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Spirtas Co. v. Insurance Company of the State of Pennsylvania

February 3, 2009

SPIRTAS COMPANY, DOING BUSINESS AS SPIRTAS WRECKING COMPANY, FORMERLY KNOWN AS ARNOLD R. SPIRTAS COMPANY; SPIRCO ENVIRONMENTAL, INC., FORMERLY KNOWN AS SPIRCO SERVICES, INC.; SPIRTAS INDUSTRIAL SERVICES, INC.; SERVICE CONTRACTORS, INC.; ABATEMENT SERVICES, INC.; ARNOLD R. SPIRTAS; SANDRA T. SPIRTAS; JOEL A. SPIRTAS, PLAINTIFFS - APPELLANTS,
v.
THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, DEFENDANT - APPELLEE.



Appeal from the United States District Court for the Eastern District of Missouri.

The opinion of the court was delivered by: Melloy, Circuit Judge

Submitted: December 14, 2007

Before BYE, ARNOLD, and MELLOY, Circuit Judges.

Appellants are a collection of related individuals, demolition firms, and environmental remediation firms. Appellee, The Insurance Company of the State of Pennsylvania ("ICSP"), is a provider of surety bonds. ICSP required Appellants to enter into two general indemnity agreements in favor of ICSP as a condition for ICSP to issue a surety bond guaranteeing that one of the appellants, Spirco Environmental, Inc. ("Spirco"), would perform a remediation contract. ICSP subsequently incurred attorney and expert witness fees defending a claim on the bond. Eventually, ICSP sought indemnification for these fees from Appellants in accordance with the general indemnity agreements. Appellants brought the present declaratory judgment action seeking a ruling that they were not liable for ICSP's fees. In ruling on two separate motions for summary judgment, the district court*fn1 held that ICSP was entitled to receive fees and expenses from Appellants and that the amount due was approximately $800,000 plus pre- and post-judgment interest. We affirm.

I. Background

In February 1997, Spirco, a Missouri-based contractor, entered into a remediation contract with a New Jersey property owner to conduct asbestos removal at a New Jersey property. Spirco was to receive about $2.8 million under the contract. In order to obtain the contract, the property owner required Spirco to post a surety bond, and Spirco sought a bond from ICSP. As a requirement for issuing the bond, ICSP demanded that Spirco and the other Appellants enter into two separate general indemnity agreements obligating Appellants to pay ICSP for "all loss and expense, including attorney fees, incurred by [ICSP] by reason of having executed any Bond." Appellants entered into the indemnity agreements, and ICSP issued the surety bond at issue in the present case in the amount of $2.8 million. The remediation contract between Spirco and the property owner contained an arbitration clause, and the contract for the bond between ICSP and Appellants expressly incorporated the remediation contract by reference.

Throughout the course of the remediation, a third party inspected and approved Spirco's work, and the property owner made partial payments based on the third party's approval. When Spirco believed all work was complete, it demanded payment of the final $150,000 under the $2.8 million contract. The property owner had been holding this amount as retainage. The third-party inspector recommended that the property owner pay the final amount. The inspector also reported to the property owner that the site was clean and that Spirco had completed asbestos removal according to the scope of work as described in technical project specifications for the contract.

The property owner refused to pay the final $150,000, alleging that Spirco had not properly performed the remediation. The property owner asserted that Spirco failed to remove all asbestos and caused property damage by spreading asbestos to previously uncontaminated areas by using power-washing equipment without proper containment. Spirco disputed these allegations based on the third-party inspector's approval of Spirco's work. Spirco further asserted that any asbestos found by the property owner was not within the scope of Spirco's work, but rather, was asbestos other workers had dislodged after Spirco left the site. Spirco asserted specifically that the asbestos came from areas of the building that were not exposed during Spirco's work.

In July 1998, the property owner submitted a bond claim to ICSP demanding that ICSP pay for additional remediation services allegedly caused by Spirco's contamination of the site. ICSP refused to pay the claim.

In September 1998, Spirco initiated arbitration with the property owner in an attempt to obtain the final $150,000 contract amount. The property owner asserted a counterclaim against Spirco, seeking over $4 million based on lost rental income and additional remediation costs. The property owner sought to add ICSP to the arbitration, asserting a claim for over $4 million in compensatory damages. The property owner also sought over $4 million in punitive damages, alleging a bad faith failure to pay the property owner's earlier bond claim.

Facing a claim that appeared to exceed Spirco's ability to pay and that, in fact, exceeded the bond limit, ICSP eventually elected to participate in the arbitration by hiring outside counsel and retaining a technical expert. Initially, ICSP resisted participating in the arbitration and argued the bond contained no provision requiring arbitration. The property owner, however, threatened to seek a federal court order compelling arbitration. The property owner noted in a letter to ICSP that the bond incorporated the remediation contract by reference and that the arbitration clause, therefore, applied to ICSP as held in Hoffman v. Deposit Co. of Maryland, 734 F. Supp. 192 (D.N.J. 1990). Eventually the property owner agreed to drop the claim for punitive damages and reduce its total demand to $2.8 million, the amount of the bond limits, plus interest, in exchange for ICSP's agreement to participate in the arbitration.

ICSP's counsel and expert attended the arbitration, which entailed forty-four days of proceedings spread over a period of months. ICSP's counsel and expert were present for most of these days, and ICSP's counsel participated actively on many days, examining and cross examining Spirco's witnesses and the property owner's witnesses. Although ICSP held several suretyship defenses,*fn2 the primary focus of the arbitration was not on ICSP's suretyship defenses until after the thirty-seventh day of proceedings.

Spirco was represented by its own counsel. During the course of arbitration, counsel for Spirco sent a letter to ICSP questioning ICSP's motives for participating in the arbitration and complaining about ICSP's participation. In the same letter, however, counsel for Spirco complained that ICSP was not mounting a sufficiently vigorous defense, suggested strategies for ICSP to employ, and demanded that ICSP mount an aggressive defense. ICSP responded by letter, offering to let Spirco assume sole defense of all claims contingent on Appellants posting the $2.8 million bond limit as collateral to ensure payment of the indemnification obligation in the event Appellants, or Appellants and ICSP, were to lose in the arbitration. Appellants did not accept ICSP's offer to let them assume the entire defense.

The parties eventually submitted the case to the arbitrators who found in favor of Spirco and ICSP and against the property owner. The arbitrators cited two rationales for finding in favor of ICSP. First, the arbitrators held, "the finding on the claim against Spirco is dispositive against [ICSP]." Second, the arbitrators found that the property owner had improperly contracted with a replacement remediation firm and commenced additional work without giving ICSP adequate opportunity to respond to the claim, as required under the bond. Accordingly, ICSP succeeded on its shared defense with Spirco as well as on a separate, suretyship defense. In reaching these ultimate conclusions, the arbitrators found that the property owner had permitted contractors working on ductwork, windows, and other items to ...


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