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National Union Fire Insurance Company of Pittsburgh, Pa, A v. Jenbacher Ltd.

April 13, 2012

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, A PENNSYLVANIA CORPORATION, PLAINTIFF,
v.
JENBACHER LTD., A DELAWARE CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiff National Union Fire Insurance Company of Pittsburgh, P.A. ("National Union"), as subrogee to its insured Biogas Energy Solutions LLC ("Biogas"), brought a diversity action against Defendant Jenbacher Ltd. ("Jenbacher"), a Delaware corporation. Jenbacher performed maintenance duties at Biogas' facility, which suffered a fire that National Union alleges was caused by Jenbacher's breach of contract (Count I) and gross negligence (Count II). Jenbacher moves to dismiss the action for failure to state a claim upon which relief can be granted, due to the subrogation waiver contained in the maintenance agreement executed by Biogas and Jenbacher.*fn1 For the following reasons, the Court grants Jenbacher's motion.

I. BACKGROUND

Biogas owns a facility in Dolton, Illinois, that captured methane gas from an adjacent landfill to generate electricity that was then sold to the local utility company. (¶6). On June 16, 2003, Biogas entered into an operating and maintenance agreement with Jenbacher ("O&M Agreement") whereby Jenbacher assumed operation and maintenance duties for the electrical generator equipment. (Ex. A). In the O&M Agreement, incorporated by reference in the Complaint, Jenbacher agreed to operate the equipment in a proper manner so as to avoid harm to Biogas' property, and take reasonable actions to prevent damage. (Ex. A, ¶¶2.14-2.17). The O&M Agreement contains an express waiver of subrogation, which states:

12.7 [Biogas] shall cause their insurance underwriter to waive its rights of subrogation against [Jenbacher] and its Affiliates, employees, officers and directors, and [Biogas] shall provide certificates of insurance to [Jenbacher] evidencing such waiver. (Ex. A, ¶12.7). National Union alleges that Jenbacher drastically cut back its maintenance at Biogas' facility, intentionally and willfully, to reduce costs. (¶8). Jenbacher instructed its employees to intentionally disregard maintenance duties of the equipment. (¶8). Jenbacher personnel intentionally and willfully disabled safety equipment, including methane and heat detection systems designed to prevent property damage and personal injury, to avoid returning to the facility every time a system was activated. (¶9). There were constant breakdowns, numerous oil and glycol leaks and fires caused by those leaks. (¶10). Biogas repeatedly warned Jenbacher of these hazardous conditions and requested proper maintenance, but Jenbacher personnel continued to disable safety equipment. (¶11).

On September 18, 2009, a fire erupted at the facility, engulfing the entire structure and resulting in significant property damage and loss of business. (¶12). National Union reimbursed Biogas for its loss pursuant to its insurance policy. (¶¶17, 22). On July 29, 2011, National Union, as subrogee of Biogas, filed a complaint against Jenbacher for breach of contract and gross negligence. Jenbacher moves to dismiss the action, for failure to state a claim upon which relief can be granted, due to the express subrogation waiver in the O&M Agreement.

II. STANDARD

When considering a Rule 12(b)(6) motion, the Court accepts as true all facts alleged in the complaint and construes all reasonable inferences in favor of the non-moving party. See Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). To state a claim upon which relief can be granted, the complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). "Detailed factual allegations" are not required, but the plaintiff must allege facts that, when "accepted as true ... 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To determine whether a complaint meets this standard the "reviewing court [must] draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679. If the factual allegations are well-pleaded, the Court assumes their veracity and then turns to determine whether they plausibly give rise to an entitlement to relief. See Id. A claim has facial plausibility when its factual content allows the Court to draw a reasonable inference that the defendant is liable for the misconduct alleged. See Id. at 678. Furthermore, "Twombly teaches that a defendant should not be forced to undergo costly discovery unless the complaint contains enough detail, factual or argumentative, to indicate that the plaintiff has a substantial case." Bissessur v. Indiana Univ. Bd. of Trustees, 581 F.3d 599, 603 (7th Cir. 2009).

III. DISCUSSION

As a threshold matter, the Court finds that its subject matter jurisdiction has been properly invoked, as National Union is a Pennsylvania corporation, Jenbacher is a Delaware corporation, and the damages alleged exceed $75,000. See U.S. Const. art. III, § 2; 28 U.S.C. §§ 1332(a)(1), (c)(1). Venue is proper because the acts or omissions occurred in Dolton, Illinois. 28 U.S.C. § 1391(a). The choice of law is that of the State of New York, which neither party disputes.*fn2

New York law recognizes subrogation, which is an equitable doctrine that allows an insurer to stand in the shoes of its insured and seek indemnification from third parties whose wrongdoing has caused a loss that the insurer is bound to reimburse. See, e.g., St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 409 F.3d 73, 84 (2nd Cir. 2005) (citing Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 687 (N.Y. 1997)); Loctite VSI Inc. v. Chemfab N.Y. Inc., 701 N.Y.S.2d 723, 724 (App. Div. 2000). Contracting parties may freely waive their respective insurers' rights of subrogation. Id. "It is well-established that waiver of subrogation clauses are enforceable in New York." St. Paul Fire & Marine Ins. Co. v. Tag 380, LLC, 2007 U.S. Dist. LEXIS 74112 (S.D.N.Y. Sept. 27, 2007) (citing St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 317 F. Supp. 2d 336, 340 (S.D.N.Y. 2004) (citing Bd. of Educ. v. Valden, 46 N.Y.2d 653 (1979)). Jenbacher argues that the O&M Agreement's express waiver of subrogation is enforceable and bars National Union from filing suit for damages occasioned by the fire at Biogas' facility. National Union does not dispute that Biogas procured property insurance from National Union for its facility, that the fire was an insured claim for which Biogas was compensated, and that the waiver of subrogation in the O&M Agreement is valid. Rather, National Union argues the waiver does not preclude its allegations of gross negligence, and breach of contract based upon specific intentional or willful misconduct, because New York law prohibits enforcement of an exculpatory provision when the defendant's conduct is intentional.

A. Gross Negligence

Under New York state law, parties are free to enter into contractual agreements that absolve a party from its own negligence, though such agreements are "disfavored by the law and closely scrutinized by the courts." Lago v. Krollage, 78 N.Y.2d 95, 99 (N.Y. 1991). However, contractual agreements that exempt a party from liability for its own gross negligence offend the public interest. Id. at 100. So-called "exculpatory clauses" deprive an injured party of the right to recover damages due to willful or grossly negligent acts, and are therefore void. Id.; see Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc., 2012 N.Y. LEXIS 504, at *4 (N.Y. Mar. 22, 2012). To pierce a contractual limitation of liability, the grossly negligent conduct must "evince a reckless disregard for the rights of others" or "must 'smack[] of intentional wrongdoing.'" Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 554 (N.Y. 1992) (citing Kalisch-Jarcho, Inc. v. New York, 58 N.Y.2d 377 (N.Y. 1983)); accord Abacus Fed. Sav. Bank, 2012 N.Y. LEXIS 504 at *4.

Jenbacher argues that a waiver of subrogation is, in effect, an exculpatory clause and the parties dispute which line of federal court cases interpreting New York state law should guide this Court. Compare St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 409 F.3d 73, 84 (2nd Cir. 2005)(waiver of subrogation clause bars a claim of gross negligence under New York law) with Am. Motorist Ins. Co. v. Morris Goldman Real Estate Corp., 277 F. Supp. 2d 304, 309 (S.D.N.Y. 2003)(waiver of subrogation does not bar a claim of gross negligence under New York law). Fortuitously, the highest court in the State of New York recently addressed a similar case, which provides authoritative precedent for this Court. See Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc., 2012 N.Y. LEXIS 504, *4 (N.Y. Mar. 22, 2012); see also Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029 (7th Cir. 2004)("A decision by a state's supreme court terminates the authoritative force of our decisions interpreting state law."). Abacus Bank was burglarized without the alarm system alerting the police. Id. at *2. Abacus Bank brought suit against its two alarm system companies, Diebold and ADT, alleging that they knew for months that their systems were malfunctioning, yet failed to investigate the equipment and notify Abacus Bank of the potential security breach. Id. at *8-9. Abacus Bank's maintenance agreements with ...


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