Telamon Corporation v. Charter Oak Fire Insurance Co

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-1205
TELAMON CORPORATION,
Plaintiff-Appellant,
v.
CHARTER OAK FIRE INSURANCE COMPANY and
ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:15-cv-01446-RLY-DML
Richard L. Young, Judge.
____________________
No. 16-1815
TELAMON CORPORATION,
Plaintiff-Appellant,
v.
CHARTER OAK FIRE INSURANCE COMPANY AND
TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA,
Defendants-Appellees.
2 Nos. 16-1205 & 16-1815
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:13-cv-00382-RLY-DML
Richard L. Young, Judge.
___________________
ARGUED SEPTEMBER 29, 2016 — DECIDED MARCH 9, 2017
____________________
Before WOOD, Chief Judge, and RIPPLE and WILLIAMS, Cir-
cuit Judges.
WOOD, Chief Judge. Underlying this insurance dispute is a
regrettably common tale of greed and dishonesty. Telamon,
an Indiana telecommunications firm, engaged Juanita Berry
to work for it from 2005 to 2011 as its Vice President of Major
Accounts. Berry used that position to steal over $5 million
from the firm. Upon discovering this loss, Telamon then
turned to two insurance policies in an effort to recover its
money: a crime insurance policy with Travelers Casualty &
Surety (Travelers), and a commercial property policy with
Charter Oak Fire Insurance (Charter Oak). At that point, Tela-
mon crashed into a brick wall. Travelers denied coverage be-
cause Berry was not, legally speaking, an employee. And
Charter Oak refused to pay because, in practice, she was.
Telamon cried foul and filed a lawsuit in which it argued
that Berry’s actions were covered under both policies and that
the insurers had breached their duty of good faith. At the elev-
enth hour, it tried to add St. Paul Fire and Marine Insurance
(St. Paul) as a defendant. The court rejected the amendment,
at which point Telamon filed a new action against St. Paul and
Nos. 16-1205 & 16-1815 3
Charter Oak. That case promptly found its way back to the
same court and was dismissed as an impermissible effort to
split the claim. Telamon appealed (case 16-1205). Later the
court granted summary judgment in favor of the defendants
in the original case. Again, Telamon appealed (case 16-1815).
We consolidated the appeals for disposition. Finding no error
in either of the district court’s decisions, we affirm.
I
We refer to the original suit against Charter Oak and Trav-
elers as Telamon I, and the suit against Charter Oak and St.
Paul as Telamon II. The critical background facts are the same
for both cases.
Berry worked for Telamon from 2005 to 2011. Her employ-
ment was governed by a series of Consulting Services Agree-
ments (Agreements) between Telamon and J. Starr Communi-
cations, Berry’s one-woman company through which she pro-
vided her services. The terms of the Agreements remained
largely unchanged during Berry’s six-year association with
Telamon. Her role, however, did not. Berry’s responsibilities
expanded well beyond those described in the Agreements,
and she eventually became Telamon’s Vice President of Major
Accounts, making her the company’s senior manager in the
New York and New Jersey region. In this capacity she over-
saw Telamon’s AT&T Asset Recovery Program, which was
supposed to remove old telecommunications equipment from
AT&T sites and sell it to salvagers. Berry removed the equip-
ment and sold it, but she pocketed the profits. By the time the
company realized something was amiss in 2011, it had suf-
fered $5.2 million in losses. Telamon fired Berry and she was
later convicted in the District of New Jersey on federal charges
of wire fraud and tax evasion; she was sentenced to 60
4 Nos. 16-1205 & 16-1815
months’ imprisonment and was assessed $3,440,885 in resti-
tution payable to Telamon.
Berry’s misdeeds left Telamon with the problem of re-
couping its losses. Undoubtedly dubious that it would ever
see much of the required restitution, it turned to two insur-
ance policies for that purpose: its crime insurance policy with
Travelers and its general commercial insurance policy with
Charter Oak. These two insurers are subsidiaries of a larger
Travelers entity, and so Telamon asked them to work together
to avoid duplicative claims investigations. They obliged, but
in late 2012 they each gave Telamon the disappointing news
that they were denying coverage. Telamon fought back by fil-
ing Telamon I, which started out in Indiana state court and
landed in the federal court via removal. Telamon asserted that
its loss was covered under both policies and that the insurers
had acted in bad faith (a tort under Indiana law). The district
court granted summary judgment for the insurers on the cov-
erage issues in December of 2015, and dismissed the remain-
ing bad faith claims the following April.
Meanwhile, in June 2014, Telamon sought permission to
amend its complaint in Telamon I to add another set of claims
based on older policies issued by St. Paul and Charter Oak.
Because this request came almost a year after the deadline for
amending pleadings had expired, the court said no. At that
point, Telamon filed Telamon II in Indiana state court, raising
essentially the same claims. The insurers again removed, and
in January 2016, the district court dismissed the suit as an im-
permissible attempt to split claims.
Nos. 16-1205 & 16-1815 5
II
As these cases rest on diversity jurisdiction, we resolve
Telamon’s claims under Indiana law. See Native Am. Arts, Inc.
v. Hartford Cas. Ins. Co., 435 F.3d 729, 731 (7th Cir. 2006). Indi-
ana courts interpret insurance policies under “the same rules
of construction as other contracts,” taking “the perspective of
an ordinary policyholder of average intelligence.” Bradshaw v.
Chandler, 916 N.E.2d 163, 166 (Ind. 2009). An insured has the
burden of proving the existence of coverage, while the insurer
must show that an exclusion applies. Nat'l Fire & Cas. Co. v.
W. By & Through Norris, 107 F.3d 531, 535 (7th Cir. 1997); Home
Fed. Sav. Bank v. Ticor Title Ins. Co., 695 F.3d 725, 732 (7th Cir.
2012).
The analysis of an insurance policy proceeds in two steps.
First, the court examines whether the terms of a policy are un-
ambiguous. If they are, then the court adopts the ordinary
meaning of the words. Beam v. Wausau Ins. Co., 765 N.E.2d 524,
528 (Ind. 2002); Allgood v. Meridian Sec. Ins. Co., 836 N.E.2d 243,
246–47 (Ind. 2005) (referring to the dictionary). If there is am-
biguity, the court advances to the second step, where it con-
strues any ambiguity strictly against the insurer and in favor
of coverage. Bradshaw, 916 N.E.2d at 166. A policy is ambigu-
ous if “reasonable people would differ as to its meaning.” Jus-
tice v. Am. Family Mut. Ins. Co., 4 N.E.3d 1171, 1176 (Ind. 2014).
A
The Travelers policy at issue covers theft by “an Em-
ployee.” It defines “an Employee” to include “any natural
person … who is leased to the Insured under a written agree-
ment between the Insured and a labor leasing firm, while that
person is subject to the Insured’s direction and control and
6 Nos. 16-1205 & 16-1815
performing services for the Insured.” Berry is a natural per-
son, and there was a written agreement between Telamon and
J. Starr. To prevail, Telamon must show both that J. Starr was
a “labor leasing firm” and that Berry was “subject to [Tela-
mon’s] direction and control.” Failure to prove either of these
is enough to defeat its claim.
Telamon argues that the plain meaning of a “labor leasing
firm” is a company “in the business of placing its employees
at client companies for varying lengths of time in exchange
for a fee.” Pac. Emp’rs Ins. Co. v. Wausau Bus. Ins. Co., 2007 WL
2900452, at *8 (M.D. Fla. Oct. 15, 2007); see also Scottsdale Ins.
Co. v. Torres, 561 F.3d 74, 76, 78 (1st Cir. 2009) (adopting a sim-
ilar interpretation). In other words, a “labor leasing firm” is a
business concern that sells another person’s work for a speci-
fied time and for a specified fee.
We will accept that definition for purposes of this opinion.
Yet even so, we cannot conclude that J. Starr meets it. It is true
that the Agreements were contracts between Telamon and J.
Starr under which the former obtained the right to Berry’s la-
bor. But J. Starr was not a firm in the business of leasing labor;
it was just Berry’s vehicle for providing her own services. To
classify her corporate alter ego as a “labor leasing firm” would
be to elevate form over substance. The cases Telamon cites to
support its position underscore our point. The “labor leasing
firm” in Pacific Employers had multiple branches and special-
ized “in providing industrial clients with daily workers.”
2007 WL 2900452, at *1–2. Similarly, the firm in Torres “hire[d]
individuals and place[d] them with client companies for var-
ying lengths of time,” including at least six with the company
litigating its insurance coverage. 561 F.3d at 75–76. There is no
way to squeeze J. Starr into the same box. Berry’s company
Nos. 16-1205 & 16-1815 7
was a legal convenience, and nothing more. Because it was not
a “labor leasing firm,” she was not an “Employee” for pur-
poses of the Travelers policy.
B
Telamon also claims that Berry’s theft is covered by its
Charter Oak commercial property policy. That policy covers
risks of direct physical loss, unless one of its exclusions ap-
plies. We can assume that Telamon suffered a loss covered by
the policy. We thus turn to the exclusions, and in particular to
the exclusion for any “[d]ishonest or criminal act by … em-
ployees (including leased employees), directors, trustees, au-
thorized representatives or anyone (other than a carrier for hire
or bailee) to whom you entrust the property for any purpose.” (Em-
phasis added.) The parties agree that Berry committed a “dis-
honest or criminal act.” What they dispute is whether she falls
into one of the specified personnel categories. If so, the exclu-
sion applies, and coverage was properly denied.
We consider first whether Berry was an “authorized rep-
resentative” of Telamon. Courts that have looked at this term
in other cases dealing with the same policy language have
concluded that it is unambiguous. See Stop & Shop Cos., Inc. v.
Fed. Ins. Co., 136 F.3d 71, 75–76 (1st Cir. 1998); Stanford Univ.
Hosp. v. Fed. Ins. Co., 174 F.3d 1077, 1085–86 (9th Cir. 1999) (in-
terpreting same policy as Stop & Shop). We agree with them,
and since Indiana has no case on point, we adopt Stop & Shop’s
definition of “authorized representative” as “a person or com-
pany empowered to act on an entity’s behalf.” 136 F.3d at 74.
This describes Berry’s relationship with Telamon well. Tel-
amon authorized her to act on its behalf. She was its most sen-
8 Nos. 16-1205 & 16-1815
ior person in New York and New Jersey, and she had opera-
tional oversight over the company’s facilities in that area. She
hired and fired employees, ran meetings, and signed contracts
on Telamon’s behalf. Indeed, she was engaged in large part to
be an “authorized representative.” Telamon arranged for her
services in order to take advantage of her relationship with
AT&T, one of its largest customers. Even Berry’s title, Vice
President of Major Accounts, reflects this role: AT&T was a
“major account,” and she was in charge of managing it.
Telamon resists this conclusion. In its view, unless Berry
was authorized to do the specific activity that gave rise to the
theft, she was not an “authorized representative.” And since
the Agreements did not expressly mention making contracts
to sell equipment, it reasons that Berry lacked the requisite
authorization. This view requires us to ignore reality. Even
Telamon concedes that Berry’s actual role grew over time to
reach matters far beyond the Agreements’ terms. It did not
expect slavish adherence to the list of responsibilities in the
Agreements, and so neither should we. Such an approach is
inconsistent with the breadth of the list of exclusions. Moreo-
ver, even using the narrow definition of duties that Telamon
prefers, it cannot prevail. Berry was spearheading the AT&T
equipment removal program and was thus authorized to con-
duct the very activity that led to her crime. This also made her
a person to whom Telamon “entrust[ed] the property for any
purpose,” since she was entrusted with the equipment she
stole. An ordinary reader would understand that Berry fell
within the exclusion, and thus that the Charter Oak policy did
not cover the losses for which she was responsible.
Nos. 16-1205 & 16-1815 9
III
We turn now to Telamon’s assertion that both insurers
breached their duty of good faith, which is a standalone tort
in Indiana. Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d 515,
518–20 (Ind. 1993); Monroe Guar. Ins. Co. v. Magwerks Corp., 829
N.E.2d 968, 975–76 (Ind. 2005). There are four well-established
grounds for such a claim. Hickman, 622 N.E.2d at 519; Mag-
werks, 829 N.E.2d at 976. Telamon concedes that none of them
applies to its case. It argues instead that the plaintiff should
never have to establish the insurer’s ill will and that there
should be a fifth ground for the tort—bad faith in handling an
insurance claim—even though it knows that this court has no
power to change Indiana law. Telamon predicts that Indiana’s
courts are on the cusp of taking this step, however, and so it
asks us to certify this case to the Supreme Court of Indiana.
Certification to Indiana’s highest court is available if there
is “an issue of state law that is determinative of the case and
on which there is no clear controlling Indiana precedent.” Ind.
R. App. P. 64. Although we have the authority to certify ques-
tions when we conclude that the state-law issue “will control
the outcome of a case pending in the federal court,” Cir. R.
52(a), we do not take this step lightly. Telamon has not per-
suaded us that we should exercise our discretion here to do
so. The principal cases on which it relied, Hickman and Mag-
werks, did leave open the possibility of expanding the grounds
that would support the tort of an insurer’s breach of the duty
of good faith. Hickman, 622 N.E.2d at 519; Magwerks, 829
N.E.2d at 976. But it has been over 20 years since Hickman and
over 10 since Magwerks, and the list has not expanded. We see
no reason to ignore the Indiana Supreme Court’s apparent
satisfaction with the status quo, especially given the fact that
10 Nos. 16-1205 & 16-1815
Magwerks explicitly refused to recognize the claim-handling
ground for which Telamon advocates here. 829 N.E.2d at 976.
Against all this, Telamon points to two cases from the In-
diana Court of Appeals: HemoCleanse, Inc. v. Phila. Indem. Ins.
Co., 831 N.E.2d 259 (Ind. Ct. App. 2005), and Klepper v. ACE
Am. Ins. Co., 999 N.E.2d 86 (Ind. Ct. App. 2013). Neither one
persuades us that Indiana’s courts have already taken the step
for which Telamon argues, or that they are on the brink of do-
ing so. A footnote in HemoCleanse cites Magwerks in support of
an offhand remark that “an insurer may exhibit bad faith in,
for example, its handling of the claim … .” 831 N.E.2d at 264
n.2. Yet that statement is incorrect—Magwerks expressly re-
jected that argument. Klepper is similarly unhelpful. After not-
ing that Magwerks refused to recognize a claims-handling the-
ory, the court again declined to do so in Klepper. See 999
N.E.2d at 98 & n.11. In the 23 years since Hickman, no Indiana
court has embraced Telamon’s theory. We certify questions
only when the answer is unclear. That is not the case here.
Without a new exception, Telamon cannot succeed under
this theory. We thus have no need to address its argument that
its bad-faith claim does not require proof of ill will, or at least
that Indiana law is unsettled on the point. We will comment
only that this too looks like an uphill battle, in light of the ob-
servation in Magwerks that “[a]s a general proposition, a find-
ing of bad faith requires evidence of a state of mind reflecting
dishonest purpose, moral obliquity, furtive design, or ill will.”
829 N.E.2d at 977 (internal quotation marks and alterations
omitted). Nor does it matter whether, as Telamon argues, its
evidence would permit a finding of ill will. Telamon finds it
suspicious that Travelers determined in May 2012 that its loss
Nos. 16-1205 & 16-1815 11
was not covered, but it did not share its decision until Novem-
ber 29, 2012, by which time it was too late to sue under the
policy. Telamon also sees ill will in the decision to delay dis-
closure until after the Travelers adjuster spoke to his Charter
Oak counterpart (recall they are part of the same corporate
entity). Even viewed in isolation, we doubt this is a sufficient
showing of ill will. But it does not stand alone. Telamon omits
the obvious explanation for the delay and communication: It
asked the insurers to coordinate their investigations. No ra-
tional finder of fact could find bad faith on such a flimsy basis.
IV
The final question is whether the district court erred in dis-
missing Telamon II. The court rested this finding on claim pre-
clusion principles. In deciding the preclusive effect of a fed-
eral-court judgment in a diversity case, the Supreme Court
has adopted a two-part procedure. In principle, the effect to
be given any federal judgment is a question of federal com-
mon law. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S.
497, 508 (2001). But when the earlier judgment rested on di-
versity (or another area where state law furnishes the rule of
decision), “the federal court should … adopt as the federal
common law rule of res judicata the rule of the state in which
the court is located.” Allan Block Corp. v. Cnty. Materials Corp.,
512 F.3d 912, 915 (7th Cir. 2008). Since nothing that justifies
departing from the general rule comes to mind, we thus look
to Indiana law to see what effect we should give to Telamon I.
Indiana bars parties from “split[ting] a cause of action,
pursuing it in a piecemeal fashion and subjecting a defendant
to needless multiple suits.” Hilliard v. Jacobs, 957 N.E.2d 1043,
1048 (Ind. Ct. App. 2011) (citation omitted). Instead, “[m]ulti-
12 Nos. 16-1205 & 16-1815
ple legal theories supporting relief on account of one transac-
tion must be litigated at one go.” Erie Ins. Co. v. George, 681
N.E.2d 183, 190 (Ind. 1997) (citation omitted). Hilliard is espe-
cially relevant, because it concerned insurance coverage. As in
our case, the trial court rebuffed the plaintiff’s attempt to add
more claims to her complaint, and the plaintiff later filed a
new suit “asserting previously-stricken claims based on the
same facts and transaction as the first lawsuit.” 957 N.E.2d at
1045. The Indiana Court of Appeals found that the second suit
was barred by Indiana’s rule against claim splitting, because
although “the legal theories advanced have changed, the facts
being litigated and the ultimate goal have remained exactly
the same.” Id. at 1048.
So too here. The claims in Telamon II are nearly identical to
those the district court refused to permit Telamon to add to its
complaint in Telamon I. That ruling was well within the district
court’s discretion, and in any event is not challenged here.
That was a wise decision: Telamon missed the deadline to
amend by nearly a year. At this point, however, the reason
why the new claims were not advanced in the earlier case has
fallen by the wayside. Under Indiana law, Telamon was not at
liberty to split its cause of action and subject the insurers to
repetitious lawsuits. A quick look at the policies at issue in
Telamon II reveals that they are materially indistinguishable
from those in Telamon I, and they were being invoked to cover
the same loss. The district court was thus correct to invoke the
bar against claim splitting.
V
Berry’s theft was not covered under either the Travelers or
the Charter Oak policy. In addition, Telamon has not stated a
claim for a breach of the duty of good faith. Finally, it was not
Nos. 16-1205 & 16-1815 13
entitled to bring a new lawsuit that did no more than add a
few additional insurers and policies to its basic case. The judg-
ments of the district court are AFFIRMED.