Summary
In National American Insurance Co. v. Columbia Packing Co., 2003 WL 21516586 (N.D. Tex. Apr. 7, 2003) (Kaplan, J.), the insured moved for summary judgment on its extra-contractual claims for violations of Tex. Ins. Code Ann. art. 21.21 § 4(10)(iv).
Summary of this case from Mid-Continent Casualty Company v. Eland Energy, Inc.Opinion
No. 3-02-CV-0909-BD
April 7, 2003
MEMORANDUM OPINION AND ORDER
This insurance coverage dispute is before the court on cross-motions for summary judgment. For the reasons stated herein, plaintiff's motion is denied and defendant's motion is granted in part and denied in part.
I.
Defendant Columbia Packing Company, Inc. ("CPC") is a family-owned business that packages and distributes meat products. (Def. App. at 1, ¶ 2). At all times relevant to this suit, CPC was insured under a commercial property insurance policy issued by Plaintiff National American Insurance Company ("NAIC"). ( Id. at 56, 119). The policy provides coverage for, inter alia, "direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss." ( Id. at 135, § A). "Covered Property" includes "stock," which is defined as "merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping." ( Id. at 135, § A(1)(b)(3) 143, § H(2)). "Covered Cause of Loss" means "risks of direct physical loss," unless the loss is excluded or otherwise limited by the terms of the policy. ( Id. at 144, § A).
Two such exclusions or limitations are implicated in this case. First, the policy excludes coverage for loss or damage caused directly or indirectly by:
Dishonest or criminal act[s] by you, any of your partners, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose:
(1) Acting alone or in collusion with others; or
(2) Whether or not occurring during the hours of employment.
This exclusion does not apply to acts of destruction by your employees (including leased employees); but theft by employees (including leased employees) is not covered.
( Id. at 145, § B(2)(h)) ("Entrustment Exclusion"). Second, there is no coverage for loss or damage to:
Property that is missing, where the only evidence of the loss or damage is a shortage disclosed on taking inventory, or other instances where there is no physical evidence to show what happened to the property.
( Id. at 147, § C(1)(e)) ("Inventory Limitation").
Sometime in mid-1999, CPC discovered that certain meat products were missing from its storage facility at 2807 East 11th Street in Dallas, Texas. (Plf. App. at 1, ¶ 3). Subsequent investigation revealed that William Mahoney, a security guard employed by CSG Security Services and assigned to work at CPC, had been stealing meat from the warehouse at night. ( Id. at 2, ¶¶ 4-7; Plf. App. at 8-10, 12-14). Mahoney was arrested and pled guilty to theft. At his plea hearing, Mahoney admitted to stealing approximately $200,000 worth of meat between December 1999 and May 2000. (Plf. App. at 21-22).
These shortages were discovered when meat items sold off the inventory list could not be found in the warehouse. (Def. App. at 1, ¶ 3).
On July 6, 2001, CPC submitted a sworn proof of loss to NAIC in the amount of $211,076.64 for losses resulting from the theft. ( Id. at 36). NAIC denied coverage based on the Entrustment Exclusion and the Inventory Limitation. (Def. App. at 36-37). In a letter dated January 15, 2002, NAIC advised CPC that it would not pay the claim because:
The letter is actually dated January 15, 2001. However, both parties agree that this is a typographical error.
1. It appears that the only evidence of the loss or damage is a shortage disclosed on taking inventory, and there is no physical evidence to show what happened to the property.
2. The materials were stolen by authorized representatives and/or those entrusted with the property.
( Id. at 37). This decision prompted CPC to make formal demand on NAIC for the full amount of its loss, plus $6,150.54 in attorney's fees. ( Id. at 38-39). NAIC did not respond to the demand. Instead, it filed this declaratory judgment action to determine whether coverage exists under the terms of the insurance policy. CPC has counterclaimed for declaratory relief, breach of contract, breach of the common law duty of good faith and fair dealing, and violations of articles 21.21 and 21.55 of the Texas Insurance Code. The case is before the court on cross-motions for summary judgment. The issues have been briefed by the parties and the motions are ripe for determination.
Federal subject matter jurisdiction is proper because NAIC and CPC are citizens of different states and the amount in controversy exceeds $75,000, exclusive of interest and costs. See 28 U.S.C. § 1332 (a)(2).
II.
Summary judgment is proper when there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). A dispute is "genuine" if the issue could be resolved in favor of either party. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Thurman v. Sears, Roebuck Co., 952 F.2d 128, 131 (5th Cir.), cert. denied, 113 S.Ct. 136 (1992). A fact is "material" if it might reasonably affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Matter of Gleasman, 933 F.2d 1277, 1281 (5th Cir. 1991). Cases involving the interpretation of an insurance policy are particularly appropriate for summary disposition. See Principal Health Care of Louisiana v. Lewer Agency, Inc., 38 F.3d 240, 242 (5th Cir. 1994); SnyderGeneral Corp. v. Great American Insurance Co., 928 F. Supp. 674, 677 (N.D. Tex. 1996) (Kaplan, M.J.), aff'd, 133 F.3d 373 (5th Cir. 1998).
The disposition of the pending motions rests on an interpretation of various provisions of the insurance policy. Under Texas law, the insured has the burden to prove that coverage exists. Wallis v. United Services Automobile Association, 2 S.W.3d 300, 303 (Tex.App.-San Antonio 1999, pet. denied). The insurer must establish that one or more policy exclusions apply. See Federated Mutual Insurance Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 723 (5th Cir. 1999). Once the insurer proves that an exclusion applies, the burden shifts back to the insured to show that the claim falls within an exception to the exclusion. Id. The parties may satisfy their respective burdens on summary judgment by pointing to evidence in the record that creates or negates a genuine issue of material fact for trial. See Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.), cert. denied, 113 S.Ct. 82 (1992). All the evidence must be viewed in the light most favorable to the party opposing summary judgment. Rosado v. Deters, 5 F.3d 119, 122 (5th Cir. 1993). However, conclusory statements, hearsay, and testimony based merely on conjecture or subjective belief are not competent summary judgment evidence. Topalian, 954 F.2d at 1131.
III.
Both parties move for summary judgment on their claims for declaratory relief. CPC also seeks summary judgment on it counterclaim for breach of contract and certain extra-contractual claims. The court will first address the issues related to coverage.
In its motion, NAIC asks the court to grant summary judgment as to each of CPC's counterclaims. (Plf. MSJ at 3, ¶ 1.04). However, the brief submitted by NAIC contains no argument or authority to support such relief.
A.
The commercial property insurance policy issued by NAIC provides coverage for "direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss." (Def. App. at 135, § A). It is undisputed that the meat stolen from CPC is "Covered Property" and that theft is a "Covered Cause of Loss." Therefore, the issue before the court is whether coverage is excluded by the Entrustment Exclusion or the Inventory Limitation.
1.
NAIC argues that the loss incurred by CPC was the result of a dishonest or criminal act by William Mahoney, a security guard to whom the stolen meat products were "entrusted." CPC counters that this exclusion does not apply as a matter of law because it did not entrust the property to Mahoney. Alternatively, CPC argues that the Entrustment Exclusion is amgibuous.
CPC also argues that Mahoney was not an employee or authorized representative of the company, but rather the employee of an independent contractor. (Def. Resp. Br. at 6-9). However, this distinction is irrelevant for purposes of determining whether the Entrustment Exclusion applies. The insurance policy excludes coverage for loss or damage resulting from dishonest or criminal acts by " anyone to whom you entrust the property for any purpose." (Def. App. at 145, § B(2)(h)) (emphasis added). Therefore, the only relevant inquiry is whether CPC entrusted the property to Mahoney.
a.
Because the NAIC policy does not define "entrusted," the court must look to established rules of contract construction in defining this term. One such rule requires that the terms of an insurance contract must be given their plain, common, and ordinary meaning unless the policy clearly indicates that the terms are used in a different or technical sense. See Gulf Chemical Metallurgical Corp. v. Associated Metals Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993) (applying Texas law); Puckett v. United States Fire Insurance Co., 678 S.W.2d 936, 938 (Tex. 1984). The common and ordinary meaning of "entrust," as found in Webster's Third New International Dictionary, is:
1: to confer a trust upon; deliver something to (another) in trust.
2: to commit or surrender to another with a certain confidence regarding his care, use, or disposal of.
WEBSTER'S THIRD NEW INT'L DICTIONARY 759 (1993). At least two Texas courts have adopted this definition when interpreting entrustment exclusions in other types of policies. Imperial Insurance Co. v. Ellington, 498 S.W.2d 368, 372 (Tex.Civ.App.-San Antonio 1973, no writ) ("all risks" property insurance policy); Pacific Indemnity Co. v. Harrison, 227 S.W.2d 256, 257, 261 (Tex.Civ.App.-Dallas 1955, no writ) (on rehearing) (automobile insurance policy). See also Cougar Sport, Inc. v. Hartford Insurance Co. of the Midwest, 190 Misc.2d 91, 94, 737 N.Y.S.2d 770, 773 (2000); Van Sumner, Inc. v. Pennsylvania National Mutual Casualty Insurance Co., 74 N.C. App. 654, 657, 329 S.E.2d 701, 703 (1985).
The Fifth Circuit also interpreted a policy exclusion with similar language in David R. Balogh, Inc. v. Pennsylvania Millers Mutual Fire Insurance Co., 307 F.2d 894 (5th. Cir. 1962). In that case, David Balogh, a jewelry dealer, consigned a 15 carat emerald to Julio Castro, another dealer, who turned the gem over to a potential customer so it could be examined by his jeweler. The customer disappeared with the stone and the merchandise was never recovered. After Balogh filed a property loss claim, his insurance company denied coverage based on a provision that excluded coverage for "[l]oss . . . caused by or resulting from sabotage, theft, conversion or other act or omission of a dishonest character . . . on the part of any person to whom the property hereby insured may be delivered or entrusted by whomsoever for any purpose whatsoever . . ." Id. at 896. The Fifth Circuit held that common words in the policy, such as "entrusted," must be given their plain and ordinary meaning. Id. The court went on to explain:
When the word "entrusted" appears in the contract the parties must be deemed to have entertained the idea of a surrender or delivery or transfer of possession with confidence that the property would be used for the purpose intended by the owner and as stated by the recipient. The controlling element is the design of the owner rather than the motive of the one who obtained possession . . . The test is the intent or state of mind of the person turning the item over to another, not the intent or state of mind of the person receiving the item.Id. at 896-97.
Consistent with these authorities, the court adopts the Webster's dictionary definition of "entrusted." This term, as used in the exclusionary provision of the NAIC policy, "clearly suggests the existence of a consensual bailment situation where the person delivering the property expects the person to whom possession is delivered to use the property for the purpose intended by the owner and stated by the recipient." Ellington, 498 S.W.2d at 372, citing Balogh, 307 F.2d at 896.
b.
The summary judgment evidence shows that CPC kept its meat products in a locked warehouse at 2807 East 11th Street in Dallas, Texas. (Def. App. at 2, ¶ 8). William Mahoney, a security guard employed by CSG Security Systems, Inc., patrolled the premises at night. ( Id. at 2, ¶ 7). As part of his job, Mahoney was responsible for the security of the meat inventory. (Plf. App. at 125-26). However, it is unclear whether Mahoney was given a key to the locked warehouse or whether he was authorized to enter the storage facility for the purpose of discharging his duties. (Def. App. at 2-3, ¶ 8). James Liska, CPC's comptroller, testified that "Columbia Packing never delivered or surrendered possession of any of its meat products to William Mahoney, and never gave him permission or authorization to enter the locked warehouse wherein the meat products were stored." ( Id.). This testimony is corroborated by Horace Smith, Mahoney's supervisor at CSG, who said that security guards were not permitted to handle any of the meat inventory or remove meat from the premises. ( Id. at 28-29).
However, other evidence in the record suggests that Mahoney may have had a key to the building where the meat was kept which enabled him to exercise control over the property. On the evening of May 16, 2000, a witness observed Mahoney and several accomplices enter the front gate of the CPC plant, drive to the loading dock, and "unlock a rear door with keys in his possession and enter the location." (Plf. App. at 12). The suspects then loaded their vehicle with boxes of meat. ( Id.). This evidence seems to contradict Liska's testimony that Mahoney only had a key to the front gate and was not authorized to enter the locked warehouse. ( See id. at 124).
Liska speculates that Mahoney may have gained access to the locked storage facility "by either picking the locks or by going to another part of Columbia Packing's premises and taking, without authorization, keys to the locked warehouses." (Def. App. at 3, ¶ 8). This testimony, which is not based on personal knowledge, is not competent summary judgment evidence.
Based on this conflicting evidence, the court is unable to determine as a matter of law whether CPC "entrusted" its meat inventory to Mahoney. This genuine issue of material fact precludes summary judgment for either party. See Glick v. Excess Insurance Co., Ltd., 14 N.Y.2d 635, 636, 249 N.Y.S.2d 423, 424, 198 N.E.2d 595, 596 (1964) (fact issue existed as to whether insured had entrusted jewelry to an employee who had a key to the store, the combination of the safe, and reentered the premises at night to steal the merchandise).
c.
Alternatively, CPC contends that the Entrustment Exclusion is ambiguous and should be interpreted in its favor. A contract is ambiguous when, after applying established rules of construction, the court finds it reasonably susceptible to more than one interpretation. See National Center for Policy Analysis v. Fiscal Associates, Inc., 2002 WL 433038 at *4 (N.D. Tex. Mar. 15, 2002) (citing Texas cases). CPC argues that, at a minimum, the policy exclusion is ambiguous as applied to the facts of this case because it is not clear whether it applies to someone who is entrusted to guard the premises where the property is stored, as opposed to the property itself. ( See Def. Resp. Br. at 13-14).
The court disagrees. An ambiguity does not arise merely because the parties advance conflicting interpretations of a contract. Rather, a contract is ambiguous only if both interpretations are reasonable. See Harris v. Parker College of Chiropractic, 286 F.3d 790, 793 (5th Cir. 2002). CPC's alternative argument, that the Entrustment Exclusion may apply to someone who is entrusted to guard the premises where property is stored, is not a reasonable interpretation of the insurance contract. The policy clearly states that coverage is excluded for loss or damage caused by dishonest or criminal acts by "anyone to whom you entrust the property for any purpose." (Def. App. at 145, § B(2)(h)) (emphasis added). Indeed, both parties recognize that this exclusion applies only if CPC entrusted Mahoney with its meat inventory. ( See Plf. MSJ Br. at 17, ¶ 2.35 Plf. Reply Br. at 2, ¶ 3.01; Def. Resp. Br. at 14). CPC is not entitled to summary judgment on this ground.
At one point in its summary judgment brief, NAIC states that "[t]he facts of this case clearly reflect that the Defendant entrusted the security guard with its premises and the property contained therein for the purpose of guarding and protecting the same." (Plf. MSJ Br. at 17, ¶ 2.35) (emphasis added). However, later in the same paragraph, NAIC argues that "theft by a person entrusted with the Defendant's property falls squarely within the clear and plain meaning of the exclusionary clause at issue." ( Id.) (emphasis added). NAIC clarifies its interpretation of the Entrustment Exclusion in its reply brief, stating that "[t]he crux of this case turns on whether Mr. Mahoney was a person to whom Defendant entrusted its property." (Plf. Reply Br. at 2, ¶ 3.01) (emphasis added). These arguments, considered as a whole, show that NAIC recognizes that this exclusion applies only if the person was entrusted with insured property.
2.
NAIC and CPC also seek summary judgment with respect to the Inventory Limitation. This policy provision excepts coverage for loss or damage to:
Property that is missing, where the only evidence of the loss or damage is a shortage disclosed on taking inventory, or other instances where there is no physical evidence to show what happened to the property.
(Def. App. at 147, § C(1)(e)). NAIC argues that this limitation applies because the loss suffered by CPC can only be established by inventory methods and documentation. CPC counters that there is adequate physical evidence to show that the loss resulted from theft.
Both parties rely on Betco Scaffolds Co., Inc. v. Houston United Casualty Insurance Co., 29 S.W.3d 341 (Tex.App.-Houston [14th Dist.] 2000, no pet.) (en banc), to support their respective arguments. In Betco, the insured filed a claim with its insurance company for losses resulting from two burglaries. The insured promptly reported the burglaries to the police, but did not file an insurance claim until further shortages were discovered following an annual inventory. The insurance company denied the claim based, in part, on a policy provision that excluded coverage for "[l]oss or shortage disclosed upon taking inventory[.]" Id. at 345. Thereafter, the insured filed suit in state district court for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code. The trial court granted summary judgment in favor of the insurance company as to all claims and causes of action. A divided court of appeals affirmed. In reaching its decision, the majority first discussed the intent and plain meaning of the inventory limitation:
[W]e believe that the inventory exclusion provision reflects a recognition of the inherent uncertainty as to the causes of shortages which are only disclosed upon taking a periodic physical inventory. We further believe that the inventory exclusion provision (like a proof of loss provision) reflects a recognition that an insurer should be afforded a fair opportunity to: (i) investigate the circumstances of a claim before circumstances change and memories fade, and (ii) where, as here, a theft is alleged, attempt recovery of the stolen items.Id. at 346 (emphasis added, footnotes omitted). Significantly, the insured presented no evidence to the insurance company or to the court establishing that the missing property was taken in the burglaries. The only evidence was the results of its annual inventory. Id. Based on these facts, the appellate court held that the inventory limitation excluded coverage.
The dissent, relying on authorities from other jurisdictions, found that the phrase "disclosed upon taking inventory" was ambiguous or, at the very least, raised a fact issue as to whether the loss in that case was disclosed, rather than quantified, by the inventory. Betco, 29 S.W.2d at 350 (Murphy, C.J., dissenting).
Unlike Betco, CPC does not rely solely on its inventory to establish its loss. The summary judgment evidence includes a judicial confession and the sworn testimony of William Mahoney admitting that he stole approximately $200,000 worth of meat from CPC between December 1999 and May 2000. (Def. App. at 18-20). Moreover, NAIC has acknowledged that CPC "sustained losses in excess of $200,000.00, as evidenced by its inventory procedures and that such losses occurred as a result of theft." (Plf. Ans. to Def. Orig. Countercl. at 2, ¶ 4). The mere fact that this loss may have been quantified through routine inventory procedures does not preclude coverage. Even the Betco majority recognized that:
[A] regularly scheduled inventory could coincide with the investigation of a casualty in such a way that the inventory is intended by the insured as a means to quantify the loss. In that event, the inventory exclusion provision would not exclude the loss because the loss would not have been disclosed upon taking inventory.Betco, 29 S.W.3d at 347 (emphasis in original).
The court concludes as a matter of law that the Inventory Limitation does not exclude coverage under the policy because there is sufficient physical evidence, other than "a shortage disclosed on taking inventory," to show what happened to the missing property. CPC's motion for summary judgment is granted and NAIC's motion for summary judgment is denied on this ground.
B.
Finally, CPC moves for summary judgment with respect to its extra-contractual claims for violations of articles 21.21, § 4 (10)(iv) and 21.55, § 3(f) of the Texas Insurance Code. The court will address each claim in turn.
CPC does not seek summary judgment with respect to its counterclaim for breach of the common law duty of good faith and fair dealing or for violations of article 21.21, § 4 (10)(ii) (vi) of the Texas Insurance Code.
1.
Article 21.21, § 4 (10)(iv) of the Texas Insurance Code prohibits insurance companies from engaging in unfair claims settlement practices by:
[F]ailing to provide promptly to a policyholder a reasonable explanation of the basis in the policy, in relation to the facts or applicable law, for the insurer's denial of a claim or for the offer of a compromise settlement of a claim.
TEX. INS. CODE ANN. art. 21.21, § 4 (10)(iv) (Vernon Supp. 2002). A knowing violation of this statute subjects the insurer to three times the amount of actual damages sustained by the insured, plus costs and reasonable attorney's fees. See id. art. 21.21, § 16(b)(1). CPC contends that NAIC engaged in unfair claims settlement practices by failing to provide a reasonable explanation for the denial of its claim. In its letter dated January 15, 2002, NAIC explained that coverage was not available under the Entrustment Exclusion and the Inventory Limitation provisions of the policy because:
1. It appears that the only evidence of the loss or damage is a shortage disclosed on taking inventory, and there is no physical evidence to show what happened to the property.
2. The materials were stolen by authorized representatives and/or those entrusted with the property.
(Plf. App. at 34-35). Whether this explanation is "reasonable" in relation to the facts or applicable law will have to be determined by a jury after it decides whether CPC entrusted its meat inventory to William Mahoney. Until this issue is resolved in its favor, CPC cannot establish a violation of article 21.21, § 4 (10)(iv).
2.
Article 21.55, § 3(f) of the Texas Insurance Code provides, in relevant part:
[I]f an insurer delays payment of a claim following its receipt of all items, statements, and forms reasonably requested and required, as provided under Section 2 of this article, for a period exceeding the period specified in other applicable statutes or, in the absence of any other specified period, for more than 60 days, the insurer shall pay damages and other items as provided for in Section 6 of this article.
TEX. INS. CODE ANN. art. 21.55, § 3(f). These "delay damages" consist of "18 percent per annum of the amount of such claim . . ., together with reasonable attorney fees." Id. art. 21.55, § 6. The wrongful rejection of a claim, even if made in good faith, may be considered a delay in payment for purposes of the 60-day rule and statutory damages under article 21.55. See Higginbotham v. State Farm Mutual Automobile Insurance Co., 103 F.3d 456, 461 (5th Cir. 1997); Cater v. United Services Automobile Ass'n, 27 S.W.3d 81, 84 (Tex.App. — San Antonio 2000, pet. denied).
CPC notified NAIC of its loss on or about July 9, 2001. (Plf. App. at 36). NAIC denied the claim on January 15, 2002. ( Id. at 34). This necessarily means that NAIC failed to pay the claim within 60 days. See Higginbotham, 103 F.3d at 461-62; Cater, 27 S.W.3d at 84. If CPC is able to convince a jury that its claim was wrongfully denied, NAIC will be liable for delay damages and reasonable attorney's fees. However, until such a determination is made, summary judgment is premature. See Keeling v. State Farm Lloyds, 2002 WL 31230804 at *4 (Sept. 30, 2002) (Kaplan, M.J.).
CONCLUSION
For these reasons, CPC's motion for summary judgment is granted in part and denied in part. The court determines as a matter of law that the Inventory Limitation contained in the NAIC policy does not exclude coverage in this case. To that extent, CPC's motion for summary judgment is granted. In all other respects, the motion is denied. NAIC's motion for summary judgment is denied in its entirety.
The court will set this case for trial by separate order.
SO ORDERED.