Auto-Owners Insurance Company et al v. Lake Erie Land Company et al

Filing 121

OPINION AND ORDER: The parties are ordered to file supplemental briefing in support of their cross-motions for summary judgment. 71 87 Both parties shall file their initial brief no later than June 5, 2014 and may file a response to the opposing partys brief no later than June 20, 2014. Signed by Judge Jon E DeGuilio on 5/6/2014.(rmn)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
AUTO-OWNERS INSURANCE
COMPANY, et al.
Plaintiffs,
v.
LAKE ERIE LAND COMPANY, et al.
Defendants.

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Case No. 2:12-CV-184 JD

OPINION AND ORDER
This is an insurance coverage dispute between the insurers Auto-Owners Insurance
Company (“Auto-Owners”) and Property-Owners Insurance Company (“Property Owners,”
collectively the “Insurers”) and the insured Lake Erie Land Company (“LEL”). Now pending
before the Court are cross-motions for summary judgment on one aspect of that dispute: whether
the insurance policies at issue cover an award of punitive damages incurred by LEL in a lawsuit
between LEL and B&B LLC (the “B&B Lawsuit”).1 [DE 71, 87.]
Deciding the cross-motions requires the Court to (1) analyze the insurance policies at
issue, (2) consider whether the actions of the Insurers in the underlying litigation justify the
application of estoppel, and (3) apply Indiana’s public policy regarding the insurability of
punitive damages. The parties disagree at each step of the analysis. The Insurers argue that the
terms of the policies do not provide coverage for an award of punitive damages; LEL disagrees
and also argues, in the alternative, that the Insurers are estopped from denying coverage based on
the Insurers’ actions during the initial B&B Lawsuit. If the Court agrees with LEL on either
contention, the end result would be that the Insurers are responsible for covering the punitive
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Also pending is a motion for oral argument on the cross-motions. [DE 111.]

damages award at issue, unless the Court determines that Indiana’s public policy prohibits the
insurability of the type of punitive damages awarded in the B&B Lawsuit. With respect to that
question, the Insurers argue that Indiana’s public policy prohibits the insurability of a punitive
damages award, unless the punitive damages were assessed on a theory of vicarious liability.
[DE 85 at 5–17; DE 108 at 9–12.] LEL argues that Indiana’s public policy only prohibits
punitive damages that result for “malicious or oppressive conduct.” [DE 72 at 14–16; DE 105 at
11–15.]
While the Court has not yet made any final determination as to the policy construction or
estoppel arguments, the Court currently believes that it is likely that it will need to consider the
insurability of the punitive damages award as a matter of Indiana’s public policy. However, that
task is complicated by at least two layers of uncertainty. First, the nature of the punitive
damages award in the B&B Lawsuit is unclear. Second, Indiana law regarding the insurability of
punitive damages as a matter of public policy in this particular context is also unclear.
With respect to the nature of the punitive damages award, the jury in the second trial
during the B&B Lawsuit considered three claims, as well as a general claim for punitive
damages. The jury returned a verdict in favor of LEL on the claim for trespass, returned a
verdict in favor of B&B on the claim for nuisance (but awarded no damages), and returned a
verdict in favor of B&B on the claim for negligence (and awarded damages in the amount of
$1,760,269.00). [DE 86-8.] The jury also returned a verdict awarding B&B $1,460,044.50 in
punitive damages. [Id.] When instructed on the topic of punitive damages, the jury was
instructed that it could award punitive damages if B&B proved by clear and convincing evidence
that LEL “acted with willful and wanton misconduct, maliciously, fraudulently, oppressively, or
with gross negligence.” [DE 86-9 at 20.]

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The Insurers attempt to portray this award as establishing that LEL (as a corporate entity)
“exhibited willful and wanton misconduct, which justified punitive damages.” [DE 85 at 12.]
LEL attempts to portray the award as most likely awarded because of non-intentional conduct of
LEL. [DE 105 at 15.] While the Court doubts that the award can be fairly characterized as one
based on a theory of vicarious liability (since the jury does not appear to have been instructed on
a theory of vicarious liability), the Court believes both parties overstate the clarity with which the
theory under which the jury awarded punitive damages can be determined. However, at the very
least, it appears to the Court that the jury’s award could be consistent with the jury having found
LEL to be grossly negligent.
With respect to Indiana’s public policy on the insurability of punitive damages, clarity is
equally lacking. When exercising its diversity jurisdiction, this Court must apply the law of
Indiana as it predicts the law would be applied by the Indiana Supreme Court. BMD
Contractors, Inc. v Fid. & Deposit Co. of Md., 679 F.3d 643, 648 (7th Cir. 2012). If the Indiana
Supreme Court has not spoken on the particular issue, then decisions of the intermediate
appellate court will control “unless there are persuasive indications that the state supreme court
would decide the issue differently.” Id. If there are no directly applicable state decisions at all,
then the Court “may consult ‘relevant state precedents, analogous decisions, considered dicta,
scholarly works, and any other reliable data’ that might be persuasive on the question of how the
Indiana Supreme Court would likely rule.” Id. (quoting Pisciotta v. Old Nat’l Bancorp., 499
F.3d 629, 635 (7th Cir. 2007)).
The parties have cited no cases in which the Indiana Supreme Court has spoken on
Indiana’s public policy regarding the insurability of punitive damages in any context, let alone
the context of an award of punitive damages based on gross negligence. The Court has

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conducted its own independent research and found no such cases. Instead, the primary cases on
which the parties rely are cases in which federal courts have attempted to predict how the Indiana
Supreme Court would interpret Indiana’s public policy with respect to the insurability of punitive
damages.
In Norfolk and Western Railway Company v. Hartford Accident and Indemnity Company,
then-Chief Judge Eschbach of the Northern District of Indiana considered the issue of Indiana’s
public policy regarding the insurability of punitive damages and predicted that the Indiana
Supreme Court would prohibit the insurability of punitive damages in cases where “the law
imposes punitive damages upon an insured in order to shape or deter the insured’s conduct.” 420
F. Supp. 92, 95 (N.D. Ind. 1976). The court also predicted an exception to that general rule,
where an employer is held liable for a punitive damage award on the basis of vicarious liability.
Id. The court summarized:
There is, accordingly, a distinction to be made in Indiana law between liability for
punitive damages directly imposed and such liability when vicariously imposed. .
. . In the former case, it would contravene public policy to allow the corporation
to shift to an insurer the deterrent award imposed on account of the corporation’s
own wrongful acts; in the latter case, it would not be inconsistent with public
policy to allow the corporation to shift to an insurer the punitive damage award
when that award is placed upon the corporation solely as a matter of vicarious
liability.
Id. at 96–97.
That decision has been cited with approval by several other courts, including the
Northern District of Indiana, Grant v. N. River Ins. Co, 453 F. Supp. 1361, 1370–71 (N.D. Ind.
1978) (holding insurance coverage was provided for punitive damages awarded on theory of
vicarious liability, but not those directly imposed on an insured); the Southern District of
Indiana, Exec. Builders, Inc. v. Motorists Ins. Cos., No. IP 00-0018-C-T/G, 2001 WL 548391, at
*4–6 (S.D. Ind. Mar. 30, 2001) (holding punitive damages award assessed directly against a
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corporation not insurable under Indiana’s public policy) and Hartford Fire Ins. Co. v. Guide
Corp., No. IP 01-572-C-Y/F, 2005 WL 5899840, at *5–6 (S.D. Ind. Feb. 14, 2005) (holding
criminal asset forfeiture not insurable under Indiana’s public policy); and the Seventh Circuit,
Commercial Union Ins. Co. v. Ramada Hotel Operating Co., 852 F.2d 298, 305 (7th Cir. 1988)
(reversing award of summary judgment where theory on which state court jury awarded punitive
damages was unclear).
Most notably, the Indiana Court of Appeals has adopted the reasoning of Norfolk in
assessing the insurability of an award of punitive damages against a corporation. Stevenson v.
Hamilton Mutual Ins. Co., 672 N.E.2d 467, 474–75 (Ind. Ct. App. 1997). In Stevenson, the
Court of Appeals affirmed the trial court’s grant of summary judgment where “the sole
shareholder/director involved in the management and operation of [the corporation] . . . herself
perpetrated the willful, and malicious acts through her operation of [the corporation] which have
resulted in the punitive damages award.” Id. at 475. While the decision in Stevenson would be
controlling absent persuasive indications that the Indiana Supreme Court would decide the issue
differently, the Court does not find Stevenson to be fully on point with this case. Notably, where
Stevenson spoke of the corporation’s actions as “willful” and “malicious,” the jury’s award of
punitive damages in the B&B Lawsuit is equally consistent with a finding that LEL acted with
gross negligence.
On the question of the insurability of a punitive damages award assessed directly against
a corporation on the theory of gross negligence, the parties have cited no cases applying Indiana
law. The Court, through independent research, has also not located any such cases. However,
many states do distinguish, as a matter of public policy, the insurability of punitive damages
awarded on a theory of intentional action versus punitive damages awarded on a theory of gross

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negligence. See, e.g., S. Farm Bureau Cas. Ins. Co. v. Daniel, 440 S.W.2d 582, 584 (Ark. 1969)
(“Neither can we find anything in the state’s public policy that prevents an insurer from
indemnifying its insured against punitive damages arising out of an accident, as distinguished
from intentional torts.”); Hartford Life Ins. Co. v. Title Guar. Co., 520 F.2d 1170, 1175 (D.C.
Cir. 1975) (applying District of Columbia law; “It is only for the knowledgeable and intentional
wrongdoer that the practice of voiding insurance contracts as being contrary to public policy is
reserved.”); Cont’l Ins. Cos. v. Hancock, 507 S.W.2d 146, 152 (Ky. Ct. App. 1974) (“Even
though punitive damages are allowed solely as punishment and as a deterrent, we do not deem it
against public policy to allow liability therefor to be insured against when the punitive damages
are imposed for a grossly negligent act of the insured rather than an intentional wrong of the
insured.”); Mazza v. Med. Mut. Ins. Co. of N.C., 319 S.E.2d 217, 219 (N.C. 1984) (“Many courts
have allowed recovery of punitive damages for willful and wanton negligence because there
existed a distinction between negligence and intentional torts.”); Harrell v. Travelers Indem. Co.,
567 P.2d 1013, 1021 (Or. 1977) (“But as long as insurance companies are willing, for a price, to
contract for insurance to provide protection against liability for punitive damages to persons or
corporations deemed by them to be ‘good risks’ for such coverage, and as long as liability for
punitive damages continues to be extended to ‘gross negligence,’ ‘recklessness,’ and for other
conduct, ‘contrary to societal interests,’ we are in agreement with those authorities which hold
that insurance contracts providing protection against such liability should not be held by courts to
be void as against public policy.”); Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d
653, 670 (Tex. 2000) (“In response to the certified question, we answer that the public policy of
Texas does not prohibit insurance coverage of exemplary damages for gross negligence in the
workers’ compensation context.”).

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As far as the Court can tell, no court applying Indiana law has ever addressed the
particular distinction between Indiana’s public policy regarding the insurability of punitive
damages awarded directly against a corporation on a theory of intentional action versus on the
theory of gross negligence.2 Additionally, as noted above, the vast majority of the cases
interpreting Indiana’s public policy on the insurability of punitive damages have come from
federal courts predicting how the Indiana Supreme Court would rule on the issue if given the
opportunity.
Given the lack of certainty in this area and the public importance of the question, the
Court believes this question may be appropriate for certification to the Indiana Supreme Court.
Rule 64 of the Indiana Rules of Appellate Procedure states, in part:
The United States Supreme Court, any federal circuit court of appeals, or any
federal district court may certify a question of Indiana law to the Supreme Court
when it appears to the federal court that a proceeding presents an issue of state
law that is determinative of the case and on which there is no clear controlling
Indiana precedent.
Ind. R. App. P. 64(a).
Accordingly, for the reasons stated above, the parties are ordered to file supplemental
briefing in support of their cross-motions for summary judgment. [DE 71, 87.] The
supplemental briefing should cover, at a minimum: (1) any supplemental authority to assist the
Court in predicting how the Indiana Supreme Court would determine whether Indiana’s public
policy prohibits the insurability of an award of punitive damages assessed directly against a
corporation on a theory of gross negligence and (2) the parties’ position as to whether the
question should be certified to the Indiana Supreme Court. Both parties shall file their initial

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In its reply brief, LEL cites cases purporting to show that Indiana courts recognize a distinction between intentional
wrongdoing and gross negligence in an insurance context. [DE 105 at 12.] However, these cases differentiate
between intentional and negligent acts for the purposes of determining coverage under policy terms, and thus
provide little assistance in identifying Indiana’s public policy with respect to the insurability of punitive damages.

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brief no later than June 5, 2014 and may file a response to the opposing party’s brief no later than
June 20, 2014.
SO ORDERED.
ENTERED: May 6, 2014

/s/ JON E. DEGUILIO
Judge
United States District Court

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