American Chemicals & Equipment Inc v. Continental Casualty Company et al

Filing 43

MEMORANDUM OPINION AND ORDER For the reasons discussed within, the Court DENIES American Osment's motion for partial summary judgment. The Court GRANTS Continental's motion to strike the class allegations and denies Continental's mot ion for summary judgment as moot. On or before June 17, 2017, Continental shall submit a brief in which it shall explain whether the policy provides coverage for punitive damages that in turn would give rise to a duty to defend Mr. Pate's fraud claim. American Osment may file a reply brief on or before July 1, 2017. Signed by Judge Madeline Hughes Haikala on 6/2/17. (SAC )

FILED
2017 Jun-02 PM 02:13
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
AMERICAN CHEMICALS &
EQUIPMENT, INC. d/b/a
AMERICAN OSMENT,
Plaintiff,
v.
CONTINENTAL CASUALTY
COMPANY and CNA FINANCIAL
CORPORATION, INC.

)
)
)
)
)
)
)
)
)
)
)

6:15-cv-00299-MHH

Defendant.
MEMORANDUM OPINION AND ORDER
Plaintiff American Chemicals & Equipment, Inc. d/b/a American Osment
brings this action against defendants Continental Casualty Company and CNA
Financial Corporation, Inc. alleging, among other things, that Continental breached
the terms of an employment practices liability policy that the company issued to
American Osment. (Docs. 1 & 7). American Osment relies on broad language in a
general provision in the policy and argues that the general provision obligated
Continental to provide a defense to American Osment in a state court action even if
the state court claim is not covered under the policy. (Docs. 10 & 37). American
Osment attempts to advance its duty to defend theory on behalf of a class of “all
other policyholders of Defendant Continental, whose policy language regarding the

duty to defend claims mirrors the policy language in Plaintiff’s policy, and who
have reported claims, as that term is defined in the policy, to Defendant
Continental for which Defendant Continental has refused to provide a defense.”
(Doc. 7, p. 9).
American Osment seeks summary judgment on its breach of contract claim
against Continental regarding Continental’s failure to provide a defense in the
underlying lawsuit against American Osment. 1 (Doc. 11). Continental seeks
summary judgment on American Osment’s class action claim and moves to strike
the class allegations in American Osment’s complaint. (Docs. 29 & 31). Because
American Osment’s interpretation of its policy does not withstand scrutiny under
Alabama’s rules of contract interpretation, the Court denies American Osment’s
motion for summary judgment. The Court grants Continental’s motion to strike
and denies Continental’s motion for summary judgment as moot. (Doc. 42). For
the reasons stated below, the Court directs the parties to examine a coverage issue
that neither American Osment nor Continental addressed in the summary judgment
briefs.

1

American Osment asserts a second breach of contract claim against Continental based on
Continental’s failure to pay a loss resulting from the underlying action. American Osment has
not moved for summary judgment on that claim. (Doc. 7, pp. 5-6).
2

I.

Summary Judgment Standard
“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). Absent ambiguity, the interpretation of an
insurance policy presents a question of law which a court may resolve summarily.
See e.g., Giddens v. Equitable Life Assur. Soc. of U.S., 445 F.3d 1286, 1297 (11th
Cir. 2006); Technical Coating Applicators, Inc. v. U.S. Fidelity Guar. Co., 157
F.3d 843, 844 (11th Cir. 1998); see also Cool Temp., Inc. v. Pennsylvania Nat.
Mut. Cas. Ins. Co., 148 So. 3d 448, 454 (Ala. 2013). When considering a
summary judgment motion, “[t]he court need consider only the cited materials, but
it may consider other materials in the record.” Fed. R. Civ. P. 56(c)(3).
II.

Relevant Facts and Procedural Background
The Insurance Policy
Continental issued the employment practices liability policy at issue --

Epack Extra policy number 26764149 -- to American Osment on February 10,
2012. (Doc. 11-2, pp. 5-6). The policy was in force until May 9, 2014. (Id., pp. 56, 9).

The policy includes a set of general terms and conditions, a specific

Employment Practices Liability Coverage Part which contains the insuring

3

agreement, and a glossary of defined terms. (See Doc. 11-2). 2 The relevant
provisions in each section of the policy are as follows:
1. General Terms and Conditions
There are 24 separate sections in the general terms and conditions portion of
the policy. Section I is titled “Terms and Conditions” and provides in part:
If any provision in the General Terms and Conditions is inconsistent
or in conflict with the terms and conditions of any Coverage Part, the
terms and conditions of such Coverage Part shall control for purposes
of that Coverage Part.
(Doc. 11-2, p. 10).
Section XXI is titled “Defense/Settlement/Mediation/Pre-Claim Assistance.”
This section of the general terms and conditions states:
Solely with respect to Liability Coverage Parts, . . .
The insurer has the right and duty to defend all Claims even if the
allegations are groundless, false or fraudulent. The Insurer shall have
the right to appoint counsel and to make such investigation and
defense of a Claim as it deems necessary. Alternatively the Insurer
may, at its option, give its written consent to the defense of any such
Claim by the Insureds. The Insurer’s obligation to defend any Claim
or pay any Loss, including Defense Costs, shall be completely
fulfilled and extinguished if the applicable limit of liability has been
exhausted by payment of Loss.
(Doc. 11-2, p. 16) (emphasis added).

2

Defined terms are capitalized in the policy. For the sake of consistency, defined terms in the
policy are capitalized in this opinion.
4

2. Employment Practices Liability Coverage Part
The Employment Practices Liability (or EPL) Coverage Part describes the
scope of the insuring agreement. The EPL states, in pertinent part:
The Insurer shall pay on behalf of Insured that Loss, in excess of the
retention and up to the applicable limit of liability, resulting from any
Claim first made against the Insureds during the Policy Period . . . by
or on behalf of [] a natural person who is an Employee . . . for a
Wrongful Employment Practice as described in paragraphs 1 through
11 of the definition of Wrongful Employment Practice [or] any other
natural person, for a Wrongful Employment Practice but solely to the
extent that such Wrongful Employment Practice is as described in
paragraph 12 of the definition of Wrongful Employment Practice.
(Id., pp. 20-21).
The EPL Coverage Part also lists exclusions from coverage, including six
exclusions that apply to all Loss and two exclusions that apply to Loss other than
Defense Costs. (Id.). Among the exclusions that apply to all Loss, the following
provision appears:
The Insurer shall not be liable to pay any Loss under this Coverage
Part in connection with any Claim made against any Insured [. . .]
based upon or arising out of any actual or alleged violation of . . . any
[] federal, state or local statutory law or common law anywhere in the
world governing wage, hour and payroll policies.
(Id.).
3. Glossary of Defined Terms
The Policy’s glossary provides the following relevant definitions:
Claim means [] a written demand for monetary or non-monetary relief
. . . against an Insured alleging a Wrongful Act . . . . When used in the
[. . .] Employment Practices Liability Coverage Part, Claim also
5

means [] a civil proceeding in a court of law or equity or any
alternative dispute resolution proceeding . . . against an Insured,
alleging a Wrongful Employment Practice, including any appeal
therefrom. . . . However, Claim does not include any criminal
proceeding, criminal administrative or criminal regulatory proceeding
or criminal investigation.
Defense Costs with respect to all Liability Coverage Parts . . . means:
1. all fees charged by attorneys designated by the Insurer, and all
reasonable fees charged by attorneys designated by the Named
Insured with the Insurer’s prior written consent; 2. all other fees, costs
and expenses resulting from the investigation, adjustment, defense and
appeal of a Claim incurred by the Insurer or by the Insureds with the
prior written consent of the Insurer; and 3. The costs of appeal,
attachment or similar bonds.
Loss means [] damages, settlements, judgments . . . and Defense Costs
for which the Insured is legally obligated to pay on account of a
covered Claim . . . . [. . .] [S]olely with respect to the . . .
Employment Practices Liability Coverage Part, Loss does not include
. . . compensation earned by the claimant in the course of employment
but unpaid by the Insured, including salary, wages, commissions,
severance, bonus or incentive compensation . . . .
When used in the Employment Practices Liability Coverage Part,
Wrongful Act means any actual or alleged error, misstatement,
misleading statement, act, omission, neglect or breach of duty
committed or attempted by the Insured Person in their capacity as
such by an insured entity.
Wrongful Employment Practice means any Wrongful Act consisting
of or relating to: . . . employment-related misrepresentation . . . .
(Id., pp. 23, 25, 29, 39, 40).
The Underlying Action and American Osment’s Claim
During the policy period, Steve Pate, a former American Osment employee,
sued the company in the Circuit Court of Jefferson County, Alabama. Mr. Pate
alleged that the company failed to pay him the salary and sales commission rate
6

that the company’s president guaranteed him when he accepted an offer to work at
American Osment. (Doc. 11-3, pp. 1-3). Mr. Pate sought damages from American
Osment for breach of contract, fraud, work and labor done, and violations of § 824-1, et seq. of the Alabama Code, which entitles him to unpaid commissions at
the time of his termination. (Id., pp. 3-6). After receiving Mr. Pate’s complaint,
American Osment submitted a claim to Continental under the Policy, seeking
defense and indemnity for the Pate action. (See Doc. 11-1, pp. 1-2).
Based on the information that American Osment provided, Continental
denied coverage for the claim. (Doc. 11-4, pp. 1-2). Continental determined that
the policy did not provide coverage for the Pate action because Section II(A)(6)(b)
of the EPL Coverage Part “excludes any claim based upon [or] arising out of any
actual or alleged violation of the Fair Labor Standards Act . . . or any other federal,
state or local statutory law or common law anywhere in the world governing wage,
hour and payroll practices.” (Id.). Additionally, Continental noted Mr. Pate sought
“to recover for unpaid commissions,” and “Loss, with respect to the EPL Coverage
Part . . . does not include any compensation earned by the claimant but unpaid by
the Insured, including . . . commissions. . . .” (Id. at p. 2) (emphasis in original).
Accordingly, Continental refused to provide American Osment with a defense or
indemnity for the Pate action. (Id.).

7

The Present Action
After Mr. Pate agreed to settle his claims against American Osment, the
company brought this action against Continental and CNA in the Circuit Court of
Jefferson County, Alabama. American Osment asserts state law breach of contract
and bad faith claims against Continental and negligence and wantonness claims
against CNA. (Doc. 1-1). The defendants timely removed the action to federal
court. (Doc. 1). 3

3

Continental and CNA Financial Corporation removed this case on the basis of diversity of
citizenship jurisdiction pursuant to 28 U.S.C. § 1332. To establish jurisdiction under § 1332, the
defendants must demonstrate that the parties are completely diverse and that the amount in
controversy exceeds $75,000. With respect to the citizenship prong of diversity jurisdiction, the
defendants allege that American Osment is an Alabama corporation with its principal place of
business in Birmingham, Alabama. (Doc. 1, ¶ 5). The defendants allege in the notice of removal
that Continental is an Illinois corporation with its principal place of business in Chicago, Illinois.
(Doc. 1, ¶ 6). The defendants allege that CNA is a Delaware corporation with its principal place
of business in Chicago, Illinois. (Doc. 1, ¶ 6). Based on these allegations, the Court finds that
the parties are completely diverse.
The Court also finds that more than $75,000 is in controversy. The defendants have established
that American Osment settled the underlying state court action for $75,000, and American
Osment incurred legal fees and expenses of $25,166 defending the underlying state court action.
(Doc. 1, ¶ 3; Doc. 1-2). In addition, American Osment seeks an award of punitive damages
under the bad faith and wantonness counts in its complaint. (Doc. 1-1). Therefore, the aggregate
amount in controversy exceeds $75,000. See State Farm Fire & Cas. Co. v. Knoblett, 561 F.
Supp. 2d 1256, 1257 (N.D. Ala. 2008) (“Because the instant suit involves only insurance
coverage issues as they relate to the underlying state court action, the court must look to the
amount in controversy in the underlying state court suit to determine the amount in controversy
for the purposes of diversity jurisdiction.”); SUA Ins. Co. v. Classic Home Builders, 751 F. Supp.
2d 1245, 1256 (S.D. Ala. 2010) (court may consider defense costs of an underlying action in
determining the amount in controversy in a declaratory judgment action); Rae v. Perry, 392 Fed.
Appx. 753, 755 (11th Cir. 2010) (“Punitive damages must be considered when determining the
jurisdictional amount in controversy in diversity cases.”) (citing Holley Equip. Co. v. Credit
Alliance Corp., 821 F.2d 1531, 1535 (11th Cir. 1987).
8

American Osment then amended its complaint to add class allegations and
class action claims against the defendants on behalf of a putative class of:
all other policyholders of Defendant Continental, whose policy
language regarding the duty to defend claims mirrors the policy
language in [American Osment’s] policy, and who have reported
claims, as that term is defined in the policy, to Defendant Continental
for which Defendant Continental has refused to provide a defense.
(Doc. 7, pp. 9-13). American Osment asserts generally that there are questions of
law and fact common to each member of the putative class and specifically
identifies the following common question:
whether the obligation created by policy language stating that the
Insurer has the right and duty to defend all claims even if the
allegations are groundless, false or fraudulent can be limited to
‘covered claims,’ even though the policy defines claims as a written
demand for monetary damages or non-monetary relief (including
demands for injunctive or declaratory relief) against an Insured
alleging a Wrongful Act, which means any actual or alleged error,
misstatement, misleading statement, act, omission, neglect or breach
of duty committed or attempted by the Insured Persons in their
capacity as such or be an insured Entity.
(Id., p. 110).
In sum, American Osment’s class allegations and class action claims are
based on its assertion that “[t]he policy does not limit the defense of claims to
‘covered claims,’” which is the argument that American Osment pursues in its

Because the defendants have satisfied both of the criteria for diversity jurisdiction, the Court
concludes that it may exercise jurisdiction over this declaratory judgment action pursuant to 28
U.S.C. § 1332.

9

motion for partial summary judgment on its breach of contract claim against
Continental based on Continental’s failure to provide a defense for the Pate action.
(Docs. 10 & 11). Continental opposes American Osment’s motion for partial
summary judgment and asks the Court to enter judgment on American Osment’s
putative class action claims against Continental and to strike American Osment’s
class allegations. (Docs. 28, 29 & 31). Continental’s arguments in support of its
motions raise the same issues that American Osment’s motion for partial summary
judgment presents, but American Osment has not responded to Continental’s
motions. (Compare Docs. 30 & 32 with Docs. 10, 28, 37 & 38). The Court stayed
discovery in this matter, including discovery on American Osment’s indemnity and
class action claims, pending resolution of American Osment’s motion for partial
summary judgment. (Docs. 35 & 41). On this record, the Court addresses the
pending motions.
III.

Analysis
As postured, the parties’ pending motions rise and fall on American

Osment’s ability to prove that under Alabama law, Continental has a contractual
duty based on a general term in the policy at issue to provide American Osment
with a defense for claims that the policy explicitly excludes from coverage in more
narrow provisions of the policy.

Under settled principles of Alabama law,

Continental has no such duty.

10

A.

Relevant Principles of Alabama Law 4

Under Alabama law, liability insurance policies such as the employment
practices liability policy at issue in this action impose two separate duties on an
insurer: the duty to defend and the duty to indemnify. See, e.g., Cool Temp., Inc.
v. Pennsylvania Nat. Mut. Cas. Ins. Co., 148 So. 3d 448, 455-56 (Ala. 2013). The
two duties are related, but the duty to defend is broader than the duty to indemnify.
Id. at 456. “Under Alabama law, whether an insurance company owes its insured a
duty to provide a defense is determined primarily by the allegations contained in
the complaint. If the allegations in the underlying complaint show an occurrence
within the coverage of the policy, then the insured is obligated to defend,
regardless of the ultimate liability of the insured.” St. Paul Fire & Marine Ins. Co.
v. ERA Oxford Realty Co. Greystone, LLC, 572 F.3d 893, 894-95 (11th Cir. 2009)
(citing United States Fid. & Guar. Co. v. Armstrong, 479 So. 2d 1164, 1168 (Ala.
1985)) (internal citation omitted). Accordingly, to determine if Continental had a
duty to defend American Osment in the Pate action, the Court must look to the

4

As a federal court sitting in diversity, this Court must apply the choice of law principles of
Alabama, the forum state. St. Paul Fire and Marine Ins. Co. v. ERA Oxford Realty Co.
Greystone, LLC, 572 F.3d 893, 895 n.1 (11th Cir. 2009) (citation omitted). Absent a contractual
provision identifying state law that the parties have selected to govern the interpretation of the
contract, Alabama applies to contract disputes the law of the state in which the contract was
formed. Id.; see also Cherokee Ins. Co. v. Sanches, 975 So. 2d 287, 292 (Ala. 2007). For
insurance policies, the state in which the policy was issued and delivered is the state in which the
contract was formed. Cherokee Ins. Co., 975 So. 2d at 293 (citation omitted). Because this
matter involves the interpretation of an insurance policy issued and delivered in Alabama,
Alabama substantive law applies. (See Doc. 11-2, p. 5)
11

allegations in Mr. Pate’s state court complaint and compare those allegations to the
language of the policy that Continental issued to American Osment. ERA Oxford
Realty, 572 F.3d at 895.
When interpreting an insurance policy, a court must construe the policy “to
give effect to the intention of the parties. . . .” See Twin City Fire Ins. Co. v. Ala
Mut. Ins. Co., 817 So. 2d 687, 691 (Ala. 2001) (quoting Attorneys Ins. Mut. of
Alabama, Inc. v. Smith, Blocker & Lowther, P.C., 703 So. 2d 866, 870 (Ala. 1996)
(internal marks omitted)). To determine the intent of the parties, “a court must
examine more than [an] isolated sentence or term; it must read each phrase in the
context of all other provisions.” Id. Additionally, “a policy must be construed
fairly, must effectuate its purpose, and must reflect common sense so as not to
bring about an absurd result.” In re HealthSouth Corp., 308 F. Supp. 2d 1253,
1269 (N.D. Ala. 2004) (quoting Boone v. Safeway Ins. Co. of Ala., Inc., 690 So. 2d
404, 406 (Ala. Civ. App. 1997) (internal marks omitted)).
“[I]t is well established ‘that when doubt exists as to whether coverage is
provided under an insurance policy, the language used by the insurer must be
construed for the benefit of the insured.’” ERA Oxford Realty, 572 F.3d at 898
(quoting St. Paul Mercury Insurance Co. v. Chilton–Shelby Mental Health Center,
595 So. 2d 1375, 1377 (Ala. 1992)). Accordingly, ambiguity in a policy must be

12

resolved against the insurer. Id. (citing Safeway Ins. Co. of Ala., Inc. v. Herrera,
912 So. 2d 1140, 1143 (Ala. 2005)).
If the terms of an insurance policy are not ambiguous, then a court must
enforce the policy “as written and cannot defeat express provisions in a policy by
making a new contract for the parties.” ERA Oxford Realty, 572 F.3d at 898
(citing Johnson v. Allstate Ins. Co., 505 So. 2d 362, 365 (Ala. 1987)). “While
ambiguities or uncertainties in an insurance policy should be resolved against the
insurer, ambiguities are not to be inserted by strained or twisted reasoning.” Twin
City Fire Ins. Co., 817 So. 2d at 692 (citation omitted). Moreover, the fact that
different parties argue for different interpretations of an insurance policy is not
enough to show the disputed policy language is ambiguous. In re Healthsouth, 308
F. Supp. 2d at 1268 (quoting Woodall v. Alfa Mut. Ins. So., 658 So. 2d 369, 371
(Ala. 1995)). “Where the parties disagree on whether the language in an insurance
[policy] is ambiguous, a court should construe language according to the meaning
that a person of ordinary intelligence would reasonably give it.”

Certain

Underwriters at Lloyd’s, London v. Kirkland, 69 So. 3d 98, 101 (Ala. 2011)
(quoting Twin City Fire Ins. Co., 817 So. 2d at 692) (internal marks omitted).
B.

American Osment’s Motion for Summary Judgment

American Osment argues that it is entitled to judgment as a matter of law on
its breach of contract claim because the Pate action constitutes a Claim under the
13

policy, and Continental had a duty to defend American Osment against all Claims
even if a Claim will not result in a Loss under the Policy. (Doc. 10, p. 7).
Continental concedes that the Pate action is a Claim within the policy definition of
that term. The Court agrees because the Pate action is a “written demand for
monetary damages . . . against [American Osment] alleging a Wrongful Act” and is
also a “civil proceeding in a court of law . . . against [American Osment], alleging
[an employment-related misrepresentation] . . . .” (See Doc. 11-2, pp. 23, 24, 40).
Nevertheless, Continental argues that it has no duty to defend American Osment
for Claims that are not covered by the Policy, and the exclusions in the policy
eliminate coverage for the Claim. (Docs. 28 & 38).
The policy provision American Osment relies upon to support its argument
in favor of a duty to defend -- the “duty to defend all Claims” provision – appears
in Section XXI of the Policy’s general terms and conditions. (Doc. 11-2, p. 16).
That provision begins as follows:
Solely with respect to Liability Coverage Parts, . . . [t]he Insurer has
the right and duty to defend all Claims even if the allegations are
groundless, false or fraudulent.
(Id.; see also Doc. 10, p. 4) (emphasis added). American Osment focuses its
attention on the “duty to defend all Claims” phrase in the provision and ignores the
limiting introductory phrase “Solely with respect to Liability Coverage Parts.” The
plain language of that introductory phrase expressly links the scope of

14

Continental’s duty to defend to the policy’s specific Liability Coverage Parts.
Under Alabama law, American Osment’s attempt to divorce the introductory
phrase from the coverage language fails. Twin City Fire Ins. Co., supra (“[A]
court must examine more than the isolated sentence or term; it must read each
phrase in the context of all other provisions.”). Thus, the Court must examine the
EPL Coverage Part provisions in the policy to evaluate the scope of Continental’s
duty to defend.
The insuring agreement in the EPL Coverage Part provides that Continental
“shall pay on behalf of [American Osment] that Loss, in excess of retention and up
to the applicable limit of liability resulting from any Claim first made against
[American Osment] during the Policy Period . . . by or on behalf of . . . an
Employee . . . for a Wrongful Employment Practice. . . .” (Doc. 11-2, p. 20). The
EPL Coverage Part excludes from coverage “any Loss in connection with any
Claim made against [American Osment] [. . .] based upon or arising out of any
actual or alleged violation of . . . any [] federal, state or local statutory law or
common law anywhere in the world governing wage, hour and payroll policies.”
(Id., p. 21). In addition, the policy’s glossary provides the following definition of
“Loss” with respect to the EPL Coverage Part:
Loss does not include . . . compensation earned by the claimant in the
course of employment but unpaid by the Insured, including salary,
wages, commissions, severance, bonus or incentive compensation . . .
15

(Doc. 11-2, p. 29).
Mr. Pate’s claims in his state court complaint relate to his contention that
American Osment failed to pay him the full salary and commissions that the
company’s president promised when American Osment hired Mr. Pate. (Doc. 113, p. 1). To recover unpaid wages and commissions, Mr. Pate asserted Alabama
common law claims against American Osment for breach of contract, work and
labor done, and promissory fraud. Mr. Pate also asserted a statutory claim against
the company under Alabama Code § 8-24-1, et seq. Under each count of his
complaint, Mr. Pate demanded unpaid commissions and reimbursement of
improper charge-backs. (Doc. 11-2, pp. 3-6). Thus, to the extent that Mr. Pate
sought unpaid commissions under Alabama law, the allegations of the state law
complaint do not fall within the policy definition of Loss. Under the express
language of Section XXI of the general terms and conditions of the policy, the
specific EPL provisions limit the broad duty to defend language in the policy’s
general terms and conditions, and Continental does not have a duty to defend
American Osment with respect to Mr. Pate’s claims for unpaid commissions. (See
Doc. 11-2, pp. 20-21, 23). 5

5

In its brief in support of summary judgment, American Osment acknowledges that the “policy
provisions in the General Terms and Conditions apply to all of the specific coverages, but if a
provision of the General Terms and Conditions is inconsistent or in conflict with the terms and
conditions of any coverage part, then the coverage part controls. Section I. Terms and
Conditions.” (Doc. 10, p. 4). The Court does not find that general term XXI is inconsistent with
the EPL coverage provisions, but even if the provisions were inconsistent, American Osment’s
16

Therefore, the Court denies American Osment’s motion for summary
judgment on its breach of contract claim. Because American Osment’s class
allegations are premised upon American Osment’s misinterpretation of Section
XXI, the Court grants Continental’s motion to strike the class allegations in Counts
VII and VIII of American Osment’s amended complaint.
IV.

Conclusion
For the reasons discussed above, the Court DENIES American Osment’s

motion for partial summary judgment. The Court GRANTS Continental’s motion
to strike the class allegations and denies Continental’s motion for summary
judgment as moot. The order denying American Osment’s summary judgment
motion does not resolve as a matter of law the question of Continental’s duty to
defend American Osment in the Pate action. In Count Four of his complaint, Mr.
Pate asserted a claim for promissory fraud and demanded not only unpaid
commissions but also “such other damages as are available by law.” (Doc. 11-3, p.
6). Under Alabama law, a plaintiff who establishes a claim for promissory fraud
may recover compensatory and punitive damages. Alabama Law of Damages §
36:32 (6th ed.) (“The victim of actual fraud may bring an action at law, sounding
in tort, against the offending party or one benefiting from the fraud and may obtain
compensatory damages suffered as a result of the fraud. . . . The plaintiff is entitled
recognition that the policy’s narrow coverage provisions trump the general terms defeats
American Osment’s legal arguments regarding the duty to defend.
17

to punitive damages when there is clear and convincing evidence that the fraud is
malicious, oppressive, or gross, and the misrepresentation is made with knowledge
of its falsity and with the purpose of injuring.”); see also Ala. Code § 6-11-20(a).
Pursuant to Rule 56(f) of the Federal Rules of Civil Procedure, on or before
June 17, 2017, Continental shall submit a brief in which it shall explain whether
the policy provides coverage for punitive damages that in turn would give rise to a
duty to defend Mr. Pate’s fraud claim. 6 American Osment may file a reply brief on
or before July 1, 2017. 7
DONE and ORDERED this June 2, 2017.
_________________________________
MADELINE HUGHES HAIKALA
UNITED STATES DISTRICT JUDGE

6

Under Alabama law, “[w]hen a complaint alleges both acts covered under the policy and acts
not covered, the insurer is under a duty to at least defend the allegations covered by the policy.”
Hartford Cas. Ins. Co. v. Merchants & Farmers Bank, 928 So. 2d 1006, 1010 (Ala. 2005)
(quoting Acceptance Ins. Co. v. Brown, 832 So. 2d 1, 14 (Ala. 2001)).

7

The Court apologizes to the parties for the delay in issuing this opinion.
18