Westport Insurance Corporation v. Energy Financial Services, LLC

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 09a0228n.06
Filed: March 24, 2009
Case No. 08-5046
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
WESTPORT INSURANCE CORP., et al., )
)
Plaintiffs-Appellants, ) ON APPEAL FROM THE
) WESTERN DISTRICT OF
v. ) KENTUCKY
)
ENERGY FINANCIAL SERVICES, LLC, et )
al., )
)
Defendants-Appellees. )
_______________________________________
BEFORE: KENNEDY and BATCHELDER, Circuit Judges; and THAPAR, District Judge.*
ALICE M. BATCHELDER, Circuit Judge. The plaintiff insurance companies appeal the
district court’s order granting summary judgment to the defendant insureds, in which the district
court determined that under the terms of the policies issued by plaintiffs, plaintiffs had a duty to
defend the insureds against third-party negligence claims. We affirm.
Energy Insurance Agency (“Energy”) is, among other things, a consultant in the insurance
field, and often refers insurance business to other insurance agencies. As a consultant, Energy
purchased an errors-and-omissions policy from Westport Insurance Corp. and a professional liability
insurance policy from Employers Reinsurance Corp. Each of these policies contained exclusions,
such that coverage would not be provided for insolvency or commingling. For example, the policies
*
The Honorable Amul R. Thapar, United States District Judge for the Eastern District of Kentucky, sitting by
designation.
state:
This policy does not apply to . . . claims for . . . the commingling or use of client’s
funds.
This policy does not apply to . . . any claim arising out of or in connection with the
financial inability to pay, insolvency, receivership, bankruptcy or liquidation of any
insurance company, any reinsurer, any pool, syndicate, association or other
combination formed for the purpose of providing insurance or reinsurance.
There are two policies at issue here, but this language is representative of both.
In 2003, Lifeline Health Group (“Lifeline”) hired Energy to find a company to administer
health insurance to its employees. Energy recommended Consumer Health Solutions (“CHS”) and
Lifeline accepted this recommendation, paying CHS over $1.8 million in premiums. But CHS failed
to pay the Lifeline employees’ claims because, as was later discovered, a CHS principal had
commingled the funds and ultimately taken the money for his own use. This misconduct rendered
CHS insolvent.
Certain Lifeline employees sued Lifeline, and Lifeline brought a Third Party Complaint
against Energy, claiming that Lifeline had chosen CHS because of Energy’s negligence. Energy
submitted a claim to its insurers (Westport and Employers), seeking legal defense. The insurers
provided the legal defense under reservation of rights and filed this separate action seeking a
declaratory judgment that their policies did not cover Energy because the underlying claim involved
commingling and insolvency. Energy countered that, while its policies excluded coverage for its
own commingling or its own insolvency, it was not Energy that had commingled any funds and
become insolvent — Lifeline had sued Energy for its negligence, a claim that the insurance policies
certainly covered.
The district court considered the policy language and the parties arguments and agreed with
Energy. The policies, the district court found, excluded coverage for claims against the insured’s
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insolvency or commingling, but did not exclude claims for the insured’s negligence in which the
harm happened to be caused by a third-party’s insolvency or commingling. Morever, the district
court found that, even if this reading were incorrect, it was surely a plausible reading and policy
language susceptible to two or more plausible readings is ambiguous and is to be construed against
the drafters (Westport and Employers) and in favor of the insured (Energy), that is, in favor of
coverage. Westport and Employers appealed.
We conduct a de novo review of the district court’s grant of summary judgment. Walton v.
Ford Motor Co., 424 F.3d 481, 485 (6th Cir. 2005). Summary judgment is appropriate if there is
no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). This case involves
no genuine issues of material fact and, “where the facts are undisputed and the only issue is whether
the facts meet the policy definition, only a question of law for the court is presented.” See State
Auto. Mut. Ins. Co. v. Security Taxicab, Inc., 44 F. App’x 513, 517 (6th Cir. 2005) (citing MGA Ins.
Co., Inc. v. Glass, 131 S.W.3d 775, 777 (Ky. Ct. App. 2004)). And, because this a diversity case,
we apply the substantive law of the state of Kentucky. See id.
In St. Paul Fire & Marine Insurance Co. v. Powell- Walton- Milward, Inc., 870 S.W.2d 223,
225 (Ky. 1994), an insurance broker (PWM) recommended a particular health-insurance provider
(NABT) to several of its clients. When NABT became insolvent and stopped paying claims, the
clients sued PWM, claiming negligence. Id. PWM filed an insurance claim with its own insurer (St.
Paul), based on its errors-and-omissions policy, which included two pertinent clauses: the Coverage
Clause (“[St. Paul will] pay amounts [PWM is] legally required to pay to compensate others for loss
that results from an error, omission or negligent act committed . . . [during the] placement of
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insurance”); and the Exclusion Clause (“[St. Paul] won’t cover claims that result from the inability
of an insurance company, joint underwriting association, or any similar entity to pay all or part of
insured claims.”). Id. St. Paul relied on the exclusion to deny coverage of PWM’s claim.
St. Paul sought clarification in federal court and we certified the question to the Kentucky
Supreme Court. Id. at 224-25. The Kentucky Supreme Court determined that a literal reading put
the two clauses into “patent conflict,” wherein “[t]he coverage afforded by St. Paul’s policy loses
all effect when it becomes subservient to the exclusion.” Id. at 226. Thus, the Kentucky Supreme
Court found an alternative reading both necessary and reasonable — finding that coverage would
be excluded only if the recommending third party (i.e., St. Paul’s insured, PWM) did something that
caused or contributed to the recommended-insurer’s inability to pay. Id. at 226-27 (“It would seem,
obviously, a relatively simple matter for St. Paul to have written its limitation expressly to exclude
inability to pay, irrespective of a wrongful act [by the insured] or not.”). Thus, the court concluded
that the policy was “susceptible to two reasonable meanings,” and, therefore, must “be resolved to
afford maximum coverage.” Id. at 226. The court determined that PWM was covered.
If we are to follow the Kentucky Supreme Court’s St. Paul reasoning — as we are obliged
to do in this diversity case — then we must read the exclusion clauses in the Westport and
Employers policies as excluding coverage only if the recommending party (i.e., Energy) did
something to cause or contribute to the recommended insurer’s (i.e., CHS’s) insolvency. See St.
Paul, 870 S.W.2d at 226-27. And it is undisputed that Energy did nothing of the sort. Moreover,
it would seem a relatively simple matter for Westport and Employers to have written their limitations
expressly to exclude CHS’s inability to pay, irrespective of a wrongful act by Energy. See id. at 226.
But, they did not. The policies at issue here are no more specific than the policy in St. Paul.
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Finally, Kentucky, like the majority of jurisdictions, has adopted the rule that “if there is any
allegation in the complaint which potentially, possibly or might come within the coverages of the
policy, then the insurance company has a duty to defend.” Simpsonville Wrecker Service, Inc. v.
Empire Fire & Marine Ins. Co., 793 S.W.2d 825, 830 (Ky. 1989); see also Aetna Cas. & Sur. Co.
v. Com., 179 S.W.3d 830, 841 (Ky. 2005). And “[t]he duty to defend continues to the point of
establishing that liability upon which plaintiff was relying was in fact not covered by the policy and
not merely that it might not be.” James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine
Ins. Co., 814 S.W.2d 273, 279 (Ky. 1991). Here, the complaint alleges that Energy was negligent,
a claim that — at the very least — potentially would come within the coverage of the policy.
Based on the foregoing, we AFFIRM the judgment of the district court.
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