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discussing damages awarded following a postdefault trial
Summary of this case from Lara v. Power of Grace Trucking, LLCOpinion
No. 3:99-CV-0351-D
October 25, 2000.
MEMORANDUM OPINION AND ORDER
This case presents questions concerning an insurance company's duties to defend and indemnify under two insurance policies.
I
Plaintiff-counterdefendant Utica Mutual Insurance Company ("Utica") seeks a declaration that it has no duty to defend or indemnify defendant-counterplaintiff John L. Hickman ("Hickman") in two lawsuits regarding misappropriated and converted premiums at J. L. Hickman Co., Inc. ("JLH"). Hickman counterclaims, suing inter alia for declaratory judgment and breach of contract.
Utica obtained an interlocutory default judgment against JLH on March 24, 1999. The present motion relates only to Utica's duty to defend and indemnify Hickman.
Utica insured JLH, an insurance agency with offices in Hurst, Texas and Pasadena, Maryland, under two claims made errors and omissions policies. The first policy ("Texas policy"), which covered the period May 13, 1996 to May 13, 1997, listed JLH's Texas office as the named insured. See P. Aug. 4, 2000 App. 6. The second policy ("Maryland policy"), with the same policy period, named the Maryland office. See id at 17. Both policies required Utica to provide coverage to JLH and "any partner, executive officer, director, or employee" of JLH against any damages claim made during the policy period. See Id at 23.
Because the parties have filed cross-motions for summary judgment, the court for clarity will refer to their appendixes by the date filed. The court has not considered for any purpose Utica's reply appendix filed September 11, 2000 because it is impermissible under either the pre-1998 or the present local summary judgment rules. See Tovar v. United States, 2000 WL 425170, at *4 n. 8 (N.D. Tex. Apr. 18, 2000) (Fitzwater, J.), appeal docketed, No. 00-10451 (5th Cir. May 3, 2000),
Utica's August 4, 2000 appendix employs a dual page numbering system (some are designated by page number alone and others contain both a page number and a different number that is preceded by an "SJ" prefix). Utica's August 4, 2000 brief sometimes cites the appendix by the "SJ" page designation rather than by the appendix page that is numbered in the sequential fashion required by the local civil rules. Although in doing so Utica has violated N.D. Tex. Civ. R. 56.5(c) and 56.6(b)(3), the court has disregarded these errors in deciding these motions.
On May 30, 1997, after the expiration of the policy and reporting periods under the Texas policy, but within the extended reporting period that expired July 12, 1999 under the Maryland policy, CIGNA Insurance Company ("CIGNA") and others sued JLH and Hickman in Texas state court alleging claims for theft, breach of fiduciary duty, breach of contract, and negligence arising from the mishandling of premiums. See D. Aug. 1, 2000 App. 51-54, CIGNA secured a default judgment against JLH for liability and, following a trial, recovered judgment for damages in the amount of $689,942.71. See P. Aug. 4, 2000 App. 80. The court also awarded CIGNA judgment against Hickman in the amount of $6,899.43 on a negligence claim. Id
On September 18, 1997, after the expiration of the policy and reporting periods under the Texas policy, but within the extended reporting period that expired July 12, 1999 under the Maryland policy, Reliance Insurance Company ("Reliance") sued JLH, Hickman, and two former JLH employees in the United States District Court for the District of Maryland. See id at 83. Reliance alleged claims for breach of contract, conversion, constructive fraud, constructive trust, fraud, and negligence arising from JLH and Hickman's mishandling of premiums. See id at 86. The District of Maryland entered a default judgment against JLH in the amount of $472,500.00. plus interest. See id at 102. On June 2, 2000 the court granted summary judgment, holding that Hickman and the other remaining defendants were liable for constructive fraud. See id. at 99.
Utica did not defend JLH or Hickman in either lawsuit. When Utica received notice of the CIGNA suit, it denied coverage and filed the present action seeking a declaratory judgment that it owed no duty to defend or indemnify them. See D. Aug. 1, 2000 App. 147-153. Similarly, Utica neither defended nor indemnified them in the Reliance action and has denied coverage.
Each party moves for summary judgment. In his motion for partial summary judgment, Hickman requests damages of $96,172.62 for breach of contract, consisting of the expenses, costs, and fees he has incurred defending himself in the CIGNA and Reliance lawsuits; a declaratory judgment that Utica has a duty to defend, reimburse, and indemnify him for any future litigation expenses incurred concerning the CIGNA and Reliance suits; recovery for fees, costs, and expenses incurred in any continued litigation of the CIGNA and Reliance suits; and recovery for (or direct payment of) any judgment eventually determined against him in the CIGNA and Reliance suits. D. Mot. at 10-11. Utica moves for summary judgment declaring that it has no duty under the policies to defend or indemnify Hickman concerning the CIGNA and Reliance lawsuits. P. Mot. at 2.
Hickman maintains for two reasons that his motion is for partial summary judgment. He asserts that the court may determine that there are genuine issues of fact that preclude summary judgment because of the pendency of the CIGNA and Reliance lawsuits. See D. Mot. at 1. He also posits that his motion is for partial summary judgment because he intends to seek attorney's fees under Fed.R.Civ.P. 54(d)(2). See id. Because a Rule 54(d)(2) motion is collateral to the merits, however, and results in the entry of a separate judgment, see Rule 54(d)(2)(C), the fact that Hickman does not address the issue of attorney's fees in his motion does not make it a motion for partial summary judgment.
II
Hickman concedes that he cannot recover under the Texas policy and that only the Maryland policy is at issue. D. Rep. Br. at 4. CIGNA and Reliance filed suit after the Texas policy coverage and reporting periods had expired. The Maryland policy, however, included an extended reporting period through July 12, 1999. See D. Aug. 1, 2000 App. 5; P. Aug. 4, 2000 App. 17. The court grants summary judgment in favor of Utica declaring that it has no duty to defend or indemnify Hickman under the Texas policy, and dismisses Hickman's counterclaim based on that policy.
III
The court must now decide whether Hickman is entitled to a defense and indemnity under the Maryland policy.
A
Because this is a diversity case, the rules of the forum state determine which state's substantive law governs the contract's interpretation. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Alberto v. Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir. 1995). To resolve choice of law issues, the Texas Supreme Court has adopted the "most significant relationship" test set forth in § 6 of the Restatement (Second) of Conflict of Laws. See Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 420 (Tex. 1984). Under the Restatement, a court should first follow the direction of the state legislature by looking to any applicable statutory directive. See Restatement (Second) of Conflict of Laws § 6(1) (1969). Absent a statutory provision, the court applies the most significant relationship test. See Houston Cas. Co. v. Certain Underwriters at Lloyd's London, 51 F. Supp.2d 789, 797 (S.D. Tex. 1999).
Utica argues that Tex. Ins. Code Ann. art. 21.42 (West 2000) governs the choice of law issue. Article 21.42 states:
Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same.
Hickman is a Texas citizen and Utica conducts business in Texas. The literal text of the statute thus appears to apply to the present case. Texas courts, however, have not interpreted article 21.42 to mandate the application of Texas law in cases such as this one.
In Austin Building Co. v. National Union Fire Insurance Co., 432 S.W.2d 697 (1968), the Texas Supreme Court rejected an argument that article 21.42 required the application of Texas law to an insurance coverage dispute involving a Texas company that obtained insurance from an out-of-state insurer. Id. at 699, 701. The court relied in part on the fact that the contract was to be performed in Kansas, not Texas. Id. at 700. The Fifth Circuit has also adopted a narrow interpretation of article 21.42. In Howell v. American Live Stock Insurance Co., 483 F.2d 1354 (5th Cir. 1973), the court held that the statute did not apply to a contract between a Texas resident and an out-of-state insurer for a horse farm owned by the Texas resident but located in New Mexico. Id. at 1361. Stating that article 21.42 applies only when a contract between a Texas resident and an insurer is made "in the course of the company's Texas business," the court refused to give the Texas law "extraterritorial effect so as to apply to a policy or bond written or executed by a foreign insurer in another state, even though the insured was a citizen or resident of the state which had adopted the statute in question, and even though the foreign insurer also did other business within that state." Id. at 1359 (quoting Austin Building Co., 432 S.W.2d at 701).
The court holds that article 21.42 does not govern the choice of law issue. Although Utica does business in Texas and Hickman is a Texas citizen, the policy at issue relates to JLH's Maryland office. Accordingly, pursuant to Texas choice of law principles and the direction of the Restatement, the court must determine which state has a more significant relationship to the contract.
B
Texas courts determine choice of law issues by considering "(a) the place of contracting; (b) the place of negotiation; (c) the place of performance; (d) the location of the contract's subject matter; and (e) the parties' domicile, residence, nationality, place of incorporation, and place of business." Minnesota Mining Mfg. Co. v. Nishika Ltd., 953 S.W.2d 733, 735-36 (Tex. 1997). In light of these considerations, Maryland has a more significant relationship to the policy than does Texas, The Maryland office of JLH is the "Named Insured." See D. Aug. 1, 2000 App. 20. Furthermore, a policy endorsement is entitled "Maryland Changes." See id. at 19, Although Hickman is a Texas citizen and JLH is incorporated and has an office in Texas, Hickman had a Certificate of Authority to transact insurance business in Maryland and was required to comply with Maryland law. See D. Aug. 24, 2000 App. 5. As a result of these contacts, Maryland law governs the interpretation of the policy.
IV
Utica maintains that it has no duty to defend or indemnify Hickman under the Maryland policy in connection with the CIGNA lawsuit because Hickman did not provide timely notice. It also contends that the "money received exclusion" precludes coverage for the CIGNA and Reliance actions. Utica also asserts that the Maryland policy does not cover the JLH Texas office. It maintains that coverage is barred under the Maryland policy for the Reliance suit because JLH failed to tender defense of that suit to Utica.
Utica also argues that the "fraud and dishonesty exclusion" of the policy bars coverage for the Reliance action. Because the court holds on other grounds that Hickman is not entitled to indemnity in the Reliance case, it need not decide whether this exclusion precludes coverage.
A 1
Utica argues that it has no duty to defend or indemnify Hickman in the Reliance action because he failed to notify it of the claim. Hickman concedes that he did not personally notify Utica. See P. Aug. 4, 2000 App. 133-34. He contends, however, that JLH Executive Vice President William Ray Miller II ("Miller"), who was also a party to the Reliance action, gave notice to Utica that is sufficient to invoke coverage under the policy.
Applying Maryland law to the interpretation of the notice provision, the court agrees that Miller's notification inures to Hickman's benefit. Addressing a similar issue in Clinical Perfusionists, Inc. v. St. Paul Fire Marine Insurance Co., 650 A.2d 285 (Md. 1994), the Maryland Court of Appeals endorsed the approach of the Eleventh Circuit in St. Paul Fire Marine Insurance Co. v. Tinney, 920 F.2d 861 (11th Cir. 1991). See Clinical, 650 A.2d at 290. In Tinney the Eleventh Circuit held that "[o]nce the insurer is put on notice that there has been an incident, together with the essential facts upon which liability of the insurer depends, a claim is made." Tinney, 920 F.2d at 863. Utica admits that it received notice from Miller, see D. Aug. 1, 2000 App. 36, and there is no indication that this notice was insufficient. Furthermore, Hickman was a named defendant in the same Reliance lawsuit as was Miller, who provided notice to Utica under the policy issued to Hickman and JLH See id. This information was sufficient to provide notice to Utica that it had an obligation to defend or indemnify Hickman in the Reliance action.
2
Utica maintains that Hickman did not provide timely notice under the Maryland policy concerning the CIGNA action.
On October 8, 1998, more than 16 months after CIGNA filed suit, Hickman provided Utica with written notice of the claims. See P. Aug. 4, 2000 App. 103-04. This letter arrived approximately one month before the claims were scheduled for mediation and two months before trial had been scheduled. See D. Aug. 1, 2000 App. 122, 125. Hickman avers by affidavit that in June 1997, less than one month after CIGNA filed suit, he telephoned a Utica representative and notified Utica of the claims. See id. at 41. At his deposition, Hickman testified that he believed he talked to John Scala ("Scala"), Utica's Underwriting Manager, Professional Liability, about the CIGNA claim, but conceded that it may have been someone else. See P. Aug. 4, 2000 App. 107. Utica disputes that Hickman spoke with Scala and has offered Scala's affidavit, in which he denies speaking to Hickman about the CIGNA action. See id at 15.
Even if a reasonable trier of fact could determine that Hickman failed to provide Utica adequate notice of the CIGNA action until October 8, 1998, Utica can neither defeat Hickman's summary judgment motion, nor sustain its own summary judgment motion, on this basis. Under Maryland law, "[i]n order to avoid its duty to defend or to indemnify on the ground of delayed notice, the insurer must establish by a preponderance of affirmative evidence that the delay in giving notice has resulted in actual prejudice to the insurer." Sherwood Brands, Inc. v. Hartford Accident Indem. Co., 698 A.2d 1078, 1083 (Md. 1997). To demonstrate actual prejudice, an insurer may not rely merely on "prejudice that is only possible, theoretical, conjectural, or hypothetical." General Accident Ins. Co. v. Scott, 669 A.2d 773, 779 (Md.Ct.Spec.App. 1996). Moreover, it is not enough "to surmise harm that may have occurred by virtue of the passage of time; prejudice cannot be presumed from the length of the delay." Id.
Where, as here, Utica will have the burden of proof on this affirmative defense at trial, to obtain summary judgment it "must establish `beyond peradventure all of the essential elements of the . . . defense.'" Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 878 F. Supp. 943, 962 (N.D. Tex. 1995) (Fitzwater, J.) (quoting Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)). Although Utica asserts that it has been prejudiced by the delay, it has offered no proof of actual prejudice. There is no evidence, for example, that the expenses Utica would have incurred in defending Hickman are less than Hickman's actual expenses. Cf. Sherwood, 698 A.2d at 1086 n. 7 (describing hypothetical examples of actual prejudice). Even when Utica received written notice of the CIGNA action, it denied that it had any contractual duty to provide coverage. See D. Aug. 1, 2000 App. 147-51. This position is consistent with Utica's denial of coverage in the Reliance action against Hickman and in the separate CIGNA Maryland state-court action against Miller, In light of Utica's repeated assertions that it has no duty to defend Hickman or other JLH employees under the terms of the policy, Utica has failed to present a genuine issue of material fact that it suffered actual prejudice. Because under Maryland law Utica must rely on an affirmative defense, and since it has not raised a genuine issue of material fact concerning that defense, the court holds that Utica cannot avoid its obligations concerning the CIGNA lawsuit based on the absence of notice.
B
Utica seeks summary judgment on the ground that it has no contractual duty to defend or indemnify Hickman in the Reliance and CIGNA actions because the policy excludes coverage for "any claim for, or arising out of . . . [a]ny liability for money received by an insured or credited to an insured for fees, premiums, taxes, commissions, loss payments, or escrow or brokerage monies." P. Aug. 4, 2000 App. 33. According to Utica, the "money received exclusion" bars coverage for all the claims against Hickman, including negligence claims in both the Reliance and CIGNA actions. Hickman argues that this issue has already been resolved by the Maryland Court of Special Appeals. See Utica Mut. Ins. Co. v. Miller, 746 A.2d 935 (Md.Ct.Spec.App. 2000). He maintains that the doctrine of non-mutual collateral estoppel precludes relitigation of the "money received exclusion."
To determine the effect of non-mutual collateral estoppel on the present issue, the court applies Maryland law because it "must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the state in which the judgment was rendered." McCoy v. Hernandez, 203 F.3d 371, 374 (5th Cir. 2000). Maryland courts have adopted a four-part test for applying non-mutual collateral estoppel: (1) Was the issue decided in the prior adjudication identical with the one presented in the action in question? (2) Was there a final judgment on the merits? (3) Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication? (4) Was the party against whom the plea is asserted given a fair opportunity to be heard on the issue? Leeds Fed Sav. Loan Ass'n v. Metcalf, 630 A.2d 245, 250 (Md. 1993).
Utica took the same position in Utica on the "money received exclusion" that it advances today. Utica involved Utica's suit for a declaratory judgment that it did not owe a duty to defend against claims brought by CIGNA against Miller, JLH's Executive Vice President. See Utica, 746 A.2d at 937. CIGNA alleged several fraud and negligence claims. See id. at 938. The court stated that "[t]he primary thrust of CIGNA's complaint against [Miller] was that [Miller] converted $326,480.12 received as premiums on CIGNA's behalf for his own use. Additionally, CIGNA claimed, inter alia, that appellee acted negligently[.]" Id. Holding that the "money received exclusion" did not bar coverage for the claims against Miller, the court focused on the allegation that Miller had acted negligently by failing adequately to handle funds and oversee business operations. Id. at 942. The existence of the negligence claim required Utica to defend Miller against all the claims. Id.
Utica's action against Hickman presents the same issue: whether the "money received exclusion" bars coverage for claims that primarily arise from the mishandling of premiums but also include a negligence claim. In both cases, Maryland law controls the interpretation of the contractual language. The first element of the test for applying non-mutual collateral estoppel is therefore satisfied because the issues are identical. The remaining three elements are also met because there was a final judgment on the merits, Utica is party to both actions, and it received a fill and fair opportunity to litigate the issue. Accordingly, the Maryland court's holding that the "money received exclusion" does not bar coverage under the policy precludes this court from revisiting the question whether Utica had a duty to defend under the Maryland policy. In both the Reliance and CIGNA suits, Hickman was sued inter alia for negligence.
Utica argues that the issues are different because inter alia Hickman's failure to provide timely notice was not an issue in the Miller action. Under the doctrine of collateral estoppel, however, the existence of additional, different defenses to a claim does not require the relitigation of other identical defenses. See Restatement (Second) of Judgments § 27 (1980) ("When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether in the same or a different claim.").
Utica does not, however, control the question whether Utica has a duty to indemnify Hickman for judgments entered against him in the Reliance and CIGNA actions. The Utica court only addressed Utica's duty to defend Hickman, explicitly noting that under Maryland law, "[t]he duty to defend an insured is broader than the duty to indemnify." Utica, 746 A.2d at 939. Furthermore, Utica acknowledged that if the negligence claims were dismissed, the "money received exclusion" would preclude coverage for the remaining claims, including breach of fiduciary duty. See id. at 942 n. 1. In light of these distinctions, Utica has no duty to indemnify Hickman for the Reliance judgment, which was based on a breach of a fiduciary duty constituting constructive fraud. See P. Aug. 4, 2000 App. 97. Utica does, however, have a duty to indemnify Hickman for the judgment in the CIGNA action, because that judgment was awarded solely on CIGNA's negligence claim. See id. at 80.
C
Utica contends that Hickman is not covered under the Maryland policy because he operated out of the JLH Texas office. The court disagrees. The plain terms of the Maryland policy provide coverage for Hickman. It explicitly covers "[a]ny partner, executive officer, director, or employee of the Named Insured . . . ." D. Aug 1, 2000 App. 17. Hickman was the President and a director of JLH.
Utica offers an affidavit from Scala in which he interprets the Maryland policy to cover only the Maryland office of JLH, not the Texas office. See P. Aug. 4, 2000 App. 16. If Utica is introducing this evidence to show that the Maryland policy does not cover Hickman even though he is an executive officer and director of JLH, the court holds that it is inadmissible under the parol evidence rule. See Creamer v. Helferstay, 448 A.2d 332, 342 (Md. 1982) (holding that intent of parties is to be derived from plain meaning of words, "not from other evidence indicating `what the parties thought the agreement meant or intended it to mean'") (quoting Board of Trustees v. Sherman, 373 A.2d 626, 629 (1977)).
D
Utica also asserts that coverage is barred under the Maryland policy for the Reliance suit because JLH failed to tender defense of that suit to Utica. This appears to be the same as the notice argument that the court addresses supra at § IV(A)(1), and the court rejects it for the reasons stated there.
* * *
In sum, the court grants Hickman's motion for partial summary judgment as follows.
1. Utica is liable under the Maryland policy for breach of contract for failing to defend and indemnify Hickman in the CIGNA suit and for failing to defend Hickman in the Reliance suit. Utica is liable for the expenses, costs, and fees that Hickman has incurred to date defending himself in the CIGNA and Reliance lawsuits. Because the court is unable to determine this amount on the present record, it denies summary judgment concerning the amount of damages for breach of contract.
2. The court enters a declaratory judgment that Utica has a duty to defend Hickman in any continued litigation of the CIGNA and Reliance suits; that, if Utica fails to do so, it is liable for the expenses, costs, and fees that Hickman incurs defending himself; and that Utica is liable to Hickman for any judgment eventually determined against him in the CIGNA suit.
The court denies Hickman's motion for summary judgment except to the extent hereby granted.
The court grants Utica's motion for summary judgment as follows.
1. The court enters a declaratory judgment that Utica has no duty under the Texas policy to defend or indemnify Hickman in the CIGNA and Reliance lawsuits.
2. The court enters a declaratory judgment that Utica has no duty under the Maryland policy to indemnify Hickman in the Reliance lawsuit.
The court denies Utica's motion for summary judgment concerning the Maryland policy except to the extent hereby granted.
SO ORDERED.