Design Professionals v. Chicago Ins. Co.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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Nos. 05-2275/2276/2326
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Design Professionals Insurance *
Company, a California *
insurance company, *
*
Appellee/Cross-Appellant, *
* Appeals from the United States
v. * District Court for the
* Eastern District of Arkansas.
Chicago Insurance Company, *
an Illinois insurance company, *
*
Appellant/Cross-Appellee, *
*
ESI Group, Inc., an Arkansas *
corporation, *
*
Appellee/Cross-Appellant. *
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Submitted: February 16, 2006
Filed: July 21, 2006
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Before WOLLMAN, ARNOLD, and GRUENDER, Circuit Judges.
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ARNOLD, Circuit Judge.
The parties to this insurance action appeal various rulings by the district court.
We affirm in part, reverse in part, and remand the case for further proceedings.
I.
Miller, England & Company (MEC) was an Arkansas accounting firm headed
by Michael Miller. MEC carried what is called a claims-made professional liability
insurance policy with the Chicago Insurance Company, a defendant in this action;
such a policy provides coverage only for claims made against an insured during the
policy period. MEC's agent for this policy was Rhodes & Associates; Chicago's agent
was the Herbert H. Landy Insurance Agency. The one-year policy period ended on
August 11, 1999. After the policy period ended, MEC had sixty days during which
to report to Chicago any claims that were first made against MEC during the policy
period. During the same sixty days, an endorsement to the policy gave MEC the right
to buy what is called tail coverage, which would provide coverage for claims first
made after the policy period expired that were based on conduct that had occurred
prior to the policy's expiration date.
Burris, Adlong & Company (BAC), headed by Gary Burris and Rosemary
Adlong, was another Arkansas accounting firm. BAC also carried claims-made
liability insurance, which it purchased from plaintiff Design Professionals Insurance
Company (DPIC). The policy period for BAC's insurance ended on September 1,
1999. According to the policy, firms that had been merged with or acquired by BAC
were insured under the policy for up to thirty days following the effective date of the
acquisition or merger. The policy did not define what constituted an acquisition or
merger for the purpose of coverage.
After Ms. Adlong announced her intention to retire, Mr. Burris and the
principals at MEC decided to combine the two accounting firms. Both firms sent
notices of that decision to their clients, and on August 1, 1999, BAC closed its office
and combined its operations with MEC, which changed its name to Burris,
Miller & Company (BMC). BMC's principals abandoned the BAC corporate charter,
and it was eventually revoked for failure to pay franchise taxes. At no time did MEC
and BAC file articles of merger with the Arkansas Secretary of State.
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With both firms now combined, BMC's principals chose DPIC as BMC's
liability insurance provider. Accordingly, Rhodes sent Chicago's agent, Landy, a
letter informing Chicago that MEC's claims-made policy would be allowed to expire;
Landy, in turn, sent a letter to Rhodes confirming the expiration. In that letter, Landy
mentioned that additional "extended reporting period options" were available. (The
policy endorsement listed premiums for what it described as twelve-, thirty-six-, or
sixty-month "extended reporting period[s].") In explaining those options, however,
Landy's letter misstated what claims would come within the tail coverage. Although
the endorsement to the policy stated that any tail coverage that MEC purchased would
cover claims first made against it during the extended reporting period, the letter
suggested that any "extended reporting period option" would cover only claims that
were first made against MEC before the policy's August 11 expiration date. Thus the
letter implied that any tail coverage would not cover claims first made after MEC's
policy expired.
On August 19, eight days after MEC's policy expired, the president of ESI
Group, Inc., telephoned Mr. Miller and made a claim against him, MEC, and an MEC
employee, Stan Parks, for damages stemming from an audit that Mr. Parks had
performed for ESI. Mr. Miller promptly notified Rhodes of the claim, who in turn
informed Landy. Chicago wrote to Mr. Miller, telling him that because the claim had
not been first made during the policy period, it was not covered by the automatic
extended reporting coverage. In that letter, Chicago did not mention that MEC could
still purchase tail coverage that would include the ESI claim.
While Mr. Miller notified Rhodes of the ESI claim, Mr. Burris contacted
DPIC's agent to let him know about the claim. At first, DPIC refused to provide a
defense. Once ESI filed suit in state court against MEC, Mr. Parks, and Mr. Miller
(the MEC defendants), however, DPIC agreed to defend them under a reservation of
rights, which preserves an insurer's right to deny that the policy covers a claim. On
the eve of the ESI trial, the parties entered into a settlement agreement: DPIC paid
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$100,000 to ESI and agreed to pay an additional $600,000 if it was later determined
that its policy with MEC covered ESI's claim, Mr. Parks agreed to a consent judgment
against him for $1,000,000, and ESI agreed to look only to insurance coverage for
payment on its claims. In a separate agreement, the MEC defendants assigned all of
their rights against Chicago (MEC's original insurer) to DPIC.
While the state lawsuit was pending, DPIC filed this action in district court,
naming Chicago and ESI as defendants. DPIC sought a declaration that its policy did
not provide coverage for ESI's claim, as well as partial reimbursement from Chicago
for payments that it (DPIC) had already made on that claim. ESI filed a cross-claim
against Chicago to recover on the $1,000,000 consent judgment entered against
Mr. Parks. The parties moved for summary judgment. The district court granted
partial summary judgment to DPIC, declaring that its policy did not provide coverage
for the ESI claim because BAC, the purchaser of the policy, had not merged with
MEC under Arkansas law. The court granted summary judgment to Chicago on DPIC
and ESI's estoppel claims. On breach of contract claims against Chicago filed by
DPIC and ESI, the district court concluded that Chicago was required to provide MEC
with certain information about tail coverage, and a jury found that Chicago had not
done so. The district court entered a judgment against Chicago based on the jury
verdict. Chicago appealed, and DPIC and ESI filed cross-appeals.
II.
A.
DPIC and ESI alleged that Chicago breached its contract with MEC by failing
to disclose that any tail coverage that MEC purchased would have covered the ESI
claim. They asserted that the duty to disclose that fact arose from Ark. Code Ann.
§ 23-79-306(3)(B), which requires that a notice of termination of insurance must
inform an insured that an extended period endorsement is available for purchase, and
they relied on "the general rule that a statute governing insurance coverage becomes
part of a policy affected by it," First Sec. Bank of Searcy v. Doe, 297 Ark. 254, 257,
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760 S.W.2d 863, 865 (1988). In denying summary judgment motions filed by DPIC
and ESI, the district court agreed that § 23-79-306(3)(B) obligated Chicago to send
a notice of termination explaining the availability and importance of tail coverage, but
it determined that a material issue of fact remained as to whether Chicago satisfied
that obligation by sending the Landy letter. That issue was submitted to a jury, which
found in favor of DPIC and ESI. The district court denied Chicago's motion for
judgment as a matter of law, and it entered a judgment for DPIC and ESI based on the
jury verdict.
We review de novo the district court's interpretation of a specific provision of
the Arkansas Code. See BancInsure, Inc. v. BNC Nat'l Bank, N.A., 263 F.3d 766, 770
(8th Cir. 2001). Section 23-79-306(3)(B) states that "[a]ny notice of termination of
a claims-made policy must include a disclosure advising the insured and his or her
agent of the availability of and premium for an extended reporting period endorsement
and the importance of purchasing the coverage." The issue here is whether Arkansas
law requires an insurer to send a notice of termination when the insured simply allows
the policy to expire. DPIC and ESI argue that a "termination" within the meaning of
§ 23-79-306(3)(B) occurs whenever a policy ends, regardless of whether it is cut short
or merely expires of its own terms. Chicago disagrees, arguing that a termination
occurs only when the insurer or the insured take some affirmative step to end an
existing policy.
Where a term in a statute is clear and unambiguous, it will be given its ordinary
meaning. Cash v. Arkansas Comm'n on Pollution Control & Ecology, 300 Ark. 317,
320, 778 S.W.2d 606, 607 (1989). A statutory term is ambiguous when it is capable
of two or more constructions, or when it is so unclear that reasonable minds could
disagree or be uncertain as to its meaning. R.K. Enter., L.L.C. v. Pro-Comp Mgmt.,
Inc., 356 Ark. 565, 572, 158 S.W.3d 685, 688 (2004). When an ambiguity exists, the
court will interpret the provision in a way consistent with the legislature's intent.
Central & S. Cos. v. Weiss, 339 Ark. 76, 80, 3 S.W.3d 294, 297 (1999). That intent
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may be divined by looking "to the language of the statute, the subject matter, the
object to be accomplished, the purpose to be served, the remedy provided, the
legislative history, and other appropriate means that throw light on the subject."
Saforo & Assocs., Inc. v. Porocel Corp., 337 Ark. 553, 565, 991 S.W.2d 117, 124
(Ark. 1999).
The subtitle of the Arkansas Code dealing with insurance does not provide a
definition for the word termination, nor is the term consistently employed throughout
that subtitle. In some instances, the legislature clearly meant for the words
"terminate" or "termination" to refer only to the unilateral actions of the insurer in
cutting a policy short. See, e.g., Ark. Code Ann. § 23-66-206(14)(F). But other
sections use the word "terminate" merely as a synonym for "end," without implying
that such an end need arise from the actions of either the insurer or the insured. See,
e.g., Ark. Code Ann. § 23-79-123(a)(1). Such varied use provides us no guidance
with respect to what the legislature intended when it used the word "termination" in
§ 23-79-306(3)(B).
Another guide to what the legislature intended is the purpose that the statute
was meant to serve. DPIC and ESI both contend that § 23-79-306(3)(B) is intended
to make insureds aware that tail coverage is available and to help them understand
what it covers. Because such coverage can often be confusing, they argue that the
statute's purpose would be frustrated if an insurer has to provide information only
when the insurer ends the policy before its natural expiration date.
In Jarboe v. Shelter Ins. Co., 307 Ark. 287, 819 S.W.2d 9 (1991), the Arkansas
Supreme Court looked at the purpose behind another notification statute, Ark. Code
Ann. § 17-30-210(c)(1) (now renumbered as § 17-37-210(c)(1)). That statute states
that an insurance company cannot cancel or terminate a pest control company's policy
without giving the state regulatory board thirty days' notice. The court concluded that
the insurance company was required to notify the board regardless of how the policy
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ended. The court reasoned that the purpose of the relevant statute was to protect the
public against uninsured pest control providers, a goal that could not be accomplished
if an insurer needed to notify the board only when it prematurely ended the policy.
The court therefore concluded that the legislature must have intended to require such
notification even where the policy lapsed due to non-payment or expired of its own
terms. Because the insurer had not notified the board, it remained liable to third
parties under the policy. Jarboe, 307 Ark. at 288-91, 819 S.W.2d at 10-11.
We do not believe that the purpose behind the statute applicable to our case,
however, justifies the broad construction that DPIC and ESI would have us give it.
When a policy is cut short by an insurer, the insured may be suddenly left without
coverage. In an attempt to avoid prejudice from an unexpected loss of claims-made
coverage, § 23-79-306(3)(B) requires the insurer to explain that the insured can
purchase coverage for claims that are made after the policy's expiration date. But no
similar exigency exists where the insured has allowed the policy to end by its own
terms: The policy expires naturally, and the coverage ends because the insured tells
the insurer not to renew the policy. Such an insured has ample opportunity to study
the policy and learn of his or her rights under it. Had the Arkansas General Assembly
intended § 23-79-306(3)(B) to apply in these circumstances, it had broader language
at its disposal that it could have employed. We conclude therefore that Chicago was
under no statutory duty to provide MEC with a notice of termination, and therefore
the district court erred in concluding that DPIC and ESI could base their breach of
contract claim on a violation of § 23-79-306(3)(B).
B.
DPIC and ESI also contended that Chicago breached its insurance contract with
MEC by violating Rule 43 of the Arkansas Insurance Department. That rule prohibits
insurers from concealing or failing to disclose to "first party claimants" all of the
benefits, coverages, or other provisions of an insurance policy pertinent to a claim.
Ark. Ins. Rule 43 § 9(g), (h). According to DPIC, Chicago violated Rule 43 because
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it used the Landy letter to conceal from MEC the provisions and coverages of MEC's
insurance policy. Chicago argues that the district court erred in denying its motion for
judgment as a matter of law, which was based, in part, on the ground that Rule 43 did
not create a private cause of action and thus no violation of Rule 43 could amount to
a breach of its contract with MEC. We review the district court's denial of Chicago's
JAML motion de novo. Margolies v. McCleary, Inc., 447 F.3d 1115, 1123 (8th Cir.
2006).
The Arkansas insurance commissioner cited the Arkansas Trade Practices Act,
which "regulate[s] trade practices in the business of insurance," Ark. Code Ann. § 23-
66-202, as authority for promulgating Rule 43. Ark. Ins. Rule 43, § 2; see Ark. Code
Ann. § 23-66-207. Though the Commissioner also cited other Arkansas statutes as
authority for the rule, those statutes refer to more general matters, such as the power
of the insurance department to promulgate regulations (Ark. Code Ann. § 23-61-108)
and the definitions in the Arkansas Administrative Procedure Act (Ark. Code Ann.
§ 25-15-202). Therefore we believe that Rule 43 was intended to implement the Trade
Practices Act, and, while the Act gives the state authority to establish rules of conduct
and to punish offenders, it provides no private right of action to insureds for violations
of the Act or of regulations promulgated under the Act's authority. Ark. Code Ann.
§ 23-66-202; see also Columbia Mut. Ins. Co. v. Home Mut. Fire Ins. Co., 74 Ark.
App. 166, 174, 47 S.W.3d 909, 913 (2001).
The purpose of Rule 43 was to establish "certain minimum standards" to control
how insurance companies settle claims. Ark. Ins. Rule 43, § 1. The rule places a duty
on an insurer to settle claims in a manner that complies with the standards set forth in
the rule, and if an insurer repeatedly disregards those standards the state insurance
department may proceed against it. See id. But because the insurer owes the duty to
the state, not to the individual insured, the insured has no private right of action for
a breach of that duty. We therefore conclude that the district court erred in holding
that Rule 43 was incorporated into the Chicago-MEC insurance policy.
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In addition, we question whether the requirements of Rule 43 even apply to the
circumstances present here. DPIC and ESI argue that Chicago violated § 9(g) and (h)
of the rule when the Landy letter misstated the coverage that an extended reporting
period option would have provided to MEC. As we noted above, these sections of the
rule prohibit insurers from concealing or failing to disclose specific information about
the policy to first-party claimants. Section five of the rule defines a first-party
claimant as an individual who asserts a right to payment or services under an
insurance contract because of the occurrence of a contingency or loss that the contract
covers. A classic example of this would be a beneficiary who seeks to collect the
proceeds of a deceased loved one's life insurance policy; the beneficiary is a first-party
claimant because a contingency or loss has occurred that allows him or her to make
a claim under the policy. In this case, though, the Landy letter was sent to Rhodes
more than a week before MEC became aware of a claim. Because there was no claim
for which MEC could assert a right to any payment or defense from Chicago, we do
not think that MEC was a first-party claimant within the meaning of the rule. We
therefore doubt that any misstatements in the Landy letter amounted to a violation of
Rule 43.
C.
For the above reasons, we reverse the judgment entered against Chicago on
DPIC and ESI's breach of contract claims.
III.
All the parties to this litigation agree that had MEC purchased the extended
reporting period endorsement from Chicago, the endorsement would have provided
MEC with coverage for the ESI claim. Mr. Miller said in an affidavit that he would
have purchased tail coverage had he known that it would have covered the ESI claim,
and that MEC relied on the statements made in the Landy letter when it decided not
to buy tail coverage. Because the statements in the letter were incorrect, DPIC and
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ESI contended that Chicago should be estopped from denying coverage for the ESI
claim. The district court granted summary judgment to Chicago on the estoppel claim.
We review the grant of summary judgment de novo. Woods v. DaimlerChrysler
Corp., 409 F.3d 984, 990 (8th Cir. 2005).
An equitable estoppel precludes a party from invoking a right that it could have
otherwise asserted. Clemmons v. Office of Child Support Enforcement, 345 Ark. 330,
352, 47 S.W.3d 227, 242 (2001) (Imber, J., concurring). The party seeking estoppel
has the burden to prove that the party to be estopped knew the facts and intended that
the conduct be acted on or acted so that the party asserting the estoppel had a right to
believe that it was so intended, and that the party asserting the estoppel was ignorant
of the facts, relied on the other's conduct, and was injured because of that reliance.
Shelter Mut. Ins. Co. v. Kennedy, 347 Ark. 184, 187, 60 S.W.3d 458, 460 (2001).
The Arkansas Supreme Court has held that the doctrine of estoppel, which it
described as "defensive in character," may not be used to enlarge or extend the
coverage available under an insurance contract, nor may it be used to create an
insurance contract. Peoples Protective Life Ins. v. Smith, 257 Ark. 76, 84-88,
514 S.W.2d 400, 406-08 (Ark. 1974); see Harasyn v. St. Paul Guardian Ins. Co.,
349 Ark. 9, 19, 75 S.W.3d 696, 701-02 (2002). Though the Arkansas Court of
Appeals has indicated that exceptions to this rule exist, see Time Ins. Co. v. Graves,
21 Ark. App. 273, 278-80, 734 S.W.2d 213, 215-17 (1987) (en banc), the district court
reasoned that the facts of this case did not require it to deviate from the general rule.
We agree with this conclusion, and also note our uneasiness about whether Graves can
be reconciled with Harasyn and Peoples Protective Life in any event.
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IV.
Chicago and ESI challenge the district court's summary judgment determination
that DPIC's policy did not cover ESI's claim. According to DPIC's policy with BAC,
firms that BAC merged with or acquired were covered for thirty days. The parties do
not dispute that MEC and BAC finished combining their operations on August 1,
1999, nineteen days before ESI first made a claim against MEC. If the combination
of operations was a merger under the DPIC policy, then the policy covered the claim.
The district court concluded that under the terms of the policy in order for two firms
to "merge" they had to comply with the provisions of Ark. Code Ann. § 4-32-1203.
Under that statute, a merger is not complete until the companies wishing to merge file
articles of merger with the Arkansas Secretary of State. Id. Because the two firms
never filed any such articles, the district court determined that they had not merged.
"The language in an insurance policy is to be construed in its plain, ordinary,
popular sense." Farmers Home Mut. Fire Ins. Co. v. Bank of Pocahontas, 355 Ark.
19, 23, 129 S.W.3d 832, 835 (2003). If a policy does not define a word, Arkansas
courts may look to a standard English-language dictionary to determine its common
meaning. See State Farm Fire & Cas. Co. v. Midgett, 319 Ark. 435, 438, 892 S.W.2d
469, 471 (1995). Where a term is unambiguous, the court will give effect to its plain
meaning. Id. If a term is ambiguous, however, the court will "construe the policy
liberally in favor of the insured and strictly against the insurer." Castaneda v.
Progressive Classic Ins. Co., 357 Ark. 345, 351, 166 S.W.3d 556, 560-61 (2004).
A term in a policy is ambiguous when there is doubt as to its meaning and it is
susceptible to two or more reasonable interpretations. Harasyn, 349 Ark. at 18, 75
S.W.3d at 701.
The issue here is whether two firms can be deemed to have merged, for the
purposes of the policy, when they combine their operations. The Oxford English
Dictionary defines a merger as "[t]he combination or consolidation of one firm or
trading company with another." Oxford English Dictionary (2d ed. 1989). Another
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dictionary similarly defines a merger as "any of various methods of combining two
or more business concerns." Webster's Third New International Dictionary 1414
(1986). In neither of these definitions is the term merger restricted in a way that
excludes business combinations that do not follow a specific statutory framework.
DPIC argues that a combination of operations cannot be considered a merger,
as two separate legal entities still existed after the combination was complete. But
what remained of BAC was merely a husk, an empty shell of a corporation. While
BAC continued to live on as a legal matter after August 1, it had functionally ceased
to exist. We therefore conclude that the parties to the insurance agreement could quite
obviously have intended the word "merger" to encompass the combination that MEC
and BAC effected. And even though DPIC's suggested definition of merger is also
plausible, it merely creates an ambiguity in the contract, which must be resolved in
favor of coverage, see Castaneda, 357 Ark. at 351, 166 S.W.3d at 560-61. We
conclude that the district court erred in granting DPIC's summary judgment motion.
V.
For the foregoing reasons, we affirm the ruling of the district court as to
estoppel, reverse on all other issues, and remand the case to the district court for
further proceedings not inconsistent with this opinion.
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