Gabriel et al v. Life Options International, Inc. et al
ORDER, GRANTING 40 Motion for Summary Judgment. Signed by Senior Judge Callie V. S. Granade on 4/5/2016. (mab)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
ROBERT GABRIEL, et al.,
INSURANCE CO., et al.,
CIVIL ACTION NO. 14-00358-CG-B
This matter is before the Court on the Motion for Summary Judgment (Doc.
40) and Brief in Support (Doc. 41), filed by Chartis Specialty Insurance Company
(“Defendant”), the response (Doc. 47) filed by Joseph Habshey, Mary Shanklin, Carl
Most, John Cabral, RMG International, Inc., AZMACOMP, Inc. (collectively,
“Plaintiffs”), and Veritrust Financial, LLC (“Veritrust”), and Defendant’s reply (Doc.
48). For the reasons set forth herein, Defendant’s motion for summary judgment is
due to be GRANTED.
This case involves a complicated set of facts and procedural history, including
several party changes, that the Court previously set out in its Order on Motions to
Remand. (Doc. 30). In order to avoid any potential confusion, the Court will not
rehash those facts here but will instead set forth only the history necessary to state
the posture of the current action.
Plaintiffs sued Michael J. Howard and his affiliated companies (collectively,
“Howard”) in the Circuit Court of Dallas County, Alabama, asserting causes of
action related to viatical settlements sold by Howard to Plaintiffs. (Doc. 1-2, pp. 34). After Plaintiffs provided Howard with funds to maintain the premiums on the
viatical settlements, Howard allegedly used the money to pay premiums on other
insurance policies purchased by other clients, causing the viatical settlements to
lapse. (Doc. 1-2, p. 7; Doc. 47, p. 3). Plaintiffs also sued Veritrust, apparently on the
theory that Howard sold the settlements while acting as an agent for Veritrust, a
securities broker-dealer. (Doc. 1, p. 2). Veritrust had purchased a Securities
Broker/Dealer’s Professional Liability Insurance policy issued by Defendant, but
Defendant informed Veritrust that it was not covered by the policy. (Doc. 1-2, p.
235). Thus, Defendant did not defend Veritrust in the suit.
Plaintiffs and Veritrust agreed to settle all state court claims for $5.1 million.
Id. at 228. Plaintiffs then amended their complaint to add Defendant as a party in
an attempt to garnish proceeds from the insurance policy issued to Veritrust,
pursuant to Section 27-23-2 of the Alabama Code. Id. at 229. Veritrust levied claims
of bad faith and breach of contract against Defendant. Id. at 235. Defendant
removed the action to this Court on grounds of diversity jurisdiction. (Doc. 1, p. 7).
A. The Summary Judgment Standard
Federal Rule of Civil Procedure 56(a) instructs that “[t]he 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.” The trial
court’s mission is to “determine whether there is a genuine issue for trial” and not
to “weigh the evidence.” See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249
The burden is on the moving party to show that there is no genuine dispute
as to any material fact. Id. at 256. In conducting its summary judgment analysis,
the Court must construe all evidence “in the light most favorable to the party
opposing the motion.” United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
After the movant meets its burden, the burden shifts to the nonmoving party
“to make a showing sufficient to establish the existence of an element essential to
that party’s case.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). If the
nonmoving party fails to do so, the “complete failure of proof concerning an essential
element of the nonmoving party’s case necessarily renders all other facts
immaterial.” Id. at 323. Further, Rule 56 “requires the nonmoving party to go
beyond the pleadings and by her own affidavits, or by the depositions, answers to
interrogatories, and admissions on file, designate specific facts showing that there is
a genuine issue for trial.” Id. at 324 (internal quotation marks omitted). There is no
genuine issue for trial “[w]here the record taken as a whole could not lead a rational
trier of fact to find for the non-moving party.” Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986).
B. Choice of Law and Contract Principles
In an action based on diversity, the Court applies “the substantive law of the
forum state.” Fioretti v. Mass. Gen. Life Ins. Co., 53 F.3d 1228, 1235 (11th Cir.
1995). Absent a choice-of-law provision, “Alabama follows the lex loci contractus
rule in determining which state’s law applies in a contract dispute.” Cherokee Ins.
Co. v. Sanches, 975 So. 2d 287, 292 (Ala. 2007). A court follows “the law of the state
where the contract was formed” unless that state’s law “is contrary to the forum
state’s fundamental public policy.” Stovall v. Universal Constr. Co., 893 So. 2d 1090,
1102 (Ala. 2004). When analyzing an insurance policy, a court will administer the
law of the state where the policy was issued and delivered. See Cherokee Ins. Co.,
975 So. 2d at 293.
It does not appear that the parties included a choice-of-law provision in the
insurance policy. Defendant argues that Texas law applies because Veritrust “is a
Texas Limited Liability Company with its principle place of business in Texas, and
its members are residents of Texas.” (Doc. 41, p. 17). The Court recognized the
Texan citizenship of Veritrust in its Order on Motions to Remand. (Doc. 30, p. 7).
Plaintiffs and Veritrust are silent to the contention that Texas law controls. The
Court will apply Texas law in interpreting the contract.
The provisions of a contract “each must be considered in the context of the
instrument as a whole.” Plains Exploration & Prod. Co. v. Torch Energy Advisors
Inc., 473 S.W.3d 296, 305 (Tex. 2015). A court must “give words their plain,
common, or generally accepted meaning unless the contract shows that the parties
used words in a technical or different sense.” Id. A contract is ambiguous when it is
“subject to two or more reasonable interpretations,” which creates “a fact issue
regarding the parties’ intent.” Id. A “contract may be read in light of the
circumstances surrounding its execution to determine whether an ambiguity exists”
unless “the instrument involved, by its terms, plainly and clearly discloses the
intention of the parties, or is so worded that it is not fairly susceptible of more than
one legal meaning or construction.” Id. (quoting Sun Oil Co. v. Madeley, 626 S.W.2d
726, 732 (Tex. 1981)) (internal quotation marks omitted). Insurance policies are
contracts and thus interpreted accordingly. JAW The Pointe, L.L.C. v. Lexington
Ins. Co., 460 S.W.3d 597, 603 (Tex. 2015).
The insured party initially “has the burden of establishing coverage under
the terms of the policy.” Id. (quoting Gilbert Tex. Constr., L.P. v. Underwriters at
Lloyd’s London, 327 S.W.3d 118, 124 (Tex. 2010)) (internal quotation marks
omitted). The burden then shifts to the insurer “to plead and prove that the loss
falls within an exclusion to the policy’s coverage.” Id. If an exclusion exists, “the
burden shifts back to the insured to show that an exception to the exclusion brings
the claim back within coverage.” Id. (quoting Gilbert, 327 S.W.3d at 124) (internal
quotation marks omitted).
Veritrust brought claims of breach of contract and bad faith against
Defendant. (Doc. 1-2, p. 235). The latter depends on the outcome of the former, as
typically there can be no finding of bad faith if the contract has not been breached.
See Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996). For the
reasons set forth below, the Court finds that Defendant did not breach the contract
and therefore no bad faith analysis is necessary.
Defendant first contends that coverage is not available to Veritrust because it
is domiciled and has its principle place of business in Texas. (Doc. 41, p. 19). An
endorsement to the policy states, “[C]overage shall be provided solely with respect
to any Insured(s) that are domiciled or maintain a primary place of business in . . .
Delaware.” (Doc. 40-21, p. 60). In addition to Veritrust’s Texan citizenship, Howard
is a resident of Alabama. (Doc. 30, p. 7). Veritrust counters that a separate
insurance policy, discussed below, does not have this restriction and should have
been considered. (Doc. 47, p. 2). Veritrust apparently concedes that the policy issued
by Defendant does not cover Veritrust or Howard by virtue of the residence
restriction, stating that the policy “contains an endorsement limiting coverage only
to Delaware residents.” Id. at 6. Thus, the Court could grant summary judgment to
Defendant based on this endorsement alone.
2. Professional Services
Defendant next argues that Veritrust cannot establish coverage because,
while the policy covers “professional services,” the sale and maintenance of viatical
settlements is not an approved professional service. (Doc. 41, pp. 19-20). Defendant
points to the policy’s definition of “Professional Services” as those “rendered in
connection with an Approved Activity for or on the behalf of a customer or client of
the Broker/Dealer pursuant to a written agreement between the Broker/Dealer and
the customer or client,” which is followed by a list of services. (Doc. 40-21, p. 16).
The policy goes on to define “Approved Activity”:
(a) “Approved Activity” means a service or activity performed by the
Registered Representative on behalf of the Broker/Dealer which:
(1) has been approved in writing by the Broker/Dealer to be
performed by the Registered Representative, and is
(2) in connection with the purchase or sale of a specific security,
annuity or insurance product which has been approved in
writing by the Broker/Dealer to be transacted through the
Registered Representative, and for which
(3) the Registered Representative has obtained all licenses
required by the Broker/Dealer or applicable law or regulation.
(Doc. 40-21, p. 34). Defendant argues that the sale and servicing of the viatical
settlements is not covered as an approved activity. (Doc. 41, p. 20). In his
deposition, Veritrust’s chief executive officer testified that he informed Howard of
the company’s prohibition of viatical transactions and that Howard did not disclose
his ongoing viatical business at that time. (Doc. 40-15, pp. 9-10, 18-20). According to
the officer, Veritrust has “never been involved in that business.” Id. at 10. When
Veritrust discovered that Howard was actively involved in the viatical trade, they
terminated his employment. (Doc. 40-15, p. 20; Doc. 40-19, p. 2). Further, the ceaseand-desist orders issued to Howard by the Alabama Securities Commission
demonstrate that Howard did not have the appropriate licenses to broker viatical
transactions. (Docs. 40-11, 40-13). Finally, none of Howard’s viatical customers
involved in the state court lawsuit were clients of Veritrust. (Doc. 40-15, pp. 6, 9,
Veritrust responds by offering the novel argument that “an agreement to
ensure that insurance premium payments are timely made is distinct and separate
from the sale of the viatical.” (Doc. 47, p. 4). Veritrust posits that the maintenance
of premium payments is an administrative activity clearly covered by the policy. Id.
It is true that an endorsement to the policy added “the separation of
insurance premiums and remittance of the insurance premiums to the various
product sponsors as per the investor’s selected allocation” to the policy’s definition of
“Professional Services.” (Doc. 40-21, p. 57). However, this endorsement did not
remove the Approved Activity requirements. The endorsement essentially changed
the definition of “Professional Services” to read like the following:
(k) “Professional Services” means the following services if rendered in
connection with an Approved Activity for or on the behalf of a customer
or client of the Broker/Dealer pursuant to a written agreement
between the Broker/Dealer and the customer or client:
(9) the separation of insurance premiums and remittance of the
insurance premiums to the various product sponsors as per the
investor’s selected allocation; . . . .
Id. at 16, 57 (emphasis added). The endorsement left the Approved Activity
conditions in place. Veritrust has not offered any arguments or evidence countering
Defendant’s Approved Activity averments, so Veritrust’s position regarding
Professional Services is unavailing. Defendant is entitled to summary judgment
because the state court claims related to activities that were not approved according
to the policy.
D. Viatical Exclusion
Finally, Defendant points to an exclusion within the policy that states, “The
Insurer shall not be liable for Loss in connection with any Claim made against an
Insured . . . m) alleging, arising out of, based upon or attributable to the purchase or
sale of (or failure to purchase or sell) any of the following, or any advice in
connection therewith: . . . 7) viatical products including viatical settlement and
viatical contracts . . . .” Id. at 17-19, 32. Defendant notes that Plaintiffs’ complaint
against Veritrust in the underlying state suit alleged, “This action arises out of,
among other things, agreements between the parties over viatical investments for
the Plaintiffs and the payment and application of premiums thereto to sustain the
underlying life insurance policies.” (Doc. 40-4, p. 3) (emphasis added). As mentioned
above, Veritrust counters that the handling of the viatical premiums is separate
from selling viatical settlements and therefore an administrative activity covered by
the policy. (Doc. 47, p. 7). Veritrust relies on a case from the Ohio Court of Appeals,
Ohio’s intermediate appellate court, and points to the following paragraph from the
opinion in particular:
In George, the profitability of the investment was impacted by the
operation of the enterprise; the investor’s profit depended on Bonanza’s
use of the investor’s outlay of capital to train personnel and market the
product. Investor profit would theoretically increase as a result of
Bonanza’s efforts. By contrast, the only variable that can impact the
profitability of the viatical settlements at issue is the timing of the
death of the insured. To the extent that Glick’s investment outlay paid
for the fees and commissions of appellants and the viatical company,
and for the premiums to maintain the insurance policies, Glick was
merely paying for administrative services and, by purchasing interests
on Glick’s behalf and paying premiums, appellants and/or Liberte
Capital Group were merely fulfilling their reciprocal obligations under
their agreement with Glick. We conclude that a viatical settlement
promoter’s efforts to perform the services it promised does not
constitute the risks of the enterprise under George.
Glick v. Sokol, 777 N.E.2d 315, 319 (Ohio Ct. App. 2002).
This case is distinguishable from Glick. The issue before the Glick Court was
whether viatical settlements were securities under Ohio law. See id. at 317. That
inquiry is starkly different than the straightforward contract interpretation
analysis in this case. Veritrust also directs the Court’s attention to the Consent
Order issued to Howard by the Alabama Securities Commission in which the
Commission allowed Howard to continue paying the premiums on the viatical
settlements even though he did not have the proper licenses to sell viatical
settlements. (Doc. 47-3, pp. 4-5). Veritrust claims this is further proof that
maintaining viatical premiums is an administrative function distinct from selling
viatical settlements. (Doc. 47, p. 8). However, as with the Glick case, the Consent
Order sheds light only on whether the paying of the premiums might be governed
by Alabama securities law and has no bearing on the interpretation of the viatical
exclusion within the insurance policy, which is a matter of contract.
“Arise” is defined as “[t]o originate; to stem (from)” and “[t]o result (from).”
Black’s Law Dictionary 115 (8th ed. 2004). In a recent contract dispute case, the
Supreme Court of Texas recognized that it had equated the “arising out of”
language with “but for” causation when reviewing insurance policies in previous
cases, although the Court implied that “but for” causation was not appropriate
when the standard “would produce a result that is illogical, unreasonable, and
inconsistent with the parties’ expressed intent.” Plains Exploration, 473 S.W.3d at
308-09. The Supreme Court of Texas has also held that, when “a contract of
insurance is susceptible of more than one reasonable interpretation, . . . [t]he court
must adopt the construction of an exclusionary clause urged by the insured as long
as that construction is not unreasonable, even if the construction urged by the
insurer appears to be more reasonable or a more accurate reflection of the parties’
intent.” Nat’l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.
1991). This Court finds that the viatical exclusion provision is clearly unambiguous
and not subject to multiple reasonable interpretations. There is simply no way to
divorce viatical premium payments from “viatical products” without completely
ignoring the “arising out of” language. The Court is reluctant to apply some
complicated securities scheme from Ohio when logic and Texas contract law provide
the clear route. Thus, even if Veritrust could somehow show that it is covered by the
policy, the granting of Defendant’s motion for summary judgment is warranted
based on this exclusion.
E. Veritrust’s Counterargument
Other than Veritrust’s weak parries of some of Defendant’s arguments and
silence on others, Veritrust claims that an “AIG contact person” failed to consider a
policy issued by Lexington Insurance Company in conjunction with the policy issued
by Defendant. (Doc. 47, pp. 1-2, 6-7). In support, Veritrust submitted
correspondence between its attorneys and the contact person. (Doc. 47-2, pp. 1-26).
The Lexington policy would allegedly provide coverage in this instance. (Doc. 47, pp.
6-7). Since Defendant and Lexington Insurance Company are both owned by
American International Group, Inc. (“AIG”), Veritrust argues that the Court should
refuse to apply the coverage requirements and exclusions of the policy issued by
Defendant based on this “bad faith.” Id. This is the first time the Court has been
made aware of AIG’s alleged refusal to consider a policy issued by Lexington
First, it is important to note that there is some confusion as to what party
Plaintiffs and Veritrust sued, at least upon first glance at the pleadings. The
amended complaint and other documents list Defendant as “AIG Property Casualty
Company a/k/a American International Group, Inc., f/k/a Chartis Specialty
Insurance Company.” (Doc. 1-1, p. 4; Doc. 1-2, p. 235). Defendant has repeatedly
asserted in its answers and other filings that “Chartis Specialty is incorrectly
named in the Complaint as AIG Property Casualty Company a/k/a American
International Group, Inc., f/k/a Chartis Specialty Insurance Company.” (Doc. 6, p. 1;
Doc. 7, p. 1; Doc. 41, p. 3). Neither Plaintiffs nor Veritrust has ever taken issue with
this characterization by Defendant. Further, Defendant contends that “American
International Group, Inc. and AIG Property Casualty Company are financial
holding companies . . . [that] did not issue an insurance policy to Veritrust.” (Doc.
41, p. 3). The policy in question lists the insurer as “Chartis Specialty Insurance
Company.” (Doc. 40-21, p. 10). In its response, Veritrust submitted a “Report on
Examination of the Chartis Select Insurance Company” (not to be confused with
Defendant, Chartis Specialty Insurance Company) issued by the Delaware
Department of Insurance. (Doc. 47-1, p. 3) (emphasis added). The report provides a
partial organizational structure of AIG, which shows that Chartis Specialty
Insurance Company is distinct from Lexington Insurance Company and a
subsidiary multiple times removed of American International Group, Inc. Id. at 1314. Veritrust’s response recognizes this hierarchy and appears to concede that
Defendant, and not one of the AIG companies mentioned in the complaint, issued
the Chartis policy. (Doc. 47, p. 6). It is clear that Plaintiffs and Veritrust intended to
sue Defendant and not the AIG companies. Therefore, the refusal of the AIG
employee to consider the Lexington policy has no bearing on Defendant’s liability.
This allegation might be pertinent if AIG and Lexington Insurance Company were
parties in this case, but they are not. The Court is unaware of any law that could be
applied to hold Defendant liable for another insurance company’s denial of coverage
under an insurance policy issued by that company.
Even if the complaint could somehow be read to have named the AIG
companies as defendants, Veritrust has not put forth any agency, piercing of the
veil, or other legal theory that would allow the Court to impute any potential
liability of Defendant or Lexington Insurance Company to the AIG companies. In
fact, Veritrust has not offered any evidence to support its position that it submitted
a claim under the Lexington policy. While Veritrust’s counsel mentioned Lexington
in several emails (Doc. 47-2, pp. 6, 17, 22), the “AIG contact person” explicitly
replied, “If you assert a right to coverage under another policy [other than the
Chartis policy] issued by any other member company of AIG, please submit notice
pursuant to the notice provisions contained in that policy.” Id. at 11. Veritrust has
not shown that it observed this formality for the Lexington policy. Furthermore,
while Veritrust claims that the Lexington policy would provide coverage, it offers no
evidence (e.g., the policy itself) supporting this argument. Veritrust’s contention
that an AIG employee wrongfully refused to consider the Lexington policy which
would have provided coverage is merely a bald assertion unsupported by evidence
and thus not sufficient to prevent the granting of Defendant’s motion for summary
judgment. See Ellis v. England, 432 F.3d 1321, 1326 (11th Cir. 2005).
Defendant’s motion for summary judgment is hereby GRANTED on
Veritrust’s claims. Because Plaintiffs’ claims depend upon Defendant’s
responsibility to Veritrust, see Ala. Code 27-23-2 (LexisNexis 2014), Defendant’s
motion for summary judgment is GRANTED on those claims as well.
DONE and ORDERED this 5th day of April, 2016.
/s/ Callie V. S. Granade
SENIOR UNITED STATES DISTRICT JUDGE
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