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
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
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
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
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 ...