility to Employers). However, this theory depends on an interpretation of the terms of the Policy, which the Third ...

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