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United Airlines, Inc. v. State Farm Fire & Casualty Co. (7/26/2002) sp-5601
United Airlines, Inc. v. State Farm Fire & Casualty Co. (7/26/2002) sp-5601
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
UNITED AIRLINES, INC., )
) Supreme Court No. S-9672
Appellant, )
) Superior Court No. 3AN-94-5086
CI
v. )
) O P I N I O N
STATE FARM FIRE & CASUALTY )
COMPANY, ) [No. 5601 - July 26,
2002]
)
Appellee. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Peter A. Michalski, Judge.
Appearances: William F. Brattain II, Baker
Brattain, LLC, Anchorage, for Appellant. Rod
R. Sisson, Sisson & Knutson, Anchorage, for
Appellee.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
I. Adrian Sanders sued the State of Alaska and United
Airlines, Inc. (UAL) for injuries he suffered when his motorcycle
struck a UAL baggage cart train. The baggage train originated
from premises subleased to UAL. The state had leased the
premises to the Krogstads, who had subleased them to UAL. Does
the Krogstad/UAL sublease require UAL to indemnify and hold
harmless the Krogstads and their subrogated liability insurer,
State Farm, against claims arising from Sanderss injuries?
Because Sanderss claims against the state and the states claim
against the Krogstads were in connection with . . . personal
injury arising from or out of any occurrence at UALs subleased
premises or from [UALs] use of those premises, the sublease
required UAL to indemnify the Krogstads insurer for amounts the
insurer paid to discharge Sanderss claims. We therefore affirm
the superior courts grant of summary judgment against UAL.
II. FACTS AND PROCEEDINGS
I. The present appeal arises out of Adrian Sanderss July 1992
motorcycle accident. We addressed legal disputes resulting from
the accident on two prior occasions.1 Sanders was riding his
motorcycle on Old International Airport Road in Anchorage when he
struck the rear of a slow-moving baggage train comprised of a
baggage tug and five baggage carts.2 The accident occurred near
Anchorage International Airport, a facility operated by the State
of Alaska.3 The state condoned UALs practice of operating
baggage trains on the road without warning lights.4 When the
accident occurred UAL was transporting cargo to the airport ramp
area from nearby property it leased from Rebecca Fox-Krogstad and
Sam Krogstad.5 The Krogstads leased the property from the state
and subleased it to UAL.6
The state informed the Krogstads in July 1993 that the
state had received a letter from Sanders threatening litigation.
The state told them it expected the Krogstads to indemnify and
defend the state against Sanderss claims. The Krogstads
potential liability to the state arose from the lease agreement
between the Krogstads, as lessee, and the state, as lessor; we
refer to this agreement as the state/Krogstad lease.7 In an
August 1993 letter the Krogstads informed UAL of the states claim
against the Krogstads, and invoked UALs obligations to indemnify,
defend and hold [the Krogstads] harmless for and from any claim,
loss, liability, and expense . . . arising out of [Sanderss
accident]. UALs potential liability to the Krogstads arose from
the sublease between UAL, as lessee, and the Krogstads, as
lessor; we refer to this agreement as the Krogstad/UAL sublease.8
UAL rejected the Krogstads tender.
The Krogstads also informed State Farm, their insurer,
of Sanderss potential claim against the state and the states
potential claim against the Krogstads. State Farm acknowledged
that the Krogstads insurance policy covered claims arising from
Sanderss accident, but expressed its belief that UAL was the
proper party to handle the investigation and potential claims.
Sanders filed a complaint against UAL, the state, and
others in June 1994. The complaint alleged a number of causes of
action against the state, including negligence, defective product
or systems, negligent design of the roadway system, and breach of
duties owed by a landlord to a tenant.9 As an insured under the
Krogstads State Farm policy, the state tendered its defense and
demand for indemnity to State Farm. State Farm rejected the
states tender, reasoning that the policy did not cover Sanderss
claims. State Farm later agreed to defend the state subject to a
reservation of rights to disclaim coverage.
The state filed a third-party complaint in October 1996
against the Krogstads based on the indemnity provision of the
state/Krogstad lease. The complaint claimed that the indemnity
provision covered any damages awarded against the state arising
out of Sanderss complaint, including all expenses incurred by the
state in defending itself. Invoking the terms of the
Krogstad/UAL sublease, the Krogstads then asked UAL to indemnify
and defend them against the states claims. UAL again rejected
the Krogstads tender.
We held in May 1997 that State Farm had a duty to
defend the state because the accident arose out of the use of the
leased premises for their authorized purpose.10 The Krogstads
sought judgment in November 1997 requiring UAL to pay for the
Krogstads defense against the states third-party complaint. The
state resolved its third-party claim in April 1998 following our
decisions in State, Department of Transportation v. State Farm11
and State, Department of Transportation v. Sanders.12 Sanders
settled with the state on April 21, 1998 for $2.09 million.13 On
the same date the state released, upon receipt of $1.77 million,
the Krogstads and their insurers from any third-party liability
related to Sanderss accident and the resulting litigation. State
Farm paid the $1.77 million. UAL settled with Sanders for
$2,275,000.
The superior court permitted State Farm to substitute
for the Krogstads in their complaint against UAL in June 1998.
State Farms fourth-party complaint stated that UAL is liable
under the [Krogstad/UAL sublease] for the $1,770,000 paid to the
State by State Farm to settle the States third-party complaint
against the Krogstads . . . [and] for all fees and costs incurred
by State Farm in defending the Krogstads against the States third-
party complaint. UAL moved and State Farm cross-moved for
summary judgment. The superior court denied UALs summary
judgment motion and granted State Farms cross-motion in February
2000. Final judgment was entered for State Farm in April 2000
for: $1.77 million, representing the settlement amount between
the Krogstads and the state; $31,641.01, representing the
reasonable attorneys fees and costs State Farm incurred in the
summary judgment proceedings against UAL; and $31,954.55,
representing the reasonable attorneys fees and costs the
Krogstads incurred in defending against the states third-party
claim.
UAL appeals.
III. DISCUSSION
A. Standard of Review
We review a grant of summary judgment de novo.14 A
summary judgment movant must establish that there are no genuine
issues of material fact and that it is entitled to judgment as a
matter of law.15 We will draw all reasonable factual inferences
in favor of UAL, the party opposing summary judgment.16 But
[w]hen there is no dispute about the factual circumstances
surrounding [a] contract, the interpretation of an indemnity
provision presents a question of law.17
B. The Superior Court Did Not Err in Granting Summary Judgment
to State Farm.
1. The plain language of the indemnity clause in the
Krogstad/UAL sublease requires UAL to indemnify and defend the
Krogstads against the states third-party claim.
UAL argues that the indemnity provision, section 7.5(b)
of the Krogstad/UAL sublease, does not require it to indemnify or
defend the Krogstads against the states third-party claim.18 The
provision requires UAL to indemnify the Krogstads from all suits,
actions, damages, liability, and expenses in connection with .
. . personal injury . . . arising from or out of any occurrence
at the Premises, or from the use by [UAL] . . . of the Premises .
. . . (Emphasis added.) UAL argues that the Krogstads potential
liability on a claim asserted by Sanders against the state and
tendered to the Krogstads for defense and indemnity did not
aris[e] from or out of any occurrence at or UALs use of the
premises. We are unpersuaded. The states third-party complaint
against the Krogstads clearly arose from UALs operation of the
baggage cart in connection with UALs use of the premises
subleased to UAL by the Krogstads.
UAL argues that the indemnity provision of the
state/Krogstad lease is broader than that of the Krogstad/UAL
sublease because the Krogstads contracted to indemnify the State
for any and all claims related to the property, even for the
States own negligence. UAL assumed no such broad obligations to
the Krogstads. UAL is correct that it owes the Krogstads no duty
to indemnify them for their own negligence.19 But the Krogstads
liability to the state was not due to the Krogstads negligence.
UAL also argues that the term Lessor in section 7.5(b)
of the Krogstad/UAL sublease includes the state. The relevant
portion of section 7.5(b) exempts UAL from liability caused by
the negligence of Lessor, its agents, contractors, employees,
servants, invitees, or licensees. UAL states in a parenthetical
comment in its brief that this passage includes the Krogstads and
the Krogstad[s] lessor - the State of Alaska . . . . This
reading would excuse UAL from its indemnity duty, but we reject
UALs interpretation. The Krogstad/UAL sublease clearly defines
Lessor to be Sam and Rebecca Fox-Krogstad.20 There is no support
in the record for UALs interpretation of the term Lessor. And
UALs interpretation is at odds with the plain meaning of the term
Lessor as it appears in the Krogstad/UAL sublease.
2. The facts of this case do not require us to address UALs
status as an insurer or non-insurer.
1. UAL urges us not to treat it as an insurer. It argues that
insurance contracts can and often are construed as contracts of
adhesion,21 while commercial leases and commercial contractual
indemnity provisions are seldom construed in this manner. UAL
correctly notes that commercial leases frequently do not involve
parties in disparate bargaining positions, as is often the case
with insurance contracts. But the fact that UAL and the
Krogstads are both sophisticated parties does not assist UALs
claim that the states third-party claim falls outside the
coverage of the Krogstad/UAL sublease. Indeed, to the extent the
two parties are sophisticated commercial entities,22 UAL could
reasonably expect the broad indemnity provision of section 7.5(b)
of the sublease to cover claims exactly like this one i.e.,
claims arising out of UALs routine, authorized use of the
premises.
Furthermore, section 13 of the Krogstad/UAL sublease
gave UAL notice of the Krogstads relationship with the state and
the duties the Krogstads undertook to the state: [UAL] hereby
accepts the Premises subject to the terms and provisions of the
prime lease between the State of Alaska and the [Krogstads]. The
sublease UAL signed with the Krogstads contained undertakings
equivalent to those undertaken by the Krogstads to the state.
UAL could reasonably expect that it faced potential liability
arising from the Krogstads contractual relationship with the
state.
Finally, we have stated that the cost of insurance to
cover indemnification can be incorporated into the costs of
conducting business.23 Any uncertainty relating to UALs potential
liability due to the indemnity clause should properly have been
reflected in the price UAL paid to sublease the premises. In any
event, we do not need to treat UAL as an insurer to give
reasonable effect to the plain language of the Krogstad/UAL
indemnity clause.24
UAL also urges us not to treat its obligation under the
Krogstad/UAL sublease as we might treat the obligation of a
similarly situated insurer.25 We have held that where an insurer
breaches its contract, it is liable for the amount of a
reasonable settlement reached by the insured which falls within
the coverage provided by the policy.26 UAL cites Rogers & Babler,
Division of MAPCO Alaska v. State27 in arguing that this court has
not imposed such penalt[ies] on non-insurers, particularly under
simple indemnity agreements. But MAPCO does not require us to
determine whether the indemnity clause puts UAL in the position
of an insurer. In the MAPCO passage UAL cites, we were primarily
addressing whether an indemnity clause stating that [t]he
contractor shall indemnify and save harmless [the indemnitee]
also implied a duty to defend.28 We held that it did not and that
nothing else in the clause suggested that it did.29 We did not
address issues relating to treating non-insurers as insurers.
In any event, the plain language of the Krogstad/UAL
sublease imposes duties on UAL with respect to lawsuits arising
from its use of the premises. Because UAL could reasonably
expect to cover under the Krogstad/UAL sublease the states third-
party claim against the Krogstads, there is no need to consider
whether an indemnity clause issued by a commercial non-insurer
should be given the same interpretation as an indemnity clause
issued by an insurer. Our determination that UALs liability
extends to the states third-party claim against the Krogstads
turns on interpretation of the plain language of the indemnity
clause of the sublease. It does not, as UAL argues, require all
future contractual indemnitors, in all commercial settings, [to]
become insurers.30
3. UALs remaining arguments do not require us to reverse the
superior courts grant of summary judgment to State Farm.
1. UAL argues that State Farm would have no subrogation claim
against UAL had State Farm not breached duties it owed to the
state. UAL cites Alyeska Pipeline Service Co. v. H.C. Price Co.
as support for the proposition that the remedy for breach of
contract is to place the non-breaching party in the same legal
position it would have occupied but for the breach.31 Alyeska
differs from the current dispute because the party bringing suit
in Alyeska was a party to the contract.32 UAL is simply a third
party requesting relief for an alleged breach of an agreement
the State Farm insurance policy covering the state to which UAL
is not a party. It cannot rely on any breach of duty State Farm
owed the state. Because the State Farm policy covering the state
and the Krogstads imposed no duty benefitting UAL, any possible
breach by State Farm is irrelevant to UALs duties to the
Krogstads.
UAL further argues that it should only be forced to pay
some pro rata share of the indemnity and defense obligation and
that UAL and State Farm were joint insurers. The plain language
of section 7.5(b) of the Krogstad/UAL sublease dooms these
arguments. The Krogstads were contractually required to
indemnify the state for losses arising from UALs use of the
subleased premises, and the Krogstads simply transferred that
liability to UAL via the sublease indemnity clause. The
settlement paid by State Farm arose out of UALs use of the
premises. UALs obligation to indemnify the Krogstads under the
indemnity clause does not depend on State Farms actions as the
states or the Krogstads insurer.
In its reply brief UAL questions the reasonableness of
the settlement. The issue was not before the superior court and
is therefore not now properly before us.33
IV. CONCLUSION
Because we hold that the plain language of the
indemnity clause requires UAL to indemnify the Krogstads, we
AFFIRM the superior courts final judgment in favor of State Farm.
_______________________________
1 State, Dept of Transp. v. State Farm (State Farm I),
939 P.2d 788 (Alaska 1997); State, Dept of Transp. v. Sanders,
944 P.2d 453 (Alaska 1997).
2 State Farm I, 939 P.2d at 789.
3 Sanders, 944 P.2d at 455 & n.1.
4 State Farm I, 939 P.2d at 789.
5 State Farm I, 939 P.2d at 789-90.
6 Id. at 789.
7 Section 16 of the state/Krogstad lease required the
Krogstads to indemnify the state for liability relating to the
leased property:
The [Krogstads] shall indemnify, defend, and
hold the [state] harmless from any liability,
action, claim, suit, loss, property damage,
or personal injury of whatever kind resulting
from or arising out of any act of commission
or omission by the [Krogstads], [their]
agents, employees, or customers or arising
from or connected with the [Krogstads] use
and occupation of the Premises or the
exercise of the rights and privileges granted
by this lease.
Section 17 of the state/Krogstad lease obliged the
Krogstads to obtain insurance to protect the state and the
Krogstads:
(a) At no expense to the [state], the
[Krogstads] shall secure and keep in force
during the term of this lease adequate
insurance to protect both the [state] and the
[Krogstads] against comprehensive public
liability and property damage in no less than
the following amounts: (i) Property damage
arising from one occurrence in the amount of
not less than $50,000. (ii) Personal injury
or death in an amount of not less than
$100,000 per person and $300,000 per
occurrence. . . . (b) . . . All insurance
required by this covenant must . . . (iii)
include a waiver of subrogation by which the
insurer waives all rights of subrogation
against the [state] for payments made under
the policy.
8 Section 7.1 of the sublease sets out UALs obligation to
acquire insurance and to include the Krogstads as an additional
insured.
At no expense to [the Krogstads], [UAL] shall
obtain and keep in force and effect during
the term of this Lease, a policy of
comprehensive public liability insurance
insuring [UAL] against any liability arising
out of the ownership, use, occupancy, or
maintenance of the Premises and all areas
appurtenant thereto, and naming [the
Krogstads] as an additional insured to the
extent of the liability assumed by [UAL]
under Paragraph 7.5 herein. Such insurance
shall be in an amount of not less than
$500,000 for injury to or death of one person
in any one accident or occurrence and in an
amount of not less than $1,000,000 for injury
to or death of more than one person in any
one accident or occurrence. Such insurance
shall further insure [UAL] against liability
for property damage of at least $100,000.
The limits of said insurance shall not,
however, limit the liability of [UAL]
hereunder. If [UAL] shall fail to procure
and maintain said insurance, [the Krogstads]
may, but shall not be required to, procure
and maintain the same at the expense of
[UAL].
Section 7.5(b) of the sublease sets out UALs duty to
indemnify for injury or property loss:
[UAL] shall indemnify, defend, and hold
harmless [the Krogstads] from all suits,
actions, damages, liability, and expenses in
connection with loss of life, bodily or
personal injury, or property damage arising
from or out of any occurrence at the
Premises, or from the use by [UAL] or [UALs]
agents, contractors, employees, servants,
invitees, or licensees of the Premises and
the Complex including, but not limited to,
sidewalks, common areas, and facilities
within the Complex, unless caused by the
negligence of [the Krogstads], [their]
agents, contractors, employees, servants,
invitees, or licensees.
9 State Farm I, 939 P.2d at 793.
10 Id.
11 939 P.2d 788 (Alaska 1997).
12 944 P.2d 453 (Alaska 1997).
13 The state also paid $110,000 to Sanderss minor son.
14 State Farm I, 939 P.2d at 790 (citation omitted).
15 Reeves v. Alyeska Pipeline Serv. Co., 926 P.2d 1130,
1134 (Alaska 1996) (citing Zeman v. Lufthansa German Airlines,
699 P.2d 1274, 1280 (Alaska 1985) (citation omitted)).
16 Id. (citation omitted).
17 Duty Free Shoppers Group Ltd. v. State, 777 P.2d 649,
652 (Alaska 1989) (citation omitted).
18 See supra note 8.
19 Id.
20 The relevant provision is section 1 of the Krogstad/UAL
sublease:
PARTIES. This lease . . . is made by and
between SAM KROGSTAD and REBECCA FOX-
KROGSTAD, as husband and wife (Lessor) and
UNITED AIRLINES (Lessee).
UAL does not argue, and the record does not establish,
that the contract language agents, contractors, employees,
servants, invitees or licensees applies to the state.
21 Bering Straits Sch. Dist. v. RLI Ins. Co., 873 P.2d
1292, 1294-95 (Alaska 1994).
22 UALs vice president of airport affairs signed the
Krogstad/UAL sublease.
23 Manson-Osberg Co. v. State, 552 P.2d 654, 659 (Alaska
1976) (giving effect to plain language of indemnity clause as
reasonably construed in commercial cases because insurance is
increasingly used as means of allocating risk); see also Burgess
Const. Co. v. State, 614 P.2d 1380, 1383 (Alaska 1980) (holding
anticipated costs of obtaining insurance to cover indemnification
included as part of bid on project); but cf. Kissick v.
Schmierer, 816 P.2d 188, 191 n.4 (Alaska 1991) (refusing to adopt
unambiguous-language-of-an-indemnity-clause-as-reasonably-
construed approach for non-commercial setting because non-
commercial cases are distinguishable: for example, commercial
entities are usually in essentially equal bargaining positions,
unlike non-commercial entities; also, commercial entities can
incorporate cost of insurance to cover indemnification).
24 Manson-Osberg, 552 P.2d at 659.
25 E.g., C.P. ex rel. M.L. v. Allstate Ins. Co., 996 P.2d
1216, 1222 (Alaska 2000) ([W]here a clause in an insurance policy
is ambiguous in the sense that it is reasonably susceptible to
more than one interpretation, we accept the interpretation that
most favors the insured.).
26 Grace v. Ins. Co. of N. Am., 944 P.2d 460, 464 n.7
(Alaska 1997) (citing Afcan v. Mut. Fire, Marine & Inland Ins.
Co., 595 P.2d 638, 646-47 (Alaska 1979)).
27 713 P.2d 795, 800 n.4 (Alaska 1986) (reasoning that
because contractual indemnitor had no duty to defend in that
case, court need not reach issue whether contractual indemnitor
was liable for whole settlement where it refused to tender
defense).
28 Id. at 800.
29 Id. at 799-800.
30 In addition, nowhere in MAPCO were we called upon to
decide whether to treat non-insurers as insurers. See id. at 800
n.4 (declining specifically to address this issue in context of
liability flowing from breach of duty to defend).
31 694 P.2d 782, 787 (Alaska 1985) (citations omitted).
32 Id. at 784.
33 Pierce v. Pierce, 949 P.2d 498, 500 (Alaska 1997)
(citation omitted).
