Colony National Insurance Company v. Sorenson Medical, Inc. et al

Filing 135

MEMORANDUM OPINION & ORDER: Plaintiff's motion for summary judgment on defendants' counterclaims for bad faith 124 is GRANTED. A separate judgment shall enter in due course. Signed by Judge William O. Bertelsman on 7/30/2015.(TJZ)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON

CIVIL ACTION NO. 2010-74 (WOB)
COLONY NATIONAL INS. CO.
VS.

PLAINTIFF

MEMORANDUM OPINION AND ORDER

SORENSON MEDICAL, INC.,
ET AL.

DEFENDANTS

This matter is before the Court on plaintiff’s motion for
summary

judgment

(Doc. 124).

on

defendants’

counterclaims

for

bad

faith.

The Court previously heard oral argument on this

motion, after which it took the matter under submission.
Having further reviewed the record, the Court now issues
the following Memorandum Opinion and Order.
Factual and Procedural Background
A. The Insurance Policies at Issue
Sorenson

Medical,

Inc.

(“SMI”)

manufactured

pain

pumps

which were used, as relevant here, in the shoulders of patients
following surgery.

SMI ceased operations in 2007, but a related

entity — Sorenson Medical Products, Inc. (“SMPI”) — continued
manufacturing and marketing the pain pumps.1

1

The Court will refer to defendants collectively as “Sorenson.”

SMI obtained both primary and excess insurance policies for
the

periods

July

1,

2007

to

July

1,

2008

(the

“Year

One”

policies), and July 1, 2008 to July 1, 2009 (the “Year Two”
policies).2
(“Columbia”),

The primary carrier was Columbia Casualty Company
and

the

excess

Insurance Company (“Colony”).

carrier

was

Colony

National

Both policies had limits of $10

million, and both were “claims made and reported” policies.
The Columbia Year One policy had a per claim deductible of
$25,000.

The Columbia Year Two policy had a $250,000 per claim

deductible.
The Year One Columbia and Colony policies were issued only
to SMI.
The

Year

The Year Two Colony policy was also issued only to SMI.
Two

Columbia

policy,

however,

included

as

insureds

numerous other Sorenson-related entities, including SMPI.3

2

Prior to the expiration of the Year Two policies, SMI purchased
extended reporting provisions under both the Columbia and Colony
policies which extended aspects of the claims-made period to
July 1, 2012.
3

  As it would turn out, the ensuing
defendants Sorenson-related entities
Colony.
Those defendants retained
Stepner, Woltermann & Dusing, PLLC
parties refer to the legal fees and
companies as the “ASWD fees.”
2

pain pump cases named as
which were not insured by
the law firm of Adams,
to represent them.
The
expenses incurred by those

B. The Pain Pump Cases and Coverage Issues
On

February

liability
Sorenson

cases
was

14,

2008,

involving

filed

in

this

the
the

first
pain

court.

of

numerous

pumps

product-

manufactured

Ritchie,

Liquidating, Inc., Cov. Civil Action No. 08-19.

et

al.

v.

by
SMI

Ultimately, a

total of thirty-seven claims were filed in Kentucky, Minnesota,
Utah, California, and Mississippi.
Although these claims spanned the Year One and Year Two
policy

periods,

in

August

2008,

Columbia

determined

that

it

would treat all the shoulder-pump claims as “related” and thus
constituting a single claim under the Columbia Year One policy,
subject to a single $25,000 deductible.

Columbia thus began

paying defense costs for all shoulder-pain-pump claims under its
Year One Policy.
Meanwhile, shortly after Columbia informed Sorenson of its
“related claims” decision, Colony — who had been notified of
some

of

the

Kentucky

pain-pump

cases

reviewing possible coverage issues.
Reitwiesner

authored

a

report

detailing the pain-pump cases.

by

Columbia

—

began

Colony claims adjuster John
dated

September

30,

2008,

Colony also retained outside

coverage counsel.
On November 17, 2008, Colony issued a reservation of rights
letter to Sorenson.

(Doc. 28-36).
3

The letter stated, among

other

things,

that

any

request

for

coverage

was

premature

because the underlying coverage through Columbia had not yet
been exhausted.

The letter also recited other provisions of the

Colony policy, including the “claims first made and reported”
requirement.

Further, the letter stated:

Some of the underlying claims were filed against SMI
Liquidating,
Inc.
f/k/a
Sorenson,
Medical,
Inc.
Please
explain
the
relationship
between
SMI
Liquidating, Inc. and Sorenson Medical, Inc. Argonaut
reserves the right to deny coverage to any entity that
does not qualify as an insured under the Argonaut
policies.
(Id. at 10).

In addition, the letter contained a chart showing

the eight claims for which Colony had received notice, as well
as the approximate claim dates.

(Id. at 3).4

For the next year, Colony continued to monitor the pain
pump cases and review coverage issues.
In early November 2009, a multiple-day mediation of the
Kentucky pain-pump cases was held.

Several of the higher-value

claims were settled and paid by Columbia under its Year One
policy,

including

a

claim

by

Amber

Cornett.5

Reitwiesner

4

These eight claimants were Jessie M. Ritchie, Timothy D.
Varney, Kristen A. Scharold, Gary W. Smallwood, Kathryn Belcher,
Chelsea Zink, Deborah Hansen, and Kent J. Klawer. (Id.).
5

Colony later successfully argued in this action that the
Cornett claim fell outside the coverage grant of Colony’s policy
and did not count towards exhaustion of the Columbia primary
policy.
4

attended the mediation on behalf of Colony.
Sorenson

expressed

claims” position.

its

disagreement

with

At this mediation,
Columbia’s

“related

(Gregory Taylor Depo., Doc. 124-5, at 83).

In late 2009, Colony retained an outside consultant, Jack
Murphy, to evaluate Colony’s obligation to provide coverage to
Sorenson.
A second mediation was scheduled for March 2-4, 2010.
advance

of

remaining

that

estimated

Year One policy.

date,

Columbia

balance

of

tendered

$3.7

million

to

In

Sorenson

under

the

Columbia’s

Columbia also restated its “related claims”

position, advised Sorenson that it would not take the lead at
the

settlement

conference,

and

advised

Sorenson

that,

once

Columbia’s Year One policy was exhausted, it would pass defense
and indemnity obligations for all remaining claims to Colony.
On February 23, 2010, Colony’s counsel wrote a letter to
Sorenson’s counsel, stating its position in anticipation of the
mediation.

(Doc. 129-4).

Colony stated that: Sorenson entities

other than the named insureds would have to contribute to the
settlements; Colony needed to understand Sorenson’s position on
the “related claim” issue in order to know when its policies
would be triggered; and Colony had become aware of possible
misrepresentations in Sorenson’s policy applications.

5

(Id.).

At the March 2010 mediation, the parties disagreed about
which policy should cover Year Two claims that were part of the
proposed settlement.

Columbia, having tendered the remaining

limits of its Year One policy, took the position that its Year
Two policy did not cover the claims.

Sorenson demanded that

Colony fund the portion of the settlements not covered by the
remaining

Columbia

funds.

Ultimately,

several

claims

were

settled with Columbia’s remaining $3.7 million, $3.56 million
from Colony, and $1 million from another carrier that insured a
related Sorenson entity.

The settled claims included those of

Kentucky plaintiffs Spencer Morgan, Cassie Voges, and Jeffrey
Wera.
After

the

March

2010

mediation,

Columbia

and

Sorenson

refused to fund Sorenson’s defense in the numerous pain-pump
cases still pending, and Sorenson argued it would be bad faith
if Colony refused to do so.
Thus, on April 1, 2010, Colony sent another reservation of
rights

letter

to

defendants’

counsel,

identifying “gaps” in the coverage.

for

the

(Doc. 27-15).

first

time

The letter

opened:
Now that Colony National will be funding the defense of
some (but not all) of the Sorenson entities in connection
with certain lawsuits, we write to formally set forth the
reservation of rights under which those costs will be
reimbursed.
6

The letter then set forth specific issues:
1.
Because both the Zink and Cornett claims were made in
the 2007-2008 policy period but not reported to Colony
until the 2008-2009 policy period, and because the Colony
policies are “claims first made and reported” policies,
neither claim triggers a coverage grant. Consequently, the
Cornett settlement payment also does not erode the
underlying limit of the [Columbia] policy for the purpose
of reaching the Colony excess coverage.
2.
Because the [Columbia] underlying policies contain a
“relate back” provision, [Columbia’s] position is that the
many pain pump claims made in the 2008-2009 period “relate
back” and fall within the coverage of the underlying
[Columbia] 2007-2008 policy.
However, the Colony policies
contain no such “relate back” clause.
Therefore, claims
first made and reported in 2008-2009 would be covered only
under the 2008-2009 Colony policy. However, because those
claims are covered only under the 2007-2008 underlying
coverage, they cannot erode the underlying coverage for
purposes of the 2008-2009 Colony excess policy.
(Id.)

The letter summarized these points:
For practical purposes, this means that, if claims “relate
back” under the 2008-09 [Columbia] policy, but not under
the 2008-09 Colony National policy, the insureds have a
substantial gap in coverage for both years.
Unless and
until liability and defense costs – for claims first made
in the 2007-08 or the 2008-09 policy period – exceed $10
million, no Colony National policy is triggered.

(Id.) (emphasis added).
Colony also stated in this letter that it reserved “its
right to decline coverage, withdraw from the defense of these
claims, and/or seek recovery of any payment made.”
7

(Id.).

C. This Litigation and the Utah Case
Colony filed this declaratory judgment action on April 2,
2010, seeking a declaration that it owed no duty to defend or
indemnify the Sorenson defendants in relation to pain-pump cases
filed against them here in Kentucky.

Colony sought rescission

of both its policies due to alleged misrepresentations during
the underwriting process.

In the alternative, Colony sought a

declaration that Year Two claims were covered, if at all, only
under the Year Two policy (i.e., that no claims were “related”).
It also sought a declaration that only those claims both made
and reported to Colony in the same policy period were covered.
In the meantime, on April 19, 2010, Sorenson’s coverage
counsel sent a letter to Columbia in which Sorenson asserted
that Sorenson did not agree that all shoulder-pain-pump cases
were “related claims,” but only that the Kentucky claims were
“related.”
On May 14, 2010, Sorenson filed its answer to the complaint
herein, as well as a counterclaim in which it asserted that
Colony’s “no related claims” position was taken in bad faith.
(Doc. 11).

The same day, Columbia filed a complaint against

Sorenson in federal court in Utah, seeking a declaration that
all shoulder-pump claims were covered only under the Columbia
Year One policy.

(Doc. 124-11).
8

Sorenson answered and asserted

its

position

that

only

the

Kentucky

claims

were

“related.”

(Doc. 124-12 at 9).
Discovery in this case proceeded, and the parties filed
cross-motions for summary judgment on the coverage issues.
D. This Court’s Coverage Opinion
On

December

12,

2011,

this

Court

issued

its

coverage

decision, holding that Colony was estopped from asserting the
defense of rescission and/or had waived the right to assert it.
The Court also held that the Cornett, Morgan, Voges, and Wera
claims were not covered under the policies because they did not
satisfy the “claims made and reported” requirement.

Further,

the claims did not count towards the erosion of the underlying
policy limits, and Colony was not estopped from asserting this
defense.

(Doc. 76).

The Court declined to reach the “related

claim” issue under the Columbia policy, because that issue was
pending before the Utah court.6
This Court’s holding regarding the four non-covered claims
created

what

coverage.

the

parties

refer

to

as

a

further

“gap”

in

That is, since the settlement payments and defense

costs on those four claims did not erode the Columbia Year One

6

Meanwhile, back in Utah, Columbia and Sorenson were briefing
motions for summary judgment.
There, for the first time,
Sorenson took the position that none of the shoulder-pain-pump
claims were “related claims.” (Doc. 124-13).
9

policy, the Colony Year One policy had, in fact, not yet been
triggered.

Thus,

the

$4.2

million

that

Colony

paid

in

settlement and defense of those claims had been premature.
Eight days after this Court issued its coverage decision,
counsel for Colony sent Sorenson’s counsel a letter, stating:


Given the total amount of the settlements and fees
incurred in connection with the Cornett, Morgan, Voges,
and Wera claims — which this Court held were not covered
— Sorenson “must reimburse Colony the approximately 4.375
million that Colony has advanced to date, and incur an
additional $2.68 million in defense and indemnity
obligations [under the Year One policy] before any duty
on the part of Colony is triggered;” (Doc. 87-2 at 3);7
and



Claims made and reported under the Year Two primary
policy are covered (if at all) under that policy and are
subject to a $250,000 per claim deductible.
Thus, “in
addition to demonstrating that they have funded the
uninsured gap recognized by the Court, the Sorenson
entities must establish that both the $10 million
underlying limits and the $250,000 per claim deductible
have been incurred in connection with the [Year Two]
claims
before
the
Colony
policy
is
potentially
triggered.” (Id.).

On

January

13,

2012,

counsel

for

Sorenson

responded,

in

pertinent part, that:


It disagreed with Colony’s calculation of the uninsured
“gap” in coverage because some of the settlement monies
for the four uncovered claims came from sources other
than the underlying carrier.
(Doc. 87-3 at 3);



Even if Colony had some right of reimbursement for funds
it advanced for Year One claims which this Court

7

The parties refer to these amounts as the “uninsured gap.”
10

ultimately
held
were
not
covered
(which
Sorenson
disputes), such a right does not affect or alter Colony’s
obligation to cover Year Two claims. That is, “Sorenson
expects Colony to assume its defense upon the exhaustion
of the [primary] Year Two policy, whether or not the Year
One gap has been funded.” (Id.).

On January 31, 2012, Colony replied that the parties would
have

to

“agree

advanced

sums

to
will

disagree”
be

with

available

regard
to

to

Colony

“whether
as

a

those

setoff

in

connection with any claims covered under the [Year Two] policy
. . .”

(Doc. 87-4 at 1).

During the course of this correspondence, on January 24,
2012, the Supreme Court of Utah issued an opinion holding that
“Utah law does not allow an insurer to seek reimbursement or
restitution
enrichment,”

through
but

an
rather

extracontractual
that

“an

claim

insurer’s

of

unjust

right

to

reimbursement from an insured must be expressly provided in an
insurance policy before it can be enforced.”
Fidelity

and

Guaranty

Co.

v.

United

States

United States
Sports

Specialty

Ass’n, 270 P.3d 464, 468 (Utah 2012).
E. The Utah Federal Decision and Further Settlement Efforts
On November 14, 2012, the federal court in Utah rejected
Columbia’s “related claims” position and held that Sorenson was
entitled to coverage for Year Two claims under the Columbia Year
Two policy, thereby leaving the Colony Year Two excess policy in
11

play once the underlying limits were exhausted.

(Doc. 124-4).

In so doing, the Court specifically found that Columbia had
anticipatorily breached its Year Two policy.
On

March

settlement

28-29,

2013,

conference

in

Magistrate

Utah,

in

(Id. at 29-30).

Judge

advance

of

Wehrman
which

held

a

Columbia

tendered its Year Two policy limits, subject to its right to
further litigate the Utah coverage dispute.

Upon being informed

by Sorenson of this fact, Colony responded on March 27, the day
before the conference:
As concerns the duty to indemnify, Colony remains prepared
to fund [Year Two] claims against its insureds, subject to
the prior reservations, in excess of the per claim SIR, in
excess of the [primary] policy, and in excess of the $4.2
advance/set-off that Colony has already paid. . . . I
understand that we are not in agreement on all aspects of
these issues, but those continue to be our positions.
(Doc. 87-5 at 1) (emphasis added).
The Utah settlement conference was attended by pain-pump
plaintiffs
counsel;

from

Kentucky,

representatives

Sorenson’s counsel.

Utah,
of

and

Colony

other
and

states
its

counsel;

their
and

Ultimately, Sorenson demanded that Colony

pay $1.7 million to resolve six remaining claims.
unwilling to agree.

and

Colony was

First, it wanted a detailed accounting due

to its position that some of the costs had been incurred on
behalf of non-covered Sorenson entities (those not named in then
applicable insurance policies).
12

Colony also believed it was

entitled to a setoff of $1 million for four $250,000 deductibles
that remained unpaid by Sorenson on Year Two claims.

And Colony

believed it was entitled to a $4.2 million setoff for previous
payments

it

made

on

claims

that

this

Court

ruled

were

not

covered.
Colony then offered to fund the settlements on an interim
basis, but only with a non-waiver agreement which would require
Sorenson to reimburse it if Colony later established that it was
not

required

to

pay

under

its

Year

Two

policy.

Sorenson

rejected that suggestion, and the mediation concluded.
From April 2013 forward, Colony and Sorenson continued to
debate,

in

respective

lengthy

correspondence,

positions.

Sorenson

the

asserted

soundness
that

of

Colony

their
had

no

right to reimbursement under Utah law, and, even if it did, such
a

right

arising

under

the

Year

One

policy

would

not

excuse

Colony’s performance of its contractual obligations under the
Year

Two

policy.

(Doc.

88-4)

Sorenson

thus

demanded

that

Colony settle all remaining claims (since the underlying policy
limits

and

deductibles

would

have

been

exhausted

by

the

outstanding settlement offers), but Colony refused, stating that
its reimbursement claim was subject to Kentucky, rather than
Utah, law and was thus valid.

(Doc. 88-5).

Colony further

stated that, regardless of which state’s law was applied, Colony
13

had a contractual right of setoff because Sorenson breached its
contractual obligation to fund claims within its deductibles.
(Id.).
The
allocation

parties
of

also

costs

exchanged

among

insured

information
and

regarding

non-insured

the

entities.

(Doc. 124-22).
F. Sorenson’s Supplemental Counterclaim for Bad Faith
On April 29, 2013, Sorenson filed a motion for leave to
file a supplemental counterclaim for bad faith based on Colony’s
refusal to provide coverage under its Year Two policy beginning
at the March 2013 settlement conference.
25,

2013,

this

Court

granted

the

(Doc. 87).

motion

and

made

On July
several

rulings:


Utah law, rather than Kentucky law, applies to Sorenson’s
counterclaim for bad faith;



Under Utah law, “an insurer’s right to reimbursement from
an insured must be expressly provided in an insurance
policy before it can be enforced.”
U.S. Fidelity and
Guarantee Co. v. U.S. Sports Specialty Ass’n, 270 P.3d
464, 468 (Utah 2012). There is no such express provision
in the Colony policies, and Sorenson’s counterclaims were
thus not futile on this ground.



Colony’s assertion that it had a contractual basis for
reimbursement
based
on
Sorenson’s
failure
to
pay
deductibles under the primary policy for several claims
was erroneous.
As Sorenson noted, it was Columbia that
construed these claims -– wrongfully, as the Utah Court
held -- as “relating back” and falling only within the
Year One primary policy, which carried only a one-time
$25,000 deductible.
14



Finally, Colony could not rely on language in the
Columbia policy that provides for reimbursement. Colony
is not a party to that policy, and any right to
reimbursement held by the primary carrier would not inure
to Colony’s benefit where its own policy –- a separate
contract with Sorenson -– contains no such language.

(Doc. 92).
On

August

29,

2013,

the

parties

participated

settlement conference before the undersigned.
$500,000

to

settle

all

claims,

while

Colony

agreements
Sorenson

and

the

with

the

remaining

and

Columbia,

Court

Sorenson

that

demanded

Sorenson

plaintiffs

assigning

to

them

a

Colony offered

million plus the retention of its bad-faith claims.
informed

in

Sorenson

had

using

$1.5

reached

funds

Sorenson’s

from
rights

against Colony for indemnity for the balance of the agreed-upon
amounts.

Colony acknowledged that the settlement values of the

remaining claims were reasonable, but the parties were unable to
resolve the coverage dispute.
From September 2013 until March 2014, Colony and Sorenson
continued
Colony

to

stated

negotiate
that

it

over
was

their
not

respective

conditioning

obligations.
settlement

on

reimbursement of the $4.2 million but that it did refuse to
advance
entities.

monies

for

fees

(Doc. 124-18).

incurred

by

non-insured

Sorenson

It also stated that it was entitled

to a setoff for the $1 million in deductibles that Sorenson had
not paid under the Columbia Year Two policy.
15

Colony increased

its settlement offer to $750,000, but Sorenson stated that its
demand remained $1.5 million.
Sorenson

also

suggested

that

the

parties

call

a

“wash”

between fees that had been incurred on behalf of non-insured
entities and the $325,000 that a third carrier had contributed
to the Zink settlement, on the theory that that contribution had
inured

to

Columbia

Colony’s

benefit

policy.

suggestion.

(Doc.

by

delaying

124-25).

the

erosion

Colony

of

rejected

the
this

(Doc. 124-26).

In October 2013, Colony sent Sorenson a check for $252,000,
which it said represented the $1.5 million demand less the $1
million in unpaid deductibles and fees incurred on behalf of
non-insured entities.

Colony also agreed to pay $267,000 to

settle the one remaining Kentucky claim (Knochelman).8
In

March

2014,

Magistrate

Judge

Wehrman

held

another

settlement conference among Colony, Sorenson, and five remaining
Utah

claimants.

$395,000,

paid

The
by

Utah

Colony,

claimants
thereby

agreed

resolving

to
all

settle

for

outstanding

claims.
The

parties

conducted

discovery

on

the

bad-faith

counterclaims, and Colony filed the motion for summary judgment
now before the Court.

8

In January 2014, Sorenson agreed to pay its deductible in
Knochelman to resolve that claim.
16

On July 1, 2015, in the Utah federal action, Judge Dee
Benson ruled that Sorenson was required to pay the four disputed
$250,000

deductibles

(Doc. 134 at 70).

under

the

Columbia

Year

Two

policy.

Judge Benson deferred determining whether

Columbia or Colony was entitled to receive that money, pending
the

Court’s

receipt

of

further

information

from

Columbia.

(Id. at 71).
Analysis
A. Utah Law of Bad Faith
As parties to a contract, “the insured and the insurer have
parallel

obligations

obligations

that

to

perform

inhere

in

the

every

contract

in

contractual

good

faith,

relationship.”

Black v. Allstate Ins. Co., 100 P.3d 1163, 1168 (Utah 2004)
(quoting Beck v. Farmers Ins. Exch., 701 P.2d 795, 801 (Utah
1985)).

This

contemplates,
diligently

“implied
at

obligation

the

investigate

very
the

of

least,
facts

to

good
that

faith
the

enable

it

performance

insurer
to

will

determine

whether a claim is valid, will fairly evaluate the claim, and
will

thereafter

act

settling the claim.”

promptly

and

reasonably

in

rejecting

or

Id.

Further, in the third-party context such as this, “claims
submitted by third parties must be diligently investigated to
determine their validity and then reasonably evaluated in light
17

of

all

the

facts.”

Id.

at

1169.

However,

“this

duty

to

investigate and reasonably evaluate a third-party claim does not
require that the insurer’s evaluation ultimately prove to be
correct.”

Id.

Rather, as the Black court explained:

[W]hether an insurer discharges its duty in these
instances hinges upon whether the investigation and
subsequent resolution of the claim is fair and
reasonable.
This
may
depend
upon
various
considerations, including, for example, the extent and
availability of evidence, whether available evidence
is collected and witnesses are contacted, common
practice in the industry, and clarity of the evidence
with regard to issues of liability.
Id.
Under Utah law, “a breach of contract is not necessary for
a claim of bad faith to arise.”

Colony Ins. Co. v. The Human

Ensemble, LLC, 299 P.3d 1149, 1153 (Utah Ct. App. 2013) (citing
Christiansen v. Farmers Ins. Exch., 116 P.3d 259 (Utah 2005)).
Finally, the Supreme Court of Utah has stated:

“When faced with

a decision as to whether to defend, an insurer is entitled to
seek a declaratory judgment as to its obligations and rights.”
Farmers Ins. Exch. v. Call, 712 P.2d 231, 237 (Utah 1985).
B. Application to Sorenson’s Counterclaims
Sorenson

asserts

three

bases

for

its

bad-faith

claim:

(1) Colony’s delay in seeking rescission of the policies on the
basis

of

misrepresentations

in

the

application

process;

(2) Colony’s means of asserting the “claims made and reported”
18

defense;

and

(3)

its

denial

policy for “unlawful” reasons.

of

coverage

under

the

Year

Two

(Doc. 129 at 43).

a. Rescission
Sorenson
asserting

argues

a

right

misrepresentations
According

to

that

Colony

to

by

not

rescission

Sorenson

Sorenson,

did

this

in

the

action

act

diligently

based

in

on

alleged

underwriting

process.

constituted

bad

faith

on

Colony’s part.
As

support

for

this

argument,

Sorenson

relies

on

this

Court’s holding in the December 21, 2011 coverage opinion that
Colony

was

because

estopped

the

information
concerning

from

company,
that

the

asserting

collectively,

should
accuracy

have
of

put

it

certain

its
was
on

right
in

to

possession

notice

information

of

of

questions

provided

Sorenson in connection with its policy applications.
at 24-30).

rescission

by

(Doc. 76,

The Court stated:

[N]o
reasonable
jury
could
find
that
Colony
acted
reasonably and timely in invoking any right to rescission
that
it
may
have
had
in
regard
to
the
alleged
misrepresentations it now alleges.
In the alternative,
Colony waived any such right by failing, after learning the
above information, to assert that right, instead extending
the policy and collecting further premiums.
Id. at 29.
This

finding

in

the

estoppel

context,

however,

cannot

necessarily be bootstrapped into creating a triable issue as to
19

whether Colony was acting in bad faith by asserting a right to
rescission in this action.

As previously noted, Utah law holds

that an insurer is entitled to seek a declaratory judgment to
determine the parameters of its coverage obligations.

Farmers

Ins., 712 P.2d at 237-38.
Colony’s

claim

for

rescission

presented

a

good

faith,

justiciable claim inasmuch as this Court found that there were
indeed

triable

issues

as

to

whether

Sorenson

certain facts during the underwriting process.
24).

The

Court’s

conclusion

that

Colony

misrepresented
(Doc. 76 at 21,

was

nonetheless

estopped from availing itself of rescission was based on a very
fact-intensive analysis of the information that was available to
Colony as a whole entity.

The Court did not find that any

particular individual made a deliberate decision to refrain from
asserting

a

right

to

rescission

one

must

remember

in

order

to

disadvantage

Sorenson.
Further,
carrier.

that

Colony

is

the

excess

Although it learned of the pain-pump cases in 2008 and

instituted

a

coverage

review

shortly

thereafter,

it

was

not

until just before the March 2010 mediation that the underlying
Columbia policy neared exhaustion, thereby triggering Colony’s
policy

and

its

duty

to

defend.

Consequently,

Colony

sent

Sorenson’s counsel a letter on February 23, 2010, alerting him
20

to

various

coverage

misrepresentations.

issues,

(Doc. 129-4).

including

the

possible

Colony thus acted promptly

once its policy was called into play and alerted its insured to
the possible grounds for rescission.
Thereafter,
which

policies

both

carriers

and

Sorenson

should

cover

certain

Year

disagreed
Two

about

claims,

and

Sorenson threatened Colony with bad-faith claims if it declined
to fund Sorenson’s defense.
declaratory

judgment

Colony thus promptly filed this

action

on

April

2,

2010,

while

in

the

meantime defending Sorenson under a reservation of rights.
Thus, while Colony ultimately did not prevail on its claim
for

rescission,

given

all

the

surrounding

circumstances,

the

record does not contain evidence that would support a reasonable
finding of bad faith based on its assertion of that claim in
this action.
b. “Claims Made and Reported”
Sorenson next argues that Colony acted in bad faith by
failing, until April 2010, to identify specifically four claims
(those of Morgan, Wera, Voges, and Cornett) that were outside
the coverage grant because they were not “made and reported”
within the same policy period.
In its very first reservation of rights letter of November
17, 2008, however, Colony emphasized the fact that its policy
21

was a “claims made and reported” policy.
letter

set

out

the

relevant

policy

(Doc. 28-36).

language

explaining

The
the

nature of this coverage grant, stating: “The Argonaut Policies
only apply to claims first made against Sorenson and reported in
writing during the policy period.

To the extent an underlying

claim was not both first made and reported during the effective
dates of one of the Argonaut Policies, then no coverage will be
provided under that Policy for that claim.”

(Id. at 10-11).

Further, the letter listed the claims for which Colony had
received notice.

(Id. at 3).

Although the Cornett, Morgan,

Wera, and Voges claims had all been filed and served on Sorenson
before July 1, 2008 (the end of the Year One policy period),
they were not listed on this chart.

It thus should have been

obvious to Sorenson that Colony’s records did not reflect that
notice of these claims had been given to Colony in the policy
period in which they were made.
As this Court held in the coverage opinion, an insured has
a duty to read its insurance policy.

(Doc. 76 at 41).

Further,

in Colony Ins. Co. v. The Human Ensemble, LLC, 299 P.3d 1149,
1153 (Utah Ct. App. 2013), the Court of Appeals of Utah held
that an insurer’s duty of good faith does not “extend[] so far
as

to

encompass

an

obligation

to

22

inform

the

insured

of

the

general

type

of

policy

that

the

insured

has

purchased.”

Id. at 1154-55.
Thus, Colony gave Sorenson — who, as this Court has noted,
was by then represented by sophisticated counsel — more than
sufficient information to alert it to the fact that these four
claims

fell

question.

outside

the

coverage

grant

of

the

policy

in

A reasonable jury thus could not find that Colony

acted in bad faith in this regard.
c. Year Two Policy
Sorenson’s final theory of bad faith is based on what it
terms Colony’s “refusal” to provide coverage under the Year Two
policy from the time of the March 2013 settlement conference
until

all

remaining

claims

were

settled

in

March

2014.

Specifically, Sorenson asserts that Colony’s insistence that it
was entitled to reimbursement of $4.2 million that it had paid
in defense and settlement of claims which turned out not to be
covered was contrary to the U.S. Sports decision of the Supreme
Court of Utah, which was issued on January 24, 2012.
It is true that, in advance of the March 2013 mediation,
Colony asserted a right to reimbursement of the $4.2 million.
During

the

mediation,

however,

Colony

also

asserted

other

concerns with paying the $1.7 million demanded by Colony: there
were fees and expenses that were incurred on behalf of non23

insured entities (the “ASWD fees”); Colony wanted an accounting
due

to

the

complexity

of

the

impact

of

the

numerous

prior

settlements, which included both covered and non-covered claims;
and the parties disputed whether Sorenson was obligated to pay
four $250,000 deductibles under the Columbia Year Two policy.9
Indeed, as Colony notes in its reply brief, these additional
issues

had

been

raised

by

Colony

as

far

back

as

2008.

(Doc. 130-3) (chart of correspondence).
Further, Colony offered to fund the remaining settlements
on an interim basis while allowing the parties to continue to
negotiate.

(Doc.

88-5

at

4).

Sorenson

rejected

that

suggestion, the mediation concluded, and the parties continued
to debate their positions.
After

this

Court

rejected

several

of

Colony’s

arguments

about the $4.2 million reimbursement issue — albeit only in the
context of the futility analysis in ruling on Sorenson’s motion
to amend its bad-faith counterclaim — Colony made a $500,000
settlement offer during a conference held before this Court on
August 29, 2013.

Sorenson’s demand remained at $1.5 million

plus the retention of its bad-faith claims.
Thereafter,

Colony

stated

that

it

was

not

conditioning

settlement on reimbursement of the $4.2 million but that it

9

As noted, the Utah court eventually held that Sorenson was
required to pay those deductibles.
24

remained concerned about the other issues.

It also increased

its settlement offer to $750,000, but Sorenson did not change
its demand.

Ultimately, Colony funded a settlement with the

remaining plaintiffs in March 2014.
Colony therefore never made the $4.2 million reimbursement
issue

an

absolute

and

standalone

condition

for

settlement.

Instead, it continued to negotiate, to suggest ways to resolve
disputed

issues,

resolved

all

to

the

increase
claims

its

with

offer.

And

Sorenson

it

paying

ultimately
only

its

deductibles.
Given the unusual nature and complexity of the pain-pump
litigation
insurance

as

a

issues

whole,
as

to

and
the

particularly

primary

and

the

excess

complicated
layers

that

repeatedly surfaced during settlement efforts, the record does
not support a reasonable finding that Colony acted in bad faith
in its treatment of the reimbursement issue, even though its
legal position turned out to be questionable under Utah law.
For all these reasons, the Court concludes that Colony is
entitled to summary judgment on defendants’ counterclaims for
bad faith under Utah law.

25

Therefore, having reviewed this matter, and being otherwise
sufficiently advised,
IT IS ORDERED that plaintiff’s motion for summary judgment
on defendants’ counterclaims for bad faith (Doc. 124) be, and is
hereby, GRANTED.

A separate judgment shall enter in due course.

This 30th day of July, 2015.

26