New Hampshire Ins. v. Westlake Hardware ( 1999 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
NOV 26 1999
TENTH CIRCUIT
__________________________ PATRICK FISHER
Clerk
NEW HAMPSHIRE INSURANCE
COMPANY,
Plaintiff-Appellee,
No. 98-3203
v. (D. Kan.)
(D.Ct. No. 97-CV-2573-KHV)
WESTLAKE HARDWARE, INC.,
Defendant-Appellant.
____________________________
ORDER AND JUDGMENT *
Before BRORBY and LUCERO, Circuit Judges, and WEST, District Judge. **
New Hampshire Insurance Company (New Hampshire) sought a declaratory
judgment that Westlake Hardware, Inc. (Westlake), the insured, lacked indemnity
and defense coverage under the employee benefits liability endorsement
(endorsement) of a comprehensive general liability policy. New Hampshire filed
*
This order and judgment is not binding precedent except under the doctrines of
law of the case, res judicata and collateral estoppel. The court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 36.3.
**
The Honorable Lee R. West, United States District Judge for the Western
District of Oklahoma, sitting by designation.
its action after Westlake sought to recover the costs of defending and settling a
lawsuit initiated by its former chief financial officer. The district court granted
New Hampshire’s summary judgment motion, and Westlake now appeals. We
exercise jurisdiction pursuant to 28 U.S.C. § 1291 and affirm. 1
BACKGROUND
New Hampshire issued Westlake a comprehensive general liability policy
containing the endorsement at issue in this case. In the endorsement, New
Hampshire agreed to indemnify Westlake for all damages it became legally
obligated to pay based on any claim by a former employee for injury caused by
“any negligent act, error or omission of [Westlake] ... in the administration of
[Westlake’s] Employee Benefits as defined herein.” Employee stock plans are
included under the endorsement’s definition of “employee benefits,” and
“administration” includes:
(a) Giving counsel to employees including their dependents and
beneficiaries, with respect to the Employee Benefits;
(b) Interpreting Employee Benefits;
(c) Handling records in connection with Employee Benefits;
(d) Effecting enrollment, termination or cancellation of employees
1
We grant Westlake Hardware Inc.’s motion to supplement the record.
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under Employee Benefit Programs
In December 1996, Richard Masinton notified Westlake he was resigning
his position as chief financial officer. A dispute ensued over the correct amount
Westlake owed Mr. Masinton for 20,329 shares of Westlake common stock he
purchased through an unfunded employee benefit plan (stock plan). The stock
plan required Mr. Masinton to sell his stock back to Westlake on termination of
his employment. The value the company would pay for the stock depended upon
whether the termination was at the employee’s election (in which case Westlake
would pay the lesser of book value or appraisal value), or whether the relationship
ended by normal retirement, death, disability or at Westlake’s election (in which
case Westlake would pay the greater of book or appraisal value). At this point,
Mr. Masinton and Westlake disagreed on the circumstances surrounding the
termination of their relationship. Westlake claimed Mr. Masinton left voluntarily,
and should receive the lower value for his shares. Mr. Masinton claimed
conditions at the company forced him to leave, leading to a constructive discharge
and therefore entitlement to the greater value for his shares.
In order to effectuate an involuntary redemption of Mr. Masinton’s shares,
and because Westlake’s independent auditors would be unable to determine the
book value of the shares for some time, Westlake transferred $450,000 to an
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irrevocable trust to cover what the company determined was the approximate
value of the shares. 2 After an investigation of Mr. Masinton’s tenure at the
company, Westlake determined the amount owed Mr. Masinton was subject to
forfeiture due to his alleged acts of malfeasance, breach of fiduciary duty and
negligence while serving as Westlake’s chief financial officer. On April 29,
1997, Mr. Masinton tendered his stock certificates to Westlake in its capacity as
trustee of the irrevocable trust, and asked to be paid the fair book value of the
stock, plus interest, from the trust. Upon advice of counsel, Westlake refused to
distribute the trust funds, citing the ongoing investigation into Mr. Masinton’s
alleged malfeasance. In late May 1997, Mr. Masinton filed suit in state court,
alleging Westlake breached its fiduciary duties as trustee of the irrevocable trust. 3
2
The trust was created “for the sole purpose of paying [Mr.] Masinton the
Purchase Price for the Subject Shares pursuant to the [stock plan], said amount to be paid
to Masinton including interest accrued ... at such time as [Mr.] Masinton surrenders the
certificates for the Subject Shares to [Westlake].” Under the terms of the trust, Mr.
Masinton was “entitled to collect the estimated Purchase Price of $390,520.00 at any time
upon surrender of” his shares prior to the final purchase price determination.
3
In his First Amended Petition filed in the underlying lawsuit, Mr. Masinton
specifically alleged Westlake breached its fiduciary duties by: “actively concealing and
failing to inform [Mr.] Masinton of the existence of the Irrevocable Trust, threatening to
sue [Mr.] Masinton for exercising his rights under the Stock Agreements, willfully
concealing and withholding the independent accountant’s report on determination of
value, and failing and refusing to distribute the purchase price of [Mr.] Masinton’s shares,
plus accrued interest, to [Mr.] Masinton in accordance with the Irrevocable Trust.” The
Petition went on to state: “Westlake’s conduct in refusing to pay [Mr.] Masinton the
purchase price of his shares and accrued interest, as required by the Irrevocable Trust,
was intentional, willful, wanton and in reckless disregard for [Mr.] Masinton’s rights.”
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(Apt. App. at 89-125, 199; Apt. Br. at 12; Ape. Br. at 8.) In August 1997, Mr.
Masinton and Westlake settled their dispute for $423,574. (Apt. App. at 348-49.)
This is the underlying suit and settlement for which Westlake now seeks
indemnification and defense costs.
DISCUSSION
We review a district court’s grant of summary judgment de novo, applying
the same legal standard employed by the district court. Bankwest v. Fidelity &
Deposit Co., 63 F.3d 974, 978 (10th Cir. 1995). Summary judgment is
appropriate “if there are no genuinely disputed material facts and the moving
party is entitled to judgment as a matter of law.” Burgess v. Farmers New World
Life Ins. Co., 12 F.3d 992, 993 (10th Cir. 1993) (citing Fed. R. Civ. P. 56(c)). We
must view the evidence in the light most favorable to the nonmoving party.
Bankwest, 63 F.3d at 978. A federal court sitting in diversity applies the law of
the forum state, in this case Kansas, and we review the district court’s application
of state law de novo. See Wood v. Eli Lilly & Co., 38 F.3d 510, 512 (10th Cir.
1994). “If a federal court cannot ascertain the law of the forum state, we must in
essence sit as a state court and predict how the highest state court would rule.”
Id.
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Under Kansas law, an insurer’s duty to defend arises when “facts give rise
to a ‘potential of liability’ under the policy.” Spruill Motors, Inc. v. Universal
Underwriters Ins. Co., 512 P.2d 403, 407 (Kan. 1973). “[A]n insurer must look
beyond the effect of the pleadings and must consider any facts brought to its
attention or any facts which it could reasonably discover in determining whether
it has a duty to defend.” Id. Thus, the relevant inquiry for the insurer is whether
there is any possibility a duty to indemnify may arise from the facts of the case.
Bankwest, 63 F.3d at 978 (citing American Fidelity Ins. Co. v. Employers Mut.
Cas. Co., 593 P.2d 14, 19-20 (Kan. Ct. App. 1979)). However, “the insurer is not
bound to defend the insured in actions brought wholly outside any coverage
obligations assumed in the policy or when the insurer would have no liability if
plaintiff secured a judgment against the insured.” Spruill Motors, 512 P.2d at
406.
The duty to defend is broader than the duty to indemnify. See Bankwest, 63
F.3d at 978. While the duty to defend is based on the allegations in the pleadings
and other facts either known or reasonably discoverable to the insurer, the duty to
indemnify is determined by the ultimate facts of the case as they are established at
trial, summary judgment, or settlement. Id. In other words, the duty to defend
arises at the time the complaint is filed, while the duty to indemnify is measured
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after a trial is completed or a settlement reached. See American Motorists Inc. v.
General Host Corp., 946 F.2d 1489, 1490-91 (10th Cir. 1991).
The district court found New Hampshire had no duty to indemnify Westlake
for the Masinton settlement because Westlake’s refusal to release the trust funds
set aside for the purchase of Mr. Masinton’s stock constituted an intentional act,
not covered under the “negligent act, error or omission” language of the
endorsement. Similarly, the district court found New Hampshire had no duty to
defend Westlake because the Masinton suit was “‘wholly outside any coverage
obligations assumed in the policy [and] the insurer would have no liability if
plaintiff secured a judgment against the insured.’” See New Hampshire Ins. Co.
v. Westlake Hardware, Inc., 11 F. Supp. 1298, 1302 (D. Kan. 1998) (quoting
Spruill Motors, 512 P.2d at 406). For substantially the same reasons articulated
by the district court, we agree.
A. Indemnification
Westlake first assigns error to the district court’s interpretation of the
“negligent act, error or omission” language of the policy, arguing “negligent”
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modifies “act,” but not “error or omission.” 4 Under Westlake’s reading of the
policy, any error or omission committed while interpreting employee benefits
would constitute an insured loss. We believe this interpretation defies basic
grammatical principles.
If New Hampshire and Westlake intended the policy to cover every error,
they could have easily accomplished that goal by agreeing to a policy covering
any “error, omission, or negligent act,” or damages resulting from an "error,
negligent omission or negligent act of the insured," as the parties did in
Continental Cas. Co. v. Cole, 809 F.2d 891, 895 (D.C. Cir. 1987). In addition,
“[i]t would be self-defeating to limit the definition of [the phrase] to negligent
acts, but at the same time cover intentional errors or omissions.” Golf Course
Superintendents Ass’n of America v. Underwriters at Lloyd’s, London, 761 F.
Supp. 1485, 1490 (D. Kan. 1991). The majority of courts hold the word
“negligent” must modify the entire phrase. We agree and conclude the
endorsement at issue here covers only negligent acts, negligent errors, and
negligent omissions. See Baylor Heating & Air Conditioning, Inc. v. Federated
4
In support of its argument, Westlake relies on nonbinding and nonpersuasive
authority. See Continental Cas. Co. v. Reed, 306 F. Supp. 1072 (D. Minn. 1969); USM
Corp. v. First State Ins. Co., 652 N.E.2d 613 (Mass. 1995); see also Altchison v.
Founders Ins. Co., 333 P.2d 178 (Cal. Ct. App. 1958).
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Mut. Ins. Co., 987 F.2d 415, 419-20 (7th Cir. 1993); First S. Ins. Co. v. Jim Lynch
Enters., Inc., 932 F.2d 717, 719 (8th Cir. 1991); United States Fidelity & Guar.
Co. v. Fireman’s Fund Ins. Co., 896 F.2d 200, 203 (6th Cir. 1990); Cincinnati
Ins. Co. v. Metropolitan Properties, Inc., 806 F.2d 1541, 1544 (11th Cir. 1986).
In holding the endorsement applies only to negligent conduct, we note
Westlake made no effort to show it negligently administered its stock plan or the
trust fund. Nor could it credibly make such an argument on the record before us.
Instead, Westlake directs us to the settlement agreement, stating the primary focus
of the agreement centers on Mr. Masinton’s commitment to compromise “all of
his claims for damages based on [Westlake’s] employment practices and on
[Westlake’s] administration of his employee benefits under the [Stock Plan].”
Westlake seems to claim the language in the settlement agreement conclusively
establishes the fact that its actions in relation to the trust fund qualify as
“interpretation of employee benefits” as defined in the policy. However,
Westlake’s argument misses the point. Even if we were to accept Westlake’s
contention, its argument goes to whether withholding the trust fund money from
Mr. Masinton qualified as an interpretation of employee benefits, 5
not to whether
5
Much of the Westlake brief is dedicated to characterizing the company’s actions
as “interpreting employee benefits” under the policy. We question whether deciding to
withhold Mr. Masinton’s stock payment for alleged malfeasance qualifies as an
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the interpretation was performed negligently. Westlake did not negligently
administer its employee benefit plans, therefore New Hampshire was under no
duty to indemnify Westlake for the Masinton settlement. 6
Our interpretation of the “negligent act, error, or omission” language of the
endorsement is also dispositive of the second issue: whether New Hampshire had
a duty to defend Westlake. While New Hampshire’s duty to defend is broader
than its duty to indemnify, Westlake fails to point to one fact in the record,
reasonably discoverable by New Hampshire, that even remotely tends to show Mr.
Masinton’s suit might have led to accusations Westlake committed negligent acts,
negligent errors, or negligent omissions in administering its stock plan.
“interpretation of employee benefits.” However, we do not reach the issue here.
6
Westlake touches on several issues that warrant only brief treatment here. The
first centers around a perceived conflict between the “negligent act, error or omission”
language and the definition of “administration of employee benefits,” which includes
“interpreting employee benefits.” Westlake argues the policy is ambiguous, or at least
covers nonnegligent errors, because the interpretation of benefits will always be an
intentional act, and therefore cannot be performed negligently. First, the district court
properly determined Westlake waived the issue of ambiguity by failing to plead it. New
Hamshipre, 11 F. Supp. at 1301 n.1. Second, the argument has no merit – certainly, as
the district court points out, an employee benefit plan, or any contract, could be
interpreted in a negligent manner. Westlake also infers New Hampshire should have
included an exclusion for intentional acts in the endorsement. Given the clear,
straightforward nature of the “negligent act, error or omission” phrase, an intentional acts
exclusion was unnecessary.
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Westlake’s argument on this point suffers from a familiar flaw – it focuses on
whether, and to what extent, Westlake’s interpretation of employee benefits was
at issue in Mr. Masinton’s suit, instead of addressing the underlying requirement
that a negligent interpretation occur in order for coverage to extend under the
policy. Simply said, there was no possibility Mr. Masinton’s suit would have
triggered New Hampshire’s liability under the policy.
Specifically, Mr. Masinton’s First Amended Petition characterized
Westlake’s breach of trust as “intentional, willful, wanton and in reckless
disregard for [Mr.] Masinton’s rights.” Nothing in this pleading, or in the
multitude of letters exchanged between counsel during the Masinton litigation,
pointed to any negligent activity by Westlake which might have been the basis for
a claim from Mr. Masinton. To the contrary, Westlake’s conduct was anything
but negligent: its leadership consulted their attorneys, kept good records, and
meticulously laid out the reasons for their refusal to release the money they held
in trust for Mr. Masinton. While an insurer’s duty to defend arises when “facts
give rise to a ‘potential of liability,’” New Hampshire was not bound to defend
Westlake in an action “brought wholly outside any coverage obligations assumed
in the policy.” Spruill Motors, 512 P.2d at 406.
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Conclusion
For these reasons, we conclude no genuine issue of material fact exists.
Rather Westlake’s actions clearly fell outside the endorsement language of the
policy, and therefore, as a matter of law, New Hampshire had no duty to defend or
indemnify Westlake in the Masinton suit. Accordingly, we AFFIRM the district
court’s grant of summary judgment in favor of New Hampshire.
Entered by the Court:
WADE BRORBY
United States Circuit Judge
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