Sharp Realty & Management, LLC v. Capitol Specialty Insurance Corp. ( 2013 )

Case: 12-13344 Date Filed: 01/04/2013 Page: 1 of 14
[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 12-13344
Non-Argument Calendar
________________________
D.C. Docket No. 2:10-cv-03180-WMA
SHARP REALTY & MANAGEMENT, LLC,
lllllllllllllllllllllllllllllllllllllll Plaintiff - Counter Defendant - Appellant,
SHADES PARKWAY, LLC,
lllllllllllllllllllllllllllllllllllllll l Plaintiff,
versus
CAPITOL SPECIALTY INSURANCE CORP.,
SPECIALTY GLOBAL INSURANCE SERVICES, LLC,
lllllllllllllllllllllllllllllllllllllllll Defendants - Appellees,
ALLIED WORLD ASSURANCE COMPANY, INC.,
llllllllllllllllllllllllllllllllllllll llDefendant - Counter Claimant - Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
________________________
(January 4, 2013)
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Before HULL, MARTIN and JORDAN, Circuit Judges.
PER CURIAM:
Sharp Realty & Management, LLC (SRM) sued Allied World Assurance
Company (Allied), which provided SRM with E&O insurance1 from November 22,
2007 to November 22, 2009, and Capitol Specialty Insurance Corp (Capitol),
which provided SRM with E&O insurance from November 22, 2009 to November
22, 2010. SRM seeks six forms of relief: “1) specific performance; 2) damages for
breach of contract; 3) damages for bad faith (negligent failure to investigate); 4)
damages for bad faith (intentional refusal to afford coverage); 5) damages for fraud
for failure to provide promised insurance coverage; and 6) costs of defense in the
underlying action.” The district court granted summary judgment in favor of
Allied and Capitol. This appeal followed.
This case arises from a complicated set of facts and procedural history, fully
set out in the district court’s Memorandum Opinion. See Sharp Realty and Mgmt.,
LLC v. Capitol Specialty Ins. Corp., LLC, No. CV-10-AR-3180-S, 2012 WL
2049817, at *1–9 (N.D. Ala. May 31, 2012). At the most basic level, this case is
an insurance dispute between SRM, which was being sued by several parties for
misconduct about its management of Shades Creek Plaza; and its E&O insurance
1
As explained by the district court, “E&O insurance coverage generally refers to coverage for
negligent acts, errors or omissions that an insured commits, or is alleged to have committed, in
the performance of its covered activities.” Sharp Realty and Mgmt., LLC v. Capitol Specialty
Ins. Corp., LLC, No. CV-10-AR-3180-S, 2012 WL 2049817, at *1 (N.D. Ala. May 31, 2012).
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providers: Allied, which provided a defense under a full reservation of rights, and
Capitol, which denied coverage.
SRM sought four forms of relief based solely on the insurance companies’
denial of coverage. These coverage-based claims were for: specific performance,
breach of contract, bad faith (negligent failure to investigate), and costs of defense.
The other two forms of relief requested by SRM – for bad faith and fraud – were
based on a slightly more complicated background. SRM alleged that the only
reason its insurance agent, Bates Insurance Agency, obtained E&O coverage from
Allied and Capitol was to ensure that it had coverage for claims arising from the
management of properties in which an insured owned or had an equity interest.
Endorsement Item 8 of the policies defined “Insured Activities” as including
management of properties that the insured owned 49% or less of and some claims
arising out of the management of majority owned or wholly owned properties.
SRM argues that this endorsement bound the insurance companies to provide
coverage for “affiliated entities.” Therefore, “when the companies denied
coverage because of the ‘affiliated entities exclusion,’2 [it] constituted (1) bad faith
2
The “affiliated entities” exclusion, in Part II.B of the policies, states that: “The Company is not
liable for Damages or Claim Expenses or obligated to defend Claims made by or on behalf of: 1.
Any entity . . . over which an Insured, by reason of ownership interest or otherwise, asserts
influence or control.” The relationship between Endorsement Item 8 and this exclusion is a point
of much contention between the parties.
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and (2) fraud in the inducement.” We will refer to this second group of claims as
the fraud-based claims. 3
We review de novo the district court’s grant of summary judgment. Skop v.
City of Atlanta, 485 F.3d 1130, 1136 (11th Cir. 2007). Summary judgment is only
appropriate where “there is no genuine issue as to any material fact and . . . the
moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).
At this stage, all evidence and factual inferences must be viewed in the light most
favorable to the non-moving party. Id. Alabama law governs this case. See Sharp
Realty and Mgmt, LLC, 2012 WL 2049817, at *14 n.4.
I. Allied
In its motion for summary judgment, Allied made several arguments about
why SRM’s claims against it must fail. These arguments included: 1) that SRM
forfeited any available coverage by failing to comply with the Allied Policy’s
notice provision; and 2) that there was no evidence of bad faith or fraud because
Allied defended SRM in the underlying litigation.
We turn first to Allied’s argument that SRM forfeited any available coverage
by failing to comply with the Policy’s notice provision. “[T]he failure of an
insured to comply within a reasonable time with such conditions precedent in an
3
In its First Amended Complaint, which asserted claims only against Capitol, SRM alleged one
Count of “Bad Faith – Intentionally Refusing to Afford Coverage” (which could encompass
coverage-based arguments and fraud-based arguments) and one count of fraud. In its Second
Amended Complaint, asserting claims against Allied, SRM combined the fraud and bad faith
claims based on these allegations into a single count.
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insurance policy requiring the insureds to give notice of an accident or occurrence
releases the insurer from obligations imposed by the insurance contract.” Reeves
v. State Farm Fire & Cas. Co., 539 So. 2d 252, 254 (Ala. 1989). “Only two factors
are to be considered in determining the reasonableness of a delay in giving notice
to the insurer: the length of the delay and the reasons for the delay.” Travelers
Indem. Co. of Connecticut v. Miller, 86 So. 3d 338, 342 (Ala. 2011). Prejudice to
the insurer is not a factor unless “there is no express provision making the
insured’s failure to give such notice a ground of forfeiture or a condition
precedent.” American Fire & Cas. Co. v. Tankersley, 116 So. 2d 579, 581 (Ala.
1959); see also Miller, 86 So. 3d at 342.
SRM incorrectly argues that prompt notice was not a condition precedent in
the Allied Policy and that therefore prejudice is a relevant factor in determining the
reasonableness of delay. The Allied Policy states:
Part VII CONDITIONS . . .
B. WHAT TO DO IF AN INSURED HAS A CLAIM
If there is a Claim, or a circumstance or incident likely to result in
a Claim, the Insured must promptly do the following:
1. Notify the Company in writing . . .
2. Send the Company copies of all . . . legal papers received in
connection with the Claim or potential Claim; . . .
C. LEGAL ACTION AGAINST THE COMPANY . . .
2. No action may be brought against the Company unless the
Insured has fully complied with all terms and conditions of this
Policy.
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Even though the term “condition precedent” is not used, these provisions make it
clear that SRM was required to promptly notify Allied of any claim before it could
bring an action against it. In light of this contract provision, we need not consider
whether Allied was prejudiced; we must only look at the length of the delay and
the reasons for the delay. See Miller, 86 So.3d at 342.
The length of the delay in this case was unreasonable as a matter of law.
Sam Sharp, the 100% owner of SRM, was served with the underlying suit on July
10, 2009. SRM did not notify Allied of the lawsuit until March 16, 2010, more
than eight months later. The Alabama Supreme Court has held that even “[a] five-
month delay in giving notice is sufficiently protracted as to require the insured to
offer evidence of a reasonable excuse for the delay.” Nationwide Mut. Fire. Ins.
Co. v. Estate of Files, 10 So. 3d 533, 536 (Ala. 2008).
Neither is there a factual question regarding whether there was a reasonable
excuse for the delay. See Reeves, 539 So. 2d at 255 (explaining that if the insured
offers an excuse that “may reasonably be said to justify the length of the delay”
there is a jury question, but the excuse offered may be unreasonable as a matter of
law). The only excuse SRM offers for the delay is that Sam Sharp immediately
brought the 75 pages of legal documents that he received on July 10th to his
attorney without reading through them. Even if it was reasonable for Sam Sharp to
bring the legal documents to SRM’s attorney without reviewing them, the
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attorney’s failure to notify Allied in a timely manner is attributable to SRM. Cf.
Allstate Ins. Co. v. Beavers, 611 So.2d 348, 349, 353 (Ala. 1992) (holding that the
insured waived his right to certain insurance benefits because neither he, nor his
attorney, satisfied the notification requirement); Indep. Stave Co., Inc. v. Bell,
Richardson and Sparkman, P.A., 678 So.2d 770, 771 (Ala. 1996) (discussing a
malpractice suit in which the plaintiff sued its attorneys for “negligently fail[ing] to
file timely proof of its claim” thereby causing the plaintiff “to be barred from
recovering”); see also Arrowood Indem. Co. v. Macon County Greyhound Park,
Inc., 757 F. Supp. 2d 1219, 1228 (M.D. Ala. 2010) (“It is the insured’s burden to
notify the . . . insurer if necessary, and [the insured] was not entitled to rely solely
on the evaluations of defense attorneys and insurance agents.”). SRM has not
explained why it took the attorney eight months to notify Allied.
Because the length of and reason for the delay were not reasonable, SRM
failed to comply with the notice provision. This failure prevents SRM from
bringing any action against Allied under the express terms of the Policy and
releases Allied from obligations imposed by the Policy, see Reeves, 539 So. 2d at
254. For these reasons, we affirm the district court’s grant of Allied’s summary
judgment motion on SRM’s coverage-based claims.
We also affirm the district court’s grant of Allied’s summary judgment
motion as to SRM’s fraud-based claims. SRM alleges that Allied charged SRM
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premiums on “affiliated entity” properties Allied did not intend to cover. Allied
did initially deny coverage based on the “affiliated entities” exclusion, Exclusion
II.B. However, shortly after receiving a letter from Charles Sharp, on behalf of
Sam Sharp and SRM, Allied decided to provide SRM with a defense under the
terms of the Policy, albeit under a full reservation of rights. In any event, Allied’s
summary judgment motion did not argue that Exclusion II.B. barred coverage.
Because SRM offered no other evidence to suggest that Allied did not intend to
cover these properties, we are simply left with no evidence suggesting that Allied
charged SRM premiums on properties it never intended to cover.
Our ruling in favor of Allied on these grounds renders it unnecessary for us
to address the other grounds on which Allied argues for summary judgment or any
of the other arguments raised on the Allied appeal.
II. Capitol
In its motion for summary judgment, Capitol made several arguments about
why SRM’s claims against it must fail. One of these arguments was that SRM’s
coverage-based claims fail because the underlying claim against SRM was not
made within the time frame for coverage under the Capitol Policy. A second
argument was that SRM’s fraud-based claims fail because SRM offered no
evidence that Capitol committed a fraudulent act that SRM reasonably relied on or
any proof that Capitol never intended to perform under the insurance contract.
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We turn first to Capitol’s argument that SRM’s coverage based claims must
fail because SRM’s underlying claim was not made within the period of coverage.
“Under Alabama law the general rule is that the insured bears the burden of
proving coverage.” Jordan v. Nat’l Acc. Ins. Underwriters Inc., 922 F.2d 732, 735
(11th Cir. 1991).
The Capitol Policy only covered “[c]laims first made against an Insured
during the Policy Period.” Under the Policy, a Claim was considered to be “first
made against an Insured when a written Claim is first received by an Insured
during the Policy Period.” The Policy Period was November 22, 2009 to
November 22, 2010.
The Policy included some specific rules for determining when a Claim was
first made against an Insured. Specifically, Part V.B of the policy explains:
Part V WHERE AND WHEN COVERAGE APPLIES . . .
B. WHEN . . .
5. Multiple Claims
All Claims arising from the same Erroneous Act will be
considered to have been made on the earlier of the following
times:
a. The date the first of those Claims is made against an Insured;
or
b. The date the Company first receives an Insured’s written
notice of the Erroneous Act. . . .
6. Related Erroneous Acts
All Erroneous Acts that:
a. are committed after the Retroactive Date [November 22,
2004] and before the Expiration Date of the last
Miscellaneous E&O Policy issued to an Insured by [Capitol]
. . .; and
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b. are logically or causally connected by common facts,
circumstances, transactions, events and/or decisions;
will be:
a. treated under this Policy as one Erroneous Act . . ..
Thus, all claims arising out of “logically or causally connected” Erroneous Acts
committed between November 22, 2004 and November 22, 2010 were considered
to have been first made on the date the first of those claims was made against the
Insured.
Applying this framework, there were not any claims made against SRM
during the Capitol Policy Period of November 22, 2009 to November 22, 2010.
On July 10, 2009, Sam Sharp was served with claims based on the results of an
audit conducted by Wray Pearce, a forensic accountant. In a letter, Pearce
concluded that SRM “has not collected rent or common area maintenance charges
appropriately.” Based on the period from 2006 through April 2009, SRM owed
$218,893 in rent and common area maintenance fees. These claims were made
against SRM prior to the Capitol Policy Period because they were first received by
the Insured on July 10, 2009 and (again) the Policy Period did not begin until
November 22, 2009. They were therefore not covered by Capitol.
Pearce conducted a second audit based on documents produced during
discovery. In a letter, which was provided to SRM’s counsel on June 3, 2010,
Pearce concluded that SRM “has not collected rent or common area maintenance
charges in accordance with the leases.” This second audit covered years 2000 to
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2009. Based on this audit, the claim against SRM in the underlying suit was
increased to $752,846.43. SRM argues that the claims based on the second Pearce
letter are covered by the Capitol Policy because SRM first received written notice
of these claims during the Capitol Policy Period. Capitol argues that because of
Part V of the Policy’s “Multiple Claims” and “Related Erroneous Act” provisions,
all of these claims are considered to have been made on July 10, 2009, which is
outside the Policy Period.
We conclude that Capitol’s construction is correct. All of the claims in the
underlying action are based on related Erroneous Acts. The same claimant sued
the same defendant for the same type of wrongdoing (failure to collect rent and
maintenance fees) at the same location over an overlapping period of time. Both
audits examined whether SRM was collecting rent and fees from the same tenants
in accordance with the same leases. Thus, while there may be separate
occurrences, those occurrences are clearly related because they are “logically or
causally connected by common facts, circumstances, transactions, events and/or
decisions.”4 Cf. HR Acquisition I Corp. v. Twin City Fire Ins. Co., 547 F.3d 1309,
1316 (11th Cir. 2008) (determining that two lawsuits were “related” under an
4
SRM argues that there is at least a factual question for the jury on this issue. It points to the
fact that Sam Sharp stated in his affidavit that “[a]ll of the alleged acts are unrelated” because
Pearce criticized the collection of rents from different tenants who had different leases and the
fact that Pearce never stated that the acts were related. However, these arguments do nothing to
break the logical connection between the first set of claims and the second, each of which
criticized SRM’s collection of rents from the same assortment of tenants.
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insurance policy exclusion because they “allege[d] the same type of wrongdoing
by [the defendant]”).
Under the Capitol Policy, these related Erroneous Acts are treated as a single
Erroneous Act. All claims arising out of this Erroneous Act will be considered to
have been made on the date the first claim was made against SRM, July 10, 2009.
Therefore, the claims were outside of the Policy Period and not covered by Capitol.
Because the Capitol Policy did not cover these claims, summary judgment in favor
of Capitol was proper as to SRM’s coverage-based claims: specific performance,
breach of contract, bad faith (failure to investigate), bad faith (intentionally
refusing to afford coverage) and costs of defense in the underlying action.
We also affirm the district court’s grant of Capitol’s summary judgment
motion as to SRM’s fraud-based claims. “The elements of fraud are (1) a false
representation (2) of a material existing fact (3) reasonably relied upon by the
plaintiff (4) who suffered damage as a proximate consequence of the
misrepresentation.” Exxon Mobil Corp. v. Alabama Dept. of Conservation and
Natural Resources, 986 So. 2d 1093, 1114 (Ala. 2007) (quotation marks and
emphasis omitted). SRM’s claim is essentially a claim of promissory fraud
because SRM alleges that SRM paid Capitol for its promise to cover “affiliated
entity” properties and Capitol “had no intention of affording coverage.” See Ex
Parte Michelin North America, Inc., 795 So.2d 674, 678 – 79 (Ala. 2001) (defining
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promissory fraud as being “based upon a promise to act or not to act in the future”
and providing an example). There are two additional elements for promissory
fraud claims: (1) “proof that at the time of the misrepresentation, the defendant had
the intention not to perform the act promised,” and (2) “proof that the defendant
had an intent to deceive.” Id. (quotation marks omitted).
No matter what the relationship is between Exception II.B and Endorsement
Item 8 and whether “affiliated entity” properties were actually covered under the
Policy, SRM has not offered any evidence that Capitol made a false representation,
or otherwise acted in bad faith. 5 Though SRM states that “[t]he purpose of
changing carriers was to get coverage for ‘affiliated entities,’” SRM does not
allege any facts suggesting this purpose was made known to Capitol or that Capitol
represented to SRM that the affiliated entities would be covered. SRM alleges that
“Gresham [& Associates] induced Bates who induced SRM.” However, SRM
hired Bates to procure E&O coverage for it and Gresham is an insurance broker
contacted by Bates. Thus, any representations made by Bates or Gresham cannot
be imputed to Capitol. See Carolina Cas. Ins. Co. v. Miss Deanna’s Child Care-
Med Net, LLC, 869 So. 2d 1169, 1174 (Ala. Civ. App. 2003) (explaining that
unless special circumstances are present, an insurance broker is considered to be
5
SRM likely had a similar problem with respect to its fraud-based claims against Allied on this
ground. However, we were able to grant Allied’s summary judgment motion regarding those
claims on other grounds.
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exclusively the insured’s agent). There is no evidence that Capitol did anything
except process application forms and issue the E&O policy.
Our ruling affirming summary judgment in favor of Capitol on these
grounds defeats all of SRM’s claims, therefore we will not address the other bases
upon which Capitol argued for summary judgment or any of the other arguments
raised on appeal.
III. Conclusion
For these reasons, we affirm the district court’s grant of summary judgment
in favor of Allied and Capitol.
AFFIRMED
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