Summary
holding exclusion did not absolve insurer of duty to defend because "no factual or legal basis currently exists for applying the Exclusion"
Summary of this case from Pendergest-Holt v. Certain UnderwritersOpinion
No. 1:04-CV-00697.
May 25, 2006
OPINION AND ORDER
This matter is before the Court on Plaintiff Federal Insurance Company's (hereinafter "Federal") Motion for Summary Judgment (doc. 47), the Defendant/Counterclaim Plaintiff Cintas Corporation's (hereinafter "Cintas") Motion for Summary Judgment (doc. 48), their respective Memoranda in Opposition (docs. 52, 50), and their respective Replies in Support (docs. 54, 53).
FACTS AND PROCEDURAL HISTORY
The Court has recited the facts in an earlier Order (See doc. 34) and this fact section is largely a carbon copy of that Order's fact section. However, where additional facts are discussed the Court so notes by indicating a document number other than "34." Currently Cintas is being sued by various current and former Cintas employees in federal court in California (hereinafter the "Veliz Action"). Federal, pursuant to an insurance policy, assumed the defense of Cintas in the Veliz Action. In a letter dated September 12, 2003, Federal indicated that coverage was available under the Policy based upon Count 1 and Count 2 (see infra) subject to a reservation of rights (doc. 48). Federal stated in this letter, "[Federal Insurance] acknowledges the availability of coverage for the Claims asserted by the plaintiffs in the Amended Complaint for violations of ERISA.") (Id.).
The Policy at issue in this matter was sold by Federal to Cintas, effective July 1, 2002 through July 1, 2003. The Policy was an Executive Protection Policy and included Fiduciary coverage. The Veliz Action, as noted above, involves an action filed by various current and former Cintas employees against Cintas, Cintas as the Plan Administrator for the Cintas' Partners Plan (hereinafter the "Plan"), and "Does 1-25" in the United States District Court for the Northern District of California, Case Number C-03-1180-SBA. The Plaintiffs in the Veliz Action claim that Cintas (as employer and as Plan Administrator) as well as other defendants violated ERISA, as well as various federal and state wage and hour laws. The Veliz Action contained thirteen claims, two of which were ERISA claims and the remaining eleven were the various wage and hour claims under both federal and state law (doc. 26).
The first ERISA claim ("Count 1") alleged that Cintas violated Section 209(a)(1) of ERISA, 29 U.S.C. § 1059(a)(a) by misclassifying the plaintiff-employees as "non hourly" and thereby failing to maintain employment records sufficient to determine the benefits that were due or might have become due to the plaintiff-employees. The second ERISA claim ("Count 2") alleged that Cintas as employer and Cintas as Plan Administrator both breached fiduciary duties owed to the plaintiff-employees under Section 404(a)(1) of ERISA by misclassifying the plaintiff-employees and failing to properly credit hours of service performed by them (Id.).
The Veliz court granted in part and denied in part Cintas' Motion to Dismiss — dismissing the second claim for relief, but denying Cintas' motion to dismiss the first claim for relief. Federal subsequently filed the matter before this Court seeking a declaration that would permit it to withdraw its defense in the Veliz Action, seeking a declaration that it is not obligated to indemnify Cintas for any judgment rendered in the Veliz Action, and seeking to recover from Cintas the majority of defense costs that Federal has paid thus far in defense of the Veliz Action. Federal maintains that the only claim arguably covered under the Policy — i.e., the claim for an alleged breach of fiduciary duty under ERISA set forth in the Count 2 — was dismissed in the Veliz Action. As such, it contends that the declarations it seeks are appropriate. The effect of the order dismissing Count 2 in the Veliz Action is of paramount importance in this matter.
Prior to Federal's filing the instant action, it communicated with Cintas via letter (doc. 48). In that letter, dated June 29, 2004, Federal informed Cintas that it no longer considered Count 1 to be covered by the policy (Id.). This letter was forwarded to Cintas approximately eight months after the Veliz court's order and approximately four months before Federal filed its declaratory action in this Court (Id.). According to Federal, the June 2004 letter was accompanied by a check in the amount of $708,049.78 for reimbursement of legal costs incurred from March 19, 2003 through February 26, 2004 (doc. 47). Federal reiterated its reservation of rights, stating "Federal reserves the right to decline coverage and to seek reimbursement of any amounts paid by Federal for the defense of non-covered claims" (Id.). Federal submits that Cintas cashed this check and did not object to Federal's repeated reservation of the right to seek reimbursement for any overpayment of defense costs (Id.). Cintas contends that this check was not accompanied by a reservation of rights letter and, as such, Cintas had nothing to which it could have objected (doc. 52).
Cintas filed a counterclaim which mirrors the action brought by Federal. In other words, Cintas seeks a declaration from this Court that Federal is obligated to defend and to indemnify Cintas for any judgment (Id.). Furthermore, Cintas makes a claim for breach of contract regarding payment of defense costs. But Cintas notes that it is not moving for summary judgment on its contract counterclaims as facts supporting this cause of action continue to evolve (doc. 48).
Shortly after the filing of the instant matter, Cintas moved for a stay (doc. 20). The Court denied that Motion (doc. 34). Cintas then filed a Motion for Reconsideration or to Dismiss, In Part, for Lack of Jurisdiction (doc. 40). The Court denied that Motion and ordered the Parties to file any dispositive motions by February 7, 2006 (doc. 44). As noted, both Parties did so (docs. 47, 48). Just recently Cintas filed for Leave to Amend Its Counterclaim (doc. 55). The Court will address this motion in a forthcoming Order.
APPLICABLE LEGAL STANDARD
The narrow question that this Court must decide on a motion for summary judgment is whether there exists a "genuine issue as to any material fact and [whether] the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The Supreme Court elaborated upon the appropriate standard in deciding a motion for summary judgment as follows:
[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
The moving party bears the initial burden of showing the absence of a genuine issue of material fact as to an essential element of the non-movant's case. Id. at 321; Guarino v. Brookfield Township Trustees, 980 F.2d 399, 405 (6th Cir. 1992); Street v. J.C. Bradford Co., 886 F.2d 1472, 1479 (6th Cir. 1989). If the moving party meets this burden, then the non-moving party "must set forth specific facts showing there is a genuine issue for trial." Fed.R.Civ.P. 56(e); seeGuarino, 980 F.2d at 405.
As the Supreme Court stated in Celotex, the non-moving party must "designate" specific facts showing there is a genuine issue for trial. Celotex, 477 U.S. at 324; Guarino, 980 F.2d at 405. Although the burden might not require the non-moving party to "designate" facts by citing page numbers, "the designated portions of the record must be presented with enough specificity that the district court can readily identify the facts upon which the non-moving party relies.'" Guarino, 980 F.2d at 405 (quoting Inter-Royal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir. 1989), cert. denied, 494 U.S. 1091 (1990).
Summary judgment is not appropriate if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Conclusory allegations, however, are not sufficient to defeat a motion for summary judgment. McDonald v. Union Camp Corp., 898 F.2d 1155, 1162 (6th Cir. 1990). Furthermore, the fact that the non-moving party fails to respond does not lessen the burden on the moving party or the court to demonstrate that summary judgment is appropriate. Guarino, 980 F.2d at 410; Carver v. Bunch, 946 F.2d 451, 454-55 (6th Cir. 1991).
ANALYSIS
Federal Insurance aptly notes that a federal court sitting in diversity applies the choice of law rules of the forum state.Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Furthermore, pursuant to Ohio law, an insurance policy that has been executed and delivered in Ohio supports an application of Ohio law. Ohayon v. Safeco Ins. Co. Of Ill., 747 N.E.2d 206, 210-11 (Ohio 2001). The Parties do not dispute that Ohio law should apply in this matter.
The Court begins its analysis with an extensive quotation from a recent Ohio Supreme Court case in which that court discusses an insurer's duty to defend an insured.
An insurance policy is a contract whose interpretation is a matter of law. Contract terms are to be given their plain and ordinary meaning. If provisions are susceptible of more than one interpretation, they will be construed strictly against the insurer and liberally in favor of the insured. Additionally, an exclusion in an insurance policy will be interpreted as applying only to that which is clearly intended to be excluded . . . An insurer's duty to defend is broader than and distinct from its duty to indemnify. An insurer has an absolute duty to defend an action when the complaint contains an allegation in one of its claims that could arguably be covered by the insurance policy, even in part and even if the allegations are groundless, false, or fraudulent. Once an insurer must defend one claim within a complaint, it must defend the insured on all the other claims within the complaint, even if they bear no relation to the insurance-policy coverage. An insurer need not defend any action or any claims within the complaint when all the claims are clearly and indisputably outside of the contracted policy coverage. The duty to defend is further heightened when the insurer expressly states that it will defend claims that are groundless, false, or fraudulent. The duty to defend an action is not determined by the action's ultimate outcome or the insurer's ultimate liability.Sharonville v. Am. Employers Ins. Co., 846 N.E.2d 833 (Ohio 2006) (internal citations and quotations omitted).
Under Ohio law, the "duty to indemnify is separate and distinct from [an insurer's] . . . obligation to defend an insured in an action . . ." Twin Maples Veterinary Hosp. v. Cincinnati Ins. Co., 824 N.E.2d 1027, 1030 (Ohio Ct.App. 2005) (internal citations omitted). Furthermore, the triggering event requiring a duty to indemnify is the insured's actual legal liability. Id. Ohio courts have noted that the duty to indemnify may be properly decided in an action for declaratory judgment filed by the insurer. Guideone Mut. Ins. Co. v. Reno, 2002 WL 857682, *3 (Ohio Ct.App. 2d Dist. April 26, 2002).
Federal Insurance submits that it is entitled to judgment in its favor for the following three reasons:
1. It owes no duty to defend and no duty to indemnify Cintas pursuant to the terms of the Policy because the Veliz Action no longer contains a Claim for a Wrongful Act as that term is defined in the Policy;
2. It owes no duty to defend and no duty to indemnify Cintas because of the Personal Profit Exclusion contained in the Federal Policy; and
3. It owes no continuing duty to defend Cintas because the Veliz Action has been confined to theories of recovery outside the scope of the Policy.
Federal also maintains that as a matter of law it is entitled to a declaration for allocation and reimbursement of defense costs that it has paid for claims not covered by the Policy (doc. 47). Cintas avers in its Motion for Summary Judgment that this Court should grant summary judgment in its favor on all of Federal's claims as well on Count 1 and 2 of its Counterclaim as no genuine issue of material fact exists as to these claims (doc. 48).
Federal first argues that the clear language of the Insuring Clause of the Policy requires a claim for a wrongful act, which is limited to a breach of fiduciary duty with regard to a sponsored plan; a claim asserted solely because of the defendant's service as a fiduciary of any sponsored plan; or negligence in the administration of a sponsored plan (Id.). Federal takes the position that no claim remains in the Veliz Action that asserts a "wrongful act" as defined by the Policy (Id.).
The Court agrees with Federal that the eleven federal and state wage and hour Claims for Relief in the Veliz Action do not allege, in any manner, conduct that could be considered a "wrongful act" under the Policy. Nor does it appear that Cintas argues to the contrary. But, the Court does not agree with Federal that the remaining ERISA claim (Count 1 in the Veliz Action) is not a "wrongful act" as defined by the Policy.
Federal submits that the duty to keep accurate records imposed by ERISA Section 209(a)(1), 29 U.S.C. § 1059(a)(1) is a requirement imposed solely on an employer not a Plan Administrator and, accordingly, can not fall within the definition of "wrongful act" under the Policy (doc. 47). Federal extensively analyzes the law as it relates to Section 209(a)(1) and reasons that no other conclusion than that the section applies solely to employers can be reached. Furthermore, Federal notes that the Veliz plaintiffs did not assert Count 1 against Cintas as Plan Administrator and employer, as they did in Count 2 (Id.). Accordingly, as no claim was made against a Plan Administrator (a fiduciary) in Count 1, Federal concludes that a "wrongful act" was not committed as defined in the Policy (Id.).
Yet, the Court agrees with Cintas, finding that the Veliz court's November 2003 order (hereinafter the "November 2003 Order") establishes that the Veliz Action continues to include a cause of action against Cintas as Plan Administrator for an alleged violation of ERISA. Having reached this conclusion, Count 1 of the Veliz Action would clearly fall within the Policy definition of "wrongful act." The insuring clause of the fiduciary coverage section of the Policy states the coverage that Federal Insurance agreed to provide to Cintas. It reads in relevant part: The Company [i.e., Federal] shall pay on behalf of the Insured [Cintas] all Loss for which the Insured becomes legally obligated to pay on account of any Claim . . . made against the Insured . . . for a Wrongful Act committed or attempted, or allegedly committed or attempted . . . by an Insured or by any person for whose Wrongful Acts an Insured is legally responsible.
The term "wrongful act" is defined, in part, to mean:
(i) any breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by the Employee Retirement Income Security Act of 1974, as amended, or by the common or statutory law of the United States, or any state or other jurisdiction anywhere in the world; or (ii) any other matter claimed against the Sponsor Organization [Cintas] or an Insured Person solely because of the Sponsor Organization's or the Insured Person's service as a fiduciary of any Sponsored Plan . . .
(doc. 48). Thus, the insuring clause of the Policy promises that Federal will pay defense costs and judgments that Cintas becomes obligated to pay as a result of a lawsuit that includes an alleged or actual violation of a responsibility imposed upon Cintas in its (fiduciary) Plan Administrator capacity or that is related to Cintas' service as a Plan Administrator.
Although, Federal would argue that the November 2003 Order implicitly states that Count 1 of the Veliz Action is made against Cintas in its capacity as employer only and not in its fiduciary capacity as Plan Administrator and employer, the Court finds that the explicit language of the November 2003 Order states otherwise. First the Court notes that the November 2003 Order applies, in evaluating the sufficiency of the Veliz plaintiffs' ERISA claims, the liberal standard of Rule 8(a) of the Federal Rules of Civil Procedure (Id.).
In so evaluating the sufficiency of Count 1 of the Veliz Action, the Veliz court stated: "ERISA requires that a benefits Plan Administrator maintain accurate records so that an employee's benefits can be readily determined. 29 U.S.C. § 1059(a)(1) (the `Record-Keeping Requirement'). Cintas is the Plan Adminstrator, thus Claim One of the Complaint alleges that as Plan Administrator Cintas violated the Record-Keeping Requirement" (doc. 52). Federal argues that this language in the November 2003 Order is an "innocent" mistake made by the Veliz court judge (doc. 50).
Determining whether a "mistake" was made is not what this Court has been asked to do. Rather, this Court has been asked to determine whether the Veliz Action presents a claim requiring Federal to defend and indemnify Cintas. A sister court has determined that under the circumstances alleged in the Veliz Action, Count 1 of that action alleges that as "Plan Administrator Cintas violated the Record-Keeping Requirement" of ERISA. This Court recognizes that the Veliz court is the court properly positioned to determine what ERISA claims are presented in the Veliz complaint. Reading the Veliz complaint liberally and observing the current posture of the Veliz Action (i.e., the November 2003 Order), it can only be determined that Count 1 "arguably" is a claim against Cintas as Plan Administrator (fiduciary) which requires, pursuant to the terms of the Policy, that Federal Insurance defend Cintas as to that claim.
Furthermore, as required by Ohio law, Federal must defend all the claims in the Veliz Action since one claim has been determined to "arguably" be covered by the Policy. See Sharonville. As the duty to defend an action is not determined by the action's ultimate outcome or the insurer's ultimate liability, the Court need not pass its own judgment on whether it finds the Veliz plaintiffs' claims well-taken. Id. It must only decide, as it has, that the claim is one arguably covered by the policy.
As to Federal's duty to indemnify, the Court has determined that the Veliz Action indeed includes an ERISA cause of action against Cintas as Plan Administrator. This cause of action is a "wrongful act" as defined by the Policy. The Policy obligates Federal to pay "all Loss for which the Insured becomes legally obligated to pay on account of any Claim . . . made against the Insured . . . for a Wrongful Act committed or attempted, or allegedly committed or attempted . . . by an Insured or by any person for whose Wrongful Acts an Insured is legally responsible." As such, Federal must indemnify Cintas for all loss resulting from Count 1 of the Veliz Action. Federal is not obligated to indemnify losses incurred as a result of the remaining federal and state wage and hour claims in the Veliz Action.
But, Federal argues that it is not required to indemnify Cintas for all loss resulting from Count 1 because of the Policy's Illegal Personal Profit Exclusion (hereinafter the "Exclusion"). The Exclusion reads:
[Federal] shall not be liable for Loss on account of any Claim made against any Insured: (h) based upon, arising from, or in consequence of such Insured having gained in fact any personal profit, remuneration or advantage to which such Insured was not legally entitled . . .
(doc. 47). Federal notes, and the Court agrees, that the Veliz plaintiffs seek "restitution and disgorgement of all benefits" Cintas obtained as a result of its alleged misconduct (Id.). But, as noted by Cintas, it has not been established in either the Veliz Action or the instant action that Cintas ever obtained a personal profit and that any such personal profit was illegal.
Federal cites TIG Speciality Ins. Co. v. Pinkmonkey.com, Inc., 375 F.3d 365 (5th Cir. 2004) in support of its argument that the Exlusion should preclude it from providing indemnification. The TIG court did find that a personal profit exclusion precluded coverage for judgments and settlements against the insureds who profited by violating securities laws.TIG at 372-73. Federal's reliance on TIG is misplaced. One must recognize that in TIG the insurer filed its declaratory judgment action after the underlying securities case was litigated and a jury had determined that the insured had, in fact, personally benefitted from his securities violations. Id at 370. In the matter before the Court, there has been no finding yet that Cintas obtained a personal benefit to which it was not entitled.
Cintas highlights St. Paul Mercury Ins. Co. v. Foster, 268 F. Supp. 2d 1035 (C.D. Ill. 2003), for the proposition that mere allegations do not provide a basis for applying the Exclusion (doc. 52). The St. Paul court stated:
With all due respect, St. Paul's position is untenable and ignores the nature of the claims asserted in the Keach case. The very language of the exclusion is premised upon an "Insured gaining in fact any personal profit . . . to which such Insured was not legally entitled . . ." (Emphasis added). St. Paul's interpretation renders the "in fact" language superfluous, which is contrary to the principles of construction directing courts to give meaning to all policy provisions and avoid interpretations that render any part of the contract superfluous. As the selling shareholders in this case could receive personal profits and be legally entitled to retain them so long as adequate consideration was given in return, and that issue remains to be determined at trial in the underlying litigation, it is clear that any determination as to whether an insured in this case gained personal profit in fact must await resolution of the underlying litigation.St. Paul at 1045. As no factual or legal basis currently exists for applying the Exlusion, Federal is not entitled to a declaration that the Exclusion precludes its duty to indemnify Cintas as to Count 1 of the Veliz Action. If it is determined that Cintas did in fact obtain personal profit to which it was not entitled, then Federal having properly reserved its rights, may renew its motion on this issue.
The Court has thus far held that Federal has a duty to defend. It should be made clear that Federal's duty to defend, as required by Ohio law, is to all claims in the Veliz Action.Sharonville at 837 ("[o]nce an insurer must defend one claim within a complaint, it must defend the insured on all the other claims within the complaint, even if they bear no relation to the insurance-policy coverage"). The Court agrees with Cintas that allocation between covered and non-covered claims under Ohio law is generally not permitted. The Court further agrees with Cintas that Federal's reliance on Telxon Corp. v. Federal Ins., 309 F.3d 386 (6th Cir. 2002) is misplaced. For allocation to apply in regards to defense costs, Federal must have used language in the Policy that is "clear and exact" so that the exclusion could be "given effect." Telxon at 394-95 (internal citations omitted). The Policy does not contain such clear and exact language. Furthermore, having found Federal has a duty to defend, it can not be entitled to a recoupment of fees already paid. Additionally, the Court has determined that Federal has a duty to indemnify Cintas as to Count 1 of the Veliz Action.
CONCLUSION
Therefore the Court hereby DENIES Federal's Motion for Summary Judgment (doc. 47) and GRANTS Cintas' Summary Judgment Motion (doc. 48). Specifically, the Court DENIES Federal's Motion as it relates to the duty to defend and GRANTS Cintas' Motion on that issue — Federal is REQUIRED TO DEFEND all claims in the Veliz Action. Furthermore, the Court DENIES Federal's Motion as it relates to recoupment of fees and GRANTS Cintas' Motion on said issue. Finally, the Court DENIES Federal's Motion for Summary Judgment on the issue of indemnification and GRANTS Cintas' Motion on this issue — Federal must indemnify Cintas for Count 1 of the Veliz Action. As neither Party moved for Summary Judgment on Cintas' breach of contract counterclaim, this cause of action remains.
SO ORDERED.