Auto Owners Insurance Company v. Premier Restoration & Remodeling Inc et al

Filing 36

MEMORANDUM OPINION. Signed by Judge Madeline Hughes Haikala on 12/29/2014. (AVC)

FILED
2014 Dec-29 AM 09:57
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
AUTO-OWNERS INSURANCE
COMPANY,
Plaintiff,
v.
PREMIERE RESTORATION &
REMODELING, INC., an Alabama
Corporation; WILLIAM NEWELL
SHERIDAN; CYNTHIA P.
SHERIDAN,
Defendants.

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Case No.: 2:13-cv-01530-MHH

MEMORANDUM OPINION
In this declaratory judgment action, plaintiff Auto-Owners Insurance
Company asks the Court to declare that under the terms of a commercial general
liability policy that Auto-Owners issued to defendant Premiere Restoration &
Remodeling, Inc., Auto-Owners does not have a duty to continue to defend or
indemnify Premiere against a $125,051.00 default judgment in an underlying state
court action. The other defendants in this case, William Newell Sheridan and
Cynthia P. Sheridan, are the plaintiffs in the state court lawsuit.1
1

Auto-Owners is a Michigan citizen. (Doc. 1, ¶ 1). The defendants are citizens of Alabama.
(Doc. 1, ¶¶ 2-3). The Court has subject matter jurisdiction over this declaratory judgment action
because the parties are completely diverse, and more than $75,000 is in controversy. 28 U.S.C. §
1332.

According to Auto-Owners, Premiere violated the terms and conditions of
the policy when Premiere failed to cooperate with Auto-Owners and the attorney
Auto-Owners provided to represent Premiere in the state court action that the
Sheridans filed. Pursuant to Federal Rule of Civil Procedure 55, Auto-Owners
seeks a default judgment against Premiere for Premiere’s failure to answer or
otherwise defend this action. Pursuant to Federal Rule of Civil Procedure 56,
Auto-Owners seeks judgment as a matter of law against the Sheridans. The Court
grants Auto-Owners’s motions because Premiere violated the terms and conditions
of the policy by failing to cooperate with Auto-Owners in defending in the
underlying state court action. The Court explains its decision in greater detail
below.
STANDARD OF REVIEW
I.

Default Judgment
Federal Rule of Civil Procedure 55(a) provides that “[w]hen a party against

whom a judgment for affirmative relief is sought has failed to plead or otherwise
defend, and that failure is shown by affidavit or otherwise, the clerk must enter the
party’s default.” Fed. R. Civ. P. 55(a). Auto-Owners filed a motion for entry of
default against the defendants accompanied by proof of service 2 and an affidavit.

2

After obtaining leave of Court, Auto-Owners served Premiere by publication on June 30, 2014.
(Docs. 26, 26-1).
2

(Docs. 26, 26-1, 27, 27-1).

The Clerk entered default against Premiere on

September 25, 2014. (Doc. 28).
The entry of default does not by itself warrant an entry of default judgment.
Rather, there must be a sufficient basis in the pleadings for the judgment. Khufu El
v. Platinum Home Mortgage Servs., Inc., 490 Fed. Appx. 306, 307 (11th Cir. 2012)
(citing Nishimatsu Constr. Co v. Houston Nat’l Bank, 515 F.2d 1200, 1206 (5th
Cir. 1975)). 3 To decide whether there is a sufficient basis for an entry of default
judgment, the Court must review the complaint and its underlying merits. See
Stegeman v. Georgia, 290 Fed. Appx. 320, 323 (11th Cir. 2008) (citation omitted).
Although “a defaulted defendant is deemed to admit the plaintiff’s well-pleaded
allegations of fact,” Tyco Fire & Sec., LLC v. Alcocer, 218 Fed. Appx. 860, 863
(11th Cir. 2007), the Court has “an obligation to assure that there is a legitimate
basis” for the judgment. Anheuser Busch, Inc. v. Philpot, 317 F.3d 1264, 1266
(11th Cir. 2007). In other words, “a default judgment cannot stand on a complaint
that fails to state a claim.” Chudasama v. Mazda Motor Corp., 123 F. 3d 1353,
1370 n. 41 (11th Cir. 1997).

3

In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Eleventh
Circuit adopted as binding precedent all decisions that the former Fifth Circuit issued before the
close of business on September 30, 1981.
3

II.

Summary Judgment
“The court shall grant summary judgment if the movant shows that there is

no genuine dispute as to any material fact and the movant is entitled to judgment as
a matter of law.” Fed. R. Civ. P. 56(a). A party opposing a motion for summary
judgment must identify disputed issues of material fact by “citing to particular
parts of materials in the record, including depositions, documents, electronically
stored information, affidavits or declarations, stipulations (including those made
for purposes of the motion only), admissions, interrogatory answers, or other
materials.” Fed. R. Civ. P. 56(c). When considering a summary judgment motion,
the Court must view the evidence in the record in the light most favorable to the
non-moving party. Moton v. Cowart, 631 F.3d 1337, 1341 (11th Cir. 2011). “The
court need consider only the cited materials, but it may consider other materials in
the record.” Fed. R. Civ. P. 56(c)(3).
FACTS
I.

Underlying State Court Action
On March 2, 2011, the Sheridans sued Premiere, Jerry Sulzby, Rodney

Bates, and Gary Thompson in the Circuit Court of Jefferson County, Alabama. 4
The Sheridans alleged that in July 2010, they entered into a contract with Premiere.
In the contract, Premiere agreed to construct a new home for the Sheridans after a
4

The Court granted Auto-Owners’s motion to dismiss its claims against Jerry Sulzby upon Mr.
Sulzby’s death. (See Docs. 13, 16). Ms. Bates and Mr. Thompson are not parties to this action.
4

fire destroyed their previous residence. (Doc. 1-1, ¶¶ 7-9). The contract obligated
Premiere to construct the new home for the amount the Sheridan’s insurance
company had agreed to pay for reconstruction. (Doc. 1-1, ¶ 11). Despite being
paid half the contract price, Premiere did not complete construction of the home in
compliance with the contract specifications. The Sheridans claimed that the work
performed by Premiere is faulty and fails to meet industry standards. The home
continued to sustain damage because Premiere left the home unprotected from the
weather and elements. (Doc. 1-1, ¶¶ 12-30). The Sheridans contend it would cost
more than $185,000.00 to finish construction of the house to meet the contract
specifications and to repair the faulty construction that Premiere had performed to
date. (Doc. 1-1, ¶ 33). The Sheridans were unable to obtain additional funds from
their insurance company to complete construction of the home, and numerous
subcontractors threated to file liens due to Premiere’s failure to pay amounts due to
them for work performed on the home and for which the Sheridans had paid
Premiere. (Doc. 1-1, ¶¶ 36-37). Premiere refused to execute a release of liens
against the project, which prevented the Sheridans from obtaining funds to pay a
third party to finish the work. (Doc. 1-1, ¶ 39). The Sheridans claimed they
missed work, lost wages, and suffered mental anguish, pain, and suffering due to
Premiere’s actions.

5

The Sheridan’s state court complaint asserted claims for: (1) breach of
contract;

(2)

negligent

construction;

(3)

wantonness;

(4)

fraudulent

misrepresentation; (5) fraudulent suppression; (6) breach of warranty; and (7) bad
faith.

(Doc. 1-1, pp. 7-12). The Sheridans sought compensatory and punitive

damages. (Doc. 1-1, p. 13).
On August 1, 2011, the Sheridans served Premiere with interrogatories and
requests for production. (Doc. 19-4, pp. 2-8). Premiere made a claim with AutoOwners for it to provide a defense and indemnification. Pursuant to Commercial
General Liability Policy number 084617-38833849-10, Auto-Owners provided a
defense in the underlying case under a reservation of rights. (Doc. 1, ¶ 10; Doc.
19-5, pp. 2-3, 5-11). On May 14, 2012, Auto-Owners sent Premiere a letter
requesting Premiere’s assistance in responding to the Sheridans’ discovery
requests. (Doc. 19-5, p. 17). On January 16, 2013, Auto-Owners sent another
letter to Premiere requesting assistance in completing the discovery requests.
Auto-Owners asked for a response “as quickly as possible” to avoid adverse court
action. (Doc. 19-5, p. 20). On March 13, 2013, Auto-Owners sent Premiere a
letter explaining that counsel “ha[d] been unable to reach you and thereby unable
to appropriately respond and participate in the ongoing discovery” in the state
court action. (Doc. 19-5, p. 13). The letter reminded Premiere that Auto-Owners
was defending Premiere under a reservation of rights and that Premiere was
6

required under the policy to “participate in the defense” of the underlying lawsuit.
The letter referred Premiere to the policy language included in Section IV.2(c):
You and any other involved insured must:
(1) Immediately send us copies of any correspondent , demand,
notices, summonses or papers in connection with any claim or
“suit”;
(2) Authorize us to obtain records and other information;
(3) Cooperate with us in the investigation or settlement of any
claim or defense of any “suit”; and
(4) Assist us, upon our request, in the enforcement of any right
against any person or organization which may be liable to the
insured because of injury or damage to which this insurance
may also apply.
(Doc. 19-5, pp. 13-14; see also Doc. 19-12, p. 4).
On April 30, 2013, the Sheridans filed a motion to compel discovery
responses from Premiere. (Doc. 19-6, pp. 2-3).

The state court granted the

Sheridans’ motion to compel on May 1, 2013, and ordered Premiere to answer the
discovery within 21 days. (Doc. 19-7, p. 2). When Premiere failed to respond to
the discovery requests, the Sheirdans filed a motion for sanctions. (Doc. 19-8, p.
2).

The state court granted the motion and entered default judgment against

Premiere. (Doc. 19-9, p. 2). After a hearing on damages, the state court awarded
the Sheridans a $125,051.00 judgment. (November 5, 2014 docket entry).

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II.

Procedural History of This Lawsuit
On August 20, 2013, Auto-Owners filed its declaratory judgment complaint

in this Court. (Doc. 1). Auto-Owners seeks a declaration that it is not obligated to
continue its defense of Premiere or pay the Sheridans insurance proceeds for any
liability associated with the default judgment in the underlying state court action.
(Doc. 1, ¶ 19). Auto-Owners attached as exhibits to the complaint a copy of the
Sheridans’ state court complaint, letters to Premiere requesting assistance in
responding to the Sheridans’ discovery requests, the Sheridans’ motion for
sanctions, and the state court order entering default judgment against Premiere in
the underlying action.

(Docs. 1-1, 1-2, 1-3, 1-4). Auto-Owners’s declaratory

judgment complaint contains the insurance policy language and various
definitions. (Doc. 1, ¶ 11). The complaint states that Premiere “has failed to
cooperate with Auto-Owners and the attorney provided by Auto-Owners under a
reservation of rights in the underlying case.” (Doc. 1, ¶ 12). Specifically, the
complaint states that “despite communications conveying the necessity of doing so
to avoid a default judgment,” Auto-Owners “has been unable to obtain any
cooperation from Premier[e] or its representative in answering discovery.” (Doc.
1, ¶ 13).

Based on Premiere’s non-cooperation, Auto-Owners alleges that

8

Premiere has “breached the insurance policy contract and is no longer entitled to
any indemnity or defense from Auto-Owners.” (Doc. 1, ¶ 13). 5
Auto-Owners served the Sheridans with a copy of the summons and
complaint on Otcober 28, 2013. (See Doc. 5). The Sheridans answered the
complaint and filed a counterclaim6 against Auto-Owners on November 13, 2013.
(Doc. 8). Despite good faith efforts to serve Premiere by certified mail, AutoOwners was unable to locate Premiere or an agent for service. (See Docs. 12, 21,
21-1).

On May 13, 2014, the Court granted Auto-Owners’s motion to serve

Premiere by publication. (Doc. 22). Service by publication was complete on June
30, 2014. (Doc. 26, ¶ 3; Doc. 26-1). Premiere’s answer or response to AutoOwners’s complaint was due on July 21, 2014.
answered the complaint.

To date, Premiere has not

On August 13, 2014, Auto-Owners moved for Clerk’s

5

The declaratory judgment complaint also alleges that there are other reasons for lack of
coverage. (See Doc. 1, ¶ 16). Because the Court can resolve the instant motions on Premiere’s
failure to cooperate, the Court does not address Auto-Owners’s alternative arguments regarding
its duty to defend and indemnify.
6

The Sheridans’ counterclaim states that “[d]ue to the actions of plaintiff Auto Owners the
defendants[] have been forced to incur expenses and attorney’s fees due to no fault of their own.”
(Doc. 8, p. 2). The Sheridans seeks to recover those expenses and attorney’s fees from AutoOwners. (Id.). Auto-Owners answered the counterclaim on November 15, 2014 and denied the
allegations of the counterclaim. (Doc. 10, ¶ 1).
“Under the bedrock principle known as the ‘American Rule,’ [e]ach litigant pays his own
attorney's fees, win or lose, unless a statute or contract provides otherwise.” Marx v. Gen.
Revenue Corp., 133 S. Ct. 1166, 1175 (2013) (internal quotations and citations omitted). The
Sheridans have not pointed the Court to a statute or contract suggesting the Court should deviate
from the general rule that the parties to this action should pay for their own attorney’s fees.
Therefore, the Court will dismiss with prejudice the Sheridans’ counterclaim for attorney’s fees.
9

entry of default against Premiere, and the Clerk entered default against Premiere on
September 19, 2014. (Docs. 27, 28). Auto-Owners filed a motion for default
judgment against Premiere on September 25, 2014. (Doc. 29).
Auto-Owners also filed a motion for summary judgment. (Doc. 19). The
Sheridans have not filed a response in opposition to the motion for summary
judgment despite multiple opportunities from the Court to do so. (See Docs. 31,
32, 33). The Sheridans did file a document titled “Defendant Sheridans Response
to Plaintiff Motion for Default.”

(Doc. 34).

The Sheridans question Auto-

Owners’s attempts to serve Premiere before the Court granted leave to serve by
publication, but the Sheridans do not challenge the service by publication itself or
otherwise contend that Auto-Owners failed to perfect service on Premiere. (Doc.
34, ¶¶ 6-10).

The Sheridans do not respond substantively to Auto-Owners’s

motion for summary judgment, but they do maintain:
The question for the Court is whether or not during the original case
was there sufficient non assistance to render the insurance policy null
and void thus preventing [the Sheridans] from recovering. The fact
that Premiere has not answered this [declaratory judgment] lawsuit is
irrelevant to [the Sheridans] claim against Premiere and what
coverage is due Premiere by Auto Owners.
(Doc. 34, ¶ 11).
On this record, the Court considers Auto-Owners’s motions.

10

ANALYSIS
Auto-Owners asks the Court for declaratory relief pursuant to the
Declaratory Judgment Act. Under the Act, a court “may declare the rights and
other legal relations of any interested party seeking such declaration.” 28 U.S.C. §
2201. “It is well established that district courts have exceptionally broad discretion
in deciding whether to issue a declaratory judgment, and the remedy is not
obligatory.” Otwell v. Alabama Power Co., 747 F.3d 1275, 1280 (11th Cir. 2014)
(citing Wilton v. Seven Falls Co., 515 U.S. 277, 286-88 (1995)). As the Supreme
Court has explained, “[s]ince its inception, the Declaratory Judgment Act has been
understood to confer on federal courts unique and substantial discretion in deciding
whether to declare the rights of litigants.” Wilton, 515 U.S. at 286-87. Thus, “[i]n
the declaratory judgment context, the normal principle that federal courts should
adjudicate claims within their jurisdiction yields to considerations of practicality
and wise judicial administration.”

Id. at 288.

Here, the Court sees no

“considerations of practicality and wise judicial administration,” such as an
ongoing state court proceeding, that would keep the Court from issuing a
declaration in this case.
As explained in greater detail below, because Premiere failed to cooperate
with Auto-Owners in the underlying state court action, the Court will enter default

11

judgment against Premiere and judgment as a matter of law in favor of AutoOwners on its coverage claim against the Sheridans.
The insurance policy Auto-Owners provided to Premiere places certain
duties upon Premiere in the event of an occurrence, offense, claim, or suit for
which the policy might provide coverage.

The policy requires that Premiere

“[c]ooperate with [Auto-Owners] in the investigation or settlement of the claim or
defense against the ‘suit.’” (Doc. 19-12, p. 4).
Auto-Owners sent Premiere an initial reservation of rights letter on
December 28, 2011. (Doc. 19-5, pp. 5-11). On May 14, 2012, Auto-Owners’s
counsel mailed a letter to Premiere, which stated: “[W]e need to respond to the
Plaintiffs’s discovery requests.”

(Doc. 19-5, p. 17).

Counsel enclosed the

discovery requests and asked Premiere to contact the attorney “so that we can
prepare appropriate responses as soon as possible.”

(Doc. 19-5, p. 17).

On

January 16, 2013, Auto Owners’s counsel mailed a letter to Premiere stating that if
Premiere was not filing for bankruptcy, the company would “need to go forward
and respond to the Plaintiffs’ discovery requests.” (Doc. 19-5, p. 20). The letter
asked for a response “as quickly as possible” so counsel could discuss the issue
with Premiere “before we encounter an adverse ruling from the court.” (Doc. 19-5,
p. 20).

12

Auto-Owners mailed a letter to Premiere on March 15, 2013 indicating that
Auto-Owners’s counsel had “been unable to reach [Premiere or one of its
representatives] and thereby unable to appropriately respond and participate in the
ongoing discovery” which was part of the underlying action. (Doc. 19-5, p. 13).
The letter encouraged Premiere to “participate in the defense of [the underlying
action] to the extent necessary as the attorney [Auto-Owners’s] has provided
requests of you.”

(Doc. 19-5, p. 13).

The letter explained that Premiere’s

participation in the defense was a requirement set forth in the policy conditions,
and the letter referred Premiere to its duty to cooperate with Auto-Owners. (Doc.
19-5, pp. 13-14).

The letter advised Premiere that its failure “to adhere to

conditions of the policy could compromise coverage being provided for defense as
a breach of the conditions set forth in the policy.” (Doc. 19-5, p. 14).
On May 6, 2013, Auto-Owners’s counsel mailed a letter to Premiere and
included a copy of the state court’s order granting the Sheridans’ motion to compel
discovery. (Doc. 19-5, p. 23). The letter explained that Premiere had 21 days to
answer or respond to the discovery and asked Premiere to “prepare draft responses
to these discovery requests immediately.” (Doc. 19-5, p. 23). The letter warned
Premiere that if it failed to respond, the state court likely would enter a default
judgment in favor of the Sheridans. (Doc. 19-5, p. 23). When Premiere failed to
respond to the discovery requests, the Sheridans filed a motion for sanctions in the
13

underlying action. (Doc. 19-8, pp. 2-3). The state court granted the motion on
July 2, 2013 and entered default judgment against Premiere. (Doc. 19-9, p. 2).
On these facts, Auto-Owners argues that Premiere’s failure to cooperate in
the defense of the Sheridan’s state court action warrants a declaration that AutoOwners owes Premiere no further defense, and Auto-Owners is not obligated to
indemnify Premiere from the default judgment. (Doc. 1, ¶ 19; Doc. 19-1, pp. 1011).
As the insurer, Auto-Owners has “the burden of proof to establish noncooperation.” Colorado Cas. Ins. Co. v. The Kirby Co., 2008 WL 149996, at *4
(M.D. Ala. Jan. 14, 2008) (internal citations and quotation marks omitted); see also
Ex parte Clarke, 728 So. 2d 135, 141 (Ala.1998) (“[T]he burden of proof to
establish non-cooperation rest[s] upon the insurer.”) (quoting Employers Ins. Co. v.
Crook, 160 So. 2d 463, 465 (Ala. 1964)). “In order for [Premiere’s] noncooperation to constitute a breach of insurance coverage, the lack of cooperation
must be ‘both material and substantial.’” Colorado Cas. Ins. Co., 2008 WL
149996, at *4 (quoting Clarke, 728 So. 2d at 141). “‘The test for determining what
is material and substantial . . . amounts to a requirement of prejudice to the
insurer.’” Alberson v. Nationwide Assurance Co., 2003 WL 23335453, at *3
(M.D. Ala. Oct. 24, 2003) (quoting Williams v. Alabama Farm Bureau Mut. Cas.
Ins. Co., 416 So. 2d 744, 746 (Ala. 1982)); see also Home Indem. Co. v. Reed
14

Equip., Co., 381 So. 2d 45, 49 (Ala. 1980) (holding that under Alabama law an
insured’s noncooperation must be “material and substantial-resulting in prejudice
to the insurer”). “What constitutes a failure of cooperation by the insured is
usually a question of fact. . . .” Alberson, 2003 WL 23335453, at *3 (internal
quotation marks and citations omitted).

But “non-cooperation is deemed

prejudicial if the failure to cooperate negate[s] the only evidence the insurer could
offer in defense . . . or the insurer is deprived of the opportunity to conduct an
investigation and mount a defense.” Colorado Cas. Ins. Co., 2008 WL 149996, at
*4 (internal quotation marks and citations omitted).
Premiere’s failure to respond to multiple requests from Auto-Owners and the
attorney Auto-Owners hired to represent Premiere in the underlying state court
action amounts to material and substantial non-cooperation that prejudiced AutoOwners. Auto-Owners sent Premiere four letters explaining that Auto-Owners
needed Premiere’s assistance in responding to the Sheridans’ discovery requests.
(See Doc. 19-5, pp. 13, 17, 20, 23). The final letter enclosed a copy of the state
court order granting the Sheridans’ motion to compel discovery responses and
explained that Premiere had 21 days to answer or respond to the discovery. (Doc.
19-5, p. 23).

The letter asked Premiere to “prepare draft responses to these

discovery requests immediately” and warned Premiere that if Premiere failed to
respond, the state court likely would enter a default judgment in favor of the
15

Sheridans. (Doc. 19-5, p. 23). Because Premiere failed to respond to numerous
requests for information responsive to the Sheridans’ discovery requests, Premiere
negated the only evidence or information Auto-Owners could have offered in
response to the discovery requests and court orders regarding discovery.
Premiere’s inaction also deprived Auto-Owners of the opportunity to mount a
defense. Auto-Owners could not respond to the Sheridans’ discovery requests
because Premiere did not provide Auto-Owners with any information responsive to
the requests. As a result, the state court entered default judgment against Premiere.
Premiere failed to respond to multiple pleas for assistance or heed warnings from
Auto-Owners regarding the consequences of Premiere’s failure to cooperate and
provide Auto-Owners with the requested information. Therefore, Premiere’s noncooperation constitutes a breach of its insurance policy, and Auto-Owners is under
no duty to continue to defend or indemnify Premiere against the state court default
judgment. See Colorado Cas. Ins. Co., 2008 WL 149996, at *4.
The Court is sympathetic to the Sheridans’ position. Due to no fault of their
own, the Sherdans likely have no recourse against Premiere or any way to enforce
the state court default judgment. The Sheridans are correct that “[t]he question for
the Court is whether or not during the original case was there sufficient non
assistance to render the insurance policy null and void thus preventing [the
Sheridans] from recovering.” (See Doc. 34, ¶ 11). The Sheridans also are correct
16

that “[t]he fact that Premiere has not answered this [declaratory judgment] lawsuit
is irrelevant to [the Sheridans’] claim against Premiere and what coverage is due
Premiere by Auto Owners.” (Doc. 34, ¶ 11). Premiere’s failure to answer or
respond to the declaratory judgment complaint before this Court impacts only the
Court’s determination of whether Auto-Owners is entitled to default judgment
against Premiere; Premiere’s failure to answer or respond to the declaratory
judgment action does not impact the Court’s analysis of the merits of AutoOwners’s motion for summary judgment regarding its coverage claims against the
Sheridans. Unfortunately for the Sheridans, as explained above, Premiere’s noncooperation relieves Auto-Owners of its duty to further defend or indemnify
Premiere against the state court default judgment. Accordingly, Auto-Owners is
entitled to default judgment against Premiere, and Auto-Owners is entitled to
judgment as matter of law against the Sheridans on its duty to defend and
indemnify claims.
CONCLUSION
For the reasons outlined above, the Court GRANTS Auto-Owners’s motion
for summary judgment against the Sheridans and Auto-Owners’s motion for
default judgment against Premiere. The Court will enter a separate final judgment
consistent with this memorandum opinion.

17

DONE and ORDERED this December 29, 2014.

_________________________________
MADELINE HUGHES HAIKALA
UNITED STATES DISTRICT JUDGE

18