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

Filing 54

MEMORANDUM OPINION - For the reasons stated above, the Court finds that Continental had a duty to defend American Osment against Mr. Pates action against the company. Accordingly, the Court finds in favor of American Osment on its breach of contract claim. Signed by Judge Madeline Hughes Haikala on 9/21/201. (KEK)

FILED
2018 Sep-21 AM 09:35
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.
Defendants.

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6:15-cv-00299-MHH

MEMORANDUM OPINION
In this action, plaintiff American Chemicals & Equipment, Inc. d/b/a
American Osment contends that defendants Continental Casualty Company and
CNA Financial Corporation, Inc. breached the terms of an employment practices
liability policy that the company issued to American Osment. American Osment
asserts breach of contract, bad faith, negligence, and wantonness claims against the
defendants.
On June 2, 2017, the Court entered a memorandum opinion and order
denying American Osment’s motion for summary judgment on its breach of
contract claim against Continental regarding Continental’s failure to provide a

defense in an underlying lawsuit that a former employee filed against American
Osment. 1 (Doc. 11).
In its June 2, 2017 memorandum opinion and order, pursuant to Federal
Rule of Civil Procedure 56(f), the Court directed the parties to examine a coverage
issue that neither American Osment nor Continental addressed in the summary
judgment briefs: whether the policy provides coverage for punitive damages that
would give rise to duty a defend the state court action.
Having considered the parties’ arguments (see Doc. 46; Doc. 47), and with
the benefit of oral argument, the Court finds in favor of American Osment on its
breach of contract claim.
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.
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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 did
not move for summary judgment on that claim, its bad faith claim, its negligence claims, or its
wantonness claims. (Doc. 7, pp. 5-8).
2

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). 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 and draw reasonable
inferences in favor of the non-moving party. Bivens v. Bank of America, N.A., 868
F.3d 915, 918 (11th Cir. 2017).
II.

Relevant Facts
A.

The Insurance Policy’s Punitive Damages Clause

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
agreement, and a glossary of defined terms. (See Doc. 11-2). The Employment
Practices Liability (or EPL) Coverage Part provides coverage for Loss on account
of a Claim against an Insured for a Wrongful Employment Practice. (Doc. 11-2, p.
20).
Under the policy, the definition of “Loss” includes:

“punitive and

exemplary damages and the multiplied portion of multiplied awards (subject to this
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Policy’s other terms, conditions and limitations). Enforceability of this paragraph
shall be governed by such applicable law that most favors coverage for such
punitive, exemplary and multiplied amounts.”

(Doc. 11-2, p. 29).

The EPL

defines “applicable law” to include the law of the jurisdiction where the Insured is
incorporated. (Doc. 11-2, p. 29). American Osment is incorporated in Alabama.
(Doc. 7, ¶ 1).
B.

Allegations of Promissory Fraud in the Underlying State Court
Action

During the policy period, Steve Pate, a former American Osment employee,
sued the company in the Circuit Court of Jefferson County, Alabama. In his state
court complaint, Mr. Pate alleged that the company failed to pay him the salary and
sales commission rate 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’s
complaint contains a promissory fraud claim. (Doc. 11-3, p. 6).
In support of his fraud claim, Mr. Pate alleged that before he entered an
employment agreement with American Osment, the company’s president
“represented that he would pay Pate $120,000.00 plus commissions at the rate of
thirty-six percent (36%).” (Doc. 11-3, p. 6, ¶ 36; see also Doc. 11-3, p. 1, ¶ 2).
According to Mr. Pate, “[a]t the time these statements were made, [American
Osment’s president] had no intention of paying Pate $120,000.00 and thirty-six
percent (36%) commissions but instead, only intended to pay him [Pate]
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$100,000.00 and thirty-two percent (32%) commissions.” (Doc. 11-3, p. 6, ¶ 36;
see also Doc. 11-3, p. 1, ¶ 3).

Mr. Pate alleged that he “believed the

representations” that American Osment’s president made, and, “in reasonable
reliance on those representations,” entered an employment agreement with the
company to work as a commissioned sales representative. (Doc. 11-3, p. 6, ¶ 37;
see also Doc. 11-3, p. 1, ¶ 4). According to Mr. Pate, he signed the employment
agreement as a result of “fraudulent conduct.” (Doc. 11-3, p. 6, ¶ 37).
When Mr. Pate discovered that American Osment was paying him thirty-two
percent (32%) commissions instead of thirty-six percent (36%) commissions, Mr.
Pate met with American Osment’s president who stated that “it was a lie that he
said he would every pay Pate thirty-six percent (36%) commission and that he was
never offered thirty-six percent (36%).” (Doc. 11-3, p. 2, ¶ 9). During another
meeting, Mr. Pate showed American Osment’s president the signed employment
agreement that stated that Mr. Pate “was to be paid thirty-six percent (36%)
commissions.”

(Doc. 11-3, pp. 2-3, ¶ 10).

American Osment’s president

“disagreed that he had ever agreed to the thirty-six percent (36%) commissions and
stated that he would get back with” Mr. Pate. (Doc. 11-3, p. 3, ¶ 10). During a
follow-up meeting, American Osment’s president told Mr. Pate that “he had never
offered him thirty-six percent (36%) commission,” and American Osment’s

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president offered Mr. Pate $12,000 “to remedy the situation.” (Doc. 11-3, p. 3, ¶
12).
As part of his fraud claim, Mr. Pate sought compensatory damages and
“such other damages as are available by law.” (Doc. 11-3, p. 6).
III.

Analysis
Continental concedes that the EPL “provides coverage for punitive damages,

subject to all other policy terms and conditions.” (Doc. 46, p. 3). Continental
argues that it has no duty to defend because although Mr. Pate asserts a promissory
fraud claim, he does not assert a claim for punitive damages, and even if he did,
because the fraud claim is related to an alleged breach of an employment contract,
the EPL excludes coverage for Mr. Pate’s fraud claim. The Court is not persuaded.
A.

The EPL Provides Coverage for Punitive Damages, and Mr. Pate
Adequately Alleged a Promissory Fraud Claim that Will Support
a Punitive Damages Award under Alabama Law

“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.

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1985)) (internal citation omitted). “Where facts are alleged in the complaint to
support a cause of action, it is the facts, not the legal phraseology, that determine
whether an insurer has a duty to defend its insured in the action.” Hartford Cas.
Ins. Co. v. Merchants & Farmers Bank, 928 So. 2d 1006, 1012 (Ala. 2005). “If the
complaint is ambiguous, [] it should be ‘liberally construed in favor of the
insured.’” Pharmacists Mutual Ins. Co. v. Godbee Med. Distributors, Inc., 733 F.
Supp. 2d 1283 (M.D. Ala. 2010) (quoting Ladner & Co., Inc. v. So. Guaranty Ins.
Co., 347 So. 2d 100, 103 (Ala. 1977)); see also Scott C. Turner, Insurance
Coverage of Construction Disputes § 7.3 (“Courts liberally construe the allegations
of a claimant’s pleadings toward a finding of coverage.”).
The allegations in Mr. Pate’s state court complaint state a claim for
promissory fraud. “A claim of promissory fraud is ‘one based upon a promise to
act or not to act in the future.’” Ex parte Michelin North America, Inc., 795 So. 2d
674, 678 (Ala. 2001) (quoting Padgett v. Hughes, 535 So. 2d 140, 142 (Ala.
1988)). Under Alabama law, to state a claim for promissory fraud, a plaintiff must
allege facts showing:
(1) a false representation; (2) of an existing material fact; (3) that is
reasonably relied upon; (4) damage resulting as a proximate cause; (5)
that at the time of the misrepresentation, the defendant had the
intention not to perform the promised act; and (6) that the defendant
had an intent to deceive.

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Target Media Partners Operating Co., LLC v. Specialty Marketing Corp., 177 So.
3d 843, 866-67 (Ala. 2013) (internal quotation marks, citation, and alterations
omitted).
Here, Mr. Pate alleged that before he entered an employment agreement with
American Osment, the company’s president “represented that he would pay Pate
$120,000.00 plus commissions at the rate of thirty-six percent (36%).” (Doc. 11-3,
p. 6, ¶ 36; see also Doc. 11-3, p. 1, ¶ 2). Mr. Pate also alleged that “[a]t the time
these statements were made, [American Osment’s president] had no intention of
paying Pate $120,000.00 and thirty-six percent (36%) commissions but instead,
only intended to pay him [Pate] $100,000.00 and thirty-two percent (32%)
commissions.” (Doc. 11-3, p. 6, ¶ 36; see also Doc. 11-3, p. 1, ¶ 3). Mr. Pate
alleged that he “believed the representations” that American Osment’s president
made, and “in reasonable reliance on those representations” entered an
employment agreement with the company to work as a commissioned sales
representative. (Doc. 11-3, p. 6, ¶ 37; see also Doc. 11-3, p. 1, ¶ 4). Accordingly,
Mr. Pate stated a promissory fraud claim.
Under Alabama law, punitive damages are available in promissory fraud
cases. See Exxon Mobil Corp. v. Ala. Dep’t of Conservation & Natural Resources,
986 So. 2d 1093, 1130 (Ala. 2007) (Lyons, J., concurring) (“[I]f a promise to
perform in the future is made with no intention to perform at the time the promise
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was made, it is promissory fraud and will give rise to an action in tort for which
compensatory and punitive damages may be recovered.”) (citing Kennedy Elec.
Co. v. Moore-Handley, Inc., 437 So. 2d 76 (Ala. 1983)) (emphasis omitted);
Sealing Equipment Products Co., Inc. v. Velarde, 644 So. 2d 904, 908-11 (Ala.
1994) (affirming punitive damages award in promissory fraud action); General
Motors Acceptance Corp., Inc. v. Covington, 586 So. 2d 178, 184 (Ala. 1991)
(affirming punitive damages award because the plaintiff presented sufficient
evidence on the elements of promissory fraud to create a jury question, and jury
found in favor of the plaintiff on his claim of misrepresentation). Under Alabama
law, if a plaintiff establishes “by clear and convincing evidence that the defendant
consciously or deliberately engaged in . . . fraud . . . with regard to the plaintiff,”
then the plaintiff may recover punitive damages. Ala. Code § 6-11-20(a). 2
Continental contends that it owed no duty to defend American Osment
because Mr. Pate’s complaint did not contain a specific demand for punitive
damages and because Mr. Pate did not allege facts suggesting “malicious,

2

Alabama’s punitive damages statute defines fraud as:
[a]n intentional misrepresentation, deceit, or concealment of a material fact the
concealing party had a duty to disclose, which was gross, oppressive, or malicious
and committed with the intention on the part of the defendant of thereby depriving
a person or entity of property or legal rights or otherwise causing injury.

Ala. Code § 6-11-20(b)(1).
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oppressive or gross” conduct, which Continental maintains is required to support a
punitive damages award. The Court disagrees.
Mr. Pate’s complaint contains clear allegations of promissory fraud, and the
conduct alleged is the sort of malicious, oppressive, or gross conduct that supports
a punitive damages award under Alabama law.

See pp. 4-6, above (factual

allegations in Pate complaint); pp. 8-9, above (Alabama decisions regarding
punitive damages in fraud cases).
In General Motors, the Alabama Supreme Court affirmed a punitive
damages award in a promissory fraud case and rejected the defendant’s argument
that the plaintiff had not presented “evidence of gross, malicious, or oppressive
conduct on the part of [the defendant] to support an award of punitive damages.”
General Motors, 586 So. 2d at 181, 184. The Alabama Supreme Court explained:
an examination of the record reveals that Covington presented
sufficient evidence of the elements of promissory fraud to create a
jury question, and it was such that the jury could reasonably infer that
Covington was defrauded by Ms. Oliver’s representation. Given the
fact that there was sufficient evidence of both elements of promissory
fraud—a present intent to deceive and an intent not to perform the
promise—the question of punitive damages was properly submitted to
the jury. Carnival Cruise Lines, Inc. v. Goodin, 535 So. 2d 98 (Ala.
1988). Therefore, the jury, in finding in favor of Covington on his
claim of misrepresentation, was justified in awarding punitive
damages in an amount that it saw fit to award.
General Motors, 586 So. 2d at 184. In affirming the punitive damages award, the
Alabama Supreme Court found that because the plaintiff submitted sufficient

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evidence on the elements of his promissory fraud claim, the trial court properly
submitted the punitive damages question to the jury. General Motors, 586 So. 2d
at 184.
In Sealing Equipment Products, the Alabama Supreme Court affirmed a
promissory fraud punitive damages award in a case involving a plaintiff’s claim
that his employer promised to pay him certain commissions, but when the
employer made the promise, the employer had no intention of honoring the
commitment. Sealing Equipment Products, 644 So. 2d at 908-11. The employer
argued on appeal that the plaintiff “failed to submit clear and convincing evidence
to support his claim of promissory fraud,” and therefore, the trial court erred when
it submitted the promissory fraud claim to the jury. Sealing Equipment Products,
644 So. 2d at 909. The Alabama Supreme Court affirmed the trial court’s decision
to submit the plaintiff’s claim for punitive damages to the jury because the record
“reveal[ed] credible evidence from which the jury could have drawn inferences to
support the verdict.” Sealing Equipment Products, 644 So. 2d at 909-10. For
example, the Alabama Supreme Court explained that from the plaintiff’s evidence,
the jury could have drawn inferences supporting the plaintiff’s contention that his
employer knew, before it hired the plaintiff, that the company did not intend to pay
the amount of commissions promised. Sealing Equipment Products, 644 So. 2d at
909. As in General Motors, the Alabama Supreme Court’s decision in Sealing
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Equipment Products did not turn on whether the plaintiff had pleaded or proven
gross, malicious, or oppressive conduct.
Given the clear allegations of promissory fraud in Mr. Pate’s complaint,
Alabama law regarding punitive damages in promissory fraud cases, and the legal
standard that requires a court to liberally construe the allegations in the complaint
in an underlying action in favor of coverage, the Court finds that Mr. Pate’s request
for compensatory damages and “such other damages as are available by law” (Doc.
11-3, p. 6) is sufficient to trigger Continental’s duty to provide a defense to
American Osment given the policy’s coverage for punitive damages. Accordingly,
the Court finds that Continental owed a duty to defend American Osment. 3
B.

The EPL’s Exclusion from Covered Loss of Punitive Damages
Resulting from a Knowing Violation of a Written Employment
Contract Does Not Eliminate Continental’s Obligation Under the
EPL to Provide a Defense to American Osment in Mr. Pate’s
State Court Action

Continental argues that it nonetheless does not have a duty to defend Mr.
Pate’s promissory fraud claim because his claim “necessarily rests on American
Osment’s entry into and purported knowing breach of its employment agreement
with [Mr. Pate]” (Doc. 46, p. 6), and the EPL expressly states that “Loss does not
3

Under Alabama law, when an insurer owes a duty to defend at least one claim in an underlying
action, the insurer must provide a defense for all claims, even claims that the policy does not
cover. Universal Underwriters Ins. Co. v. East Cent. Alabama Ford-Mercury, Inc., 674 So. 2d
716, 719 (Ala. 1990) (citing Ladner, 347 So. 2d at 100). This is because under Alabama law, the
duty to defend is broader than the duty to indemnify. Ladner, 347 So. 2d at 102 (“It is well
established that the insurer’s duty to defend is more extensive than its duty to pay.”).
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include … any amounts for which an insured is liable due to an act or omission in
knowing violation of any written contract of employment.” (Doc. 11-2, p. 29, ¶
II.3). Again, Continental’s argument is inconsistent with Alabama law.
“In Alabama, a single transaction can support an award of damages for both
breach of contract and fraud.” Deupree v. Butner, 522 So. 2d 242, 244 (Ala. 1988)
(citing Herring v. Prestwood, 414 So. 2d 52 (Ala. 1982)); see also Combined
Servs., Inc. v. Lynn Elecs. Corp., 888 F.2d 106 (11th Cir. 1989) (“Alabama courts
have consistently held that, where a party fraudulently conceals or misrepresents
facts relating to its intention or ability to perform under a contract … a plaintiff is
not required to elect between contract and fraud remedies.”). However, “a fraud
claim cannot be maintained simply because a party—even mistakenly,
intentionally, or maliciously—did not properly perform a contractual obligation.”
Hunt Petroleum Corp. v. State of Alabama, 901 So. 2d 1, 12 (Ala. 2004) (Houston,
J., concurring).

Rather, “the fraud claim must be based on representations

independent from the promises in the contract and must independently satisfy the
elements of fraud.” Muncher v. NCR Corp., 2017 WL 2774805, at *16 (N.D. Ala.
June 27, 2017).
Mr. Pate’s complaint contains clear allegations of promissory fraud, separate
and distinct from his breach of contract claim. See pp. 4-6, 8, above. With respect
to Mr. Pate’s fraud claim, Mr. Pate alleged that American Osment entered into an
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employment contract with him even though the company had no intention of
performing its obligations under the contract, and that his reasonable reliance upon
the company’s misrepresentations induced him to enter into the contract. (Doc.
11-3, p. 6, ¶¶ 35-37). With respect to Mr. Pate’s breach of contract claim, Mr. Pate
alleged that he suffered damages as a result of American Osment’s failure to
perform its obligations under the employment contract that existed between the
parties. (Doc. 11-3, p. 6, ¶¶ 16-19). “The fact that the measure of damages may be
the same for both causes of action does not make the fraud claim disappear.”
Muncher, 2017 WL 2774805, at *16 (quoting Dickinson v. Land Developers
Construction Co., 882 So. 2d 291, 304 (Ala. 2003) (Houston, J., concurring)).
IV.

Conclusion
For the reasons stated above, the Court finds that Continental had a duty to

defend American Osment against Mr. Pate’s action against the company.
Accordingly, the Court finds in favor of American Osment on its breach of
contract claim.
DONE and ORDERED this September 21, 2018.

_________________________________
MADELINE HUGHES HAIKALA
UNITED STATES DISTRICT JUDGE

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