Outdoor Venture Corporation et al v. Philadelphia Indemnity Insurance Company et al
Filing
82
OPINION & ORDER: 1) Owners' motion for summary judgment (DE 54) is GRANTED; 2) Grange's motion for summary judgment (DE 55) is GRANTED; 3) Scottsdale's motion for summary judgment (DE 58) is GRANTED in part and DENIED in part as follow s: a) The motion is GRANTED as to the insureds claim that Scottsdale breached its duty to defend OVC and Egnew; b) The motion is DENIED as to the insureds claim that Scottsdale breached its duty to defend Moncrief in the LEEP action; 4) The insureds& #039; motion for summary judgment (DE 52) is GRANTED in part and DENIED in part as follows: a) The motion is GRANTED as to the insureds claim that Scottsdale breached the duty to defend Moncrief in the LEEP action; b) The motion is otherwise DENIED. Signed by Judge Karen K. Caldwell on 9/27/2018.(RC)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
AT LONDON
OUTDOOR VENTURE CORPORATION,
STEARNS MANUFACTURING,
KENTUCKY HIGHLANDS INVESTMENT
CORPORATION,
J.C. EGNEW, and
L. RAY MONCRIEF
CIVIL ACTION NO. 6:16-cv-182-KKC
Plaintiffs,
V.
OPINION AND ORDER
PHILADELPHIA INDEMNITY
INSURANCE COMPANY,
GRANGE MUTUAL CASUALTY CO.,
SCOTTSDALE INDEMNITY COMPANY,
AUTO-OWNERS INSURANCE
COMPANY, and
OWNERS INSURANCE COMPANY
Defendants.
*** *** ***
This matter is before the Court on the parties’ cross-motions for summary judgment (DE
52, 54, 55, 58). The defendants are all insurance companies. The plaintiffs were insured by
one or more of the insurance companies. With this action, the insureds primarily seek
reimbursement from their insurance companies for the costs they incurred in defending
three lawsuits filed against them.
Pursuant to a conference call with the parties and the Court’s subsequent order (DE 51),
the parties have submitted briefs on the threshold issue of whether the insurance
companies had a duty to defend the insureds in the three lawsuits.
I. Background
The plaintiffs in this matter are three corporations and two individuals who were
officers of the corporations.
The three corporations are Stearns Manufacturing and its successor Outdoor Venture
Corporation (together, “OVC”) and Kentucky Highlands Investment Corporation. (DE 1,
Complaint, ¶ 11.) The two individual plaintiffs are J.C. Egnew and L. Ray Moncrief. During
at least the relevant time, Egnew was the president of OVC. (DE 1, Complaint, ¶4.)
Moncrief was a director of OVC and an officer of Kentucky Highlands (DE 1, Complaint,
¶3.)
The root of this dispute is three lawsuits filed against various of the plaintiffs by a
company called LEEP, Inc. and one of LEEP’s insiders, Roger Blanken. LEEP alleged that
it entered into “joint venture negotiations” with OVC. (DE 52-1, Mem. at 6.) During the
negotiations, Egnew signed on OVC’s behalf a non-disclosure and non-circumvention
agreement (the “NDA”) which prevented OVC from contacting LEEP’s lenders or
customers. (DE 52-1, Mem. at 5.)
Eventually, LEEP and OVC signed a letter of intent which “contemplated the formation
of a new company to manufacture, in Kentucky, steel insulated building panels.” (DE 52-1,
Mem. at 5.) The companies were unable to reach an agreement, however, and negotiations
ceased in August 2012. (DE 52-1, Mem. at 6.)
At the time, LEEP owed more than $7 million to Fortress Credit Corporation and was in
default under the terms of the parties’ financing agreement. (DE 52-1, Mem. at 6.) After
joint venture negotiations between LEEP and OVC ceased, Kentucky Highlands purchased
Fortress’s rights under the financing agreement. Kentucky Highlands then repossessed
LEEP’s assets and sold the assets to plaintiff Stearns Manufacturing, which is a subsidiary
2
of OVC. (DE 52-1, Mem. at 6.) Stearns Manufacturing no longer exists; OVC now owns
Stearns’ assets and liabilities. (DE 52-1, Mem. at 6 n. 5.)
With the three lawsuits underlying this action, LEEP and Blanken asserted that
Kentucky Highlands wrongfully repossessed their assets.
The first lawsuit was brought by LEEP in Jefferson Circuit Court against Kentucky
Highlands, OVC, Egnew, and Moncrief (the “LEEP lawsuit’). With this lawsuit, LEEP alleged
that the insureds had devised a scheme to “force LEEP out of business and to take over
LEEP’s business by virtue of obtaining LEEP’s confidential information and then purchasing
the Fortress note.” (DE 53-3, LEEP Complaint ¶ 94.) LEEP alleged that, after buying the
note, the insureds gave notice of default to LEEP and took possession of LEEP’s facility and
its assets and “took over LEEP’s business and contacted LEEP’s customers, all in an effort to
destroy LEEP and to take over LEEP’s business through unlawful means.” (DE 53-3, LEEP
Complaint ¶¶ 94-97.) LEEP sought $30 million in damages. (DE 52-1, Mem. at 6.)
The second lawsuit was brought by Blanken, who sued Kentucky Highlands and OVC in
this Court. See Blanken, et al. v. Kentucky Highlands Investment Corporation, et al., No.
6:13-47-DLB (E.D. Ky. filed April 22, 2013) (the “Blanken Kentucky action”). With this action,
Blanken asserted that he – not LEEP – owned a major piece of equipment repossessed by
Kentucky Highlands called the Bradbury Roll Forming Machine and, thus, Kentucky
Highlands had wrongfully repossessed it and sold it to OVC. (DE 53-6, Blanken Kentucky
Complaint, ¶¶31, 48.)
The third lawsuit was also brought by Blanken, this time in state court in Pennsylvania
(the “Blanken Pennsylvania action”). In the Pennsylvania action, Blanken again sued
Kentucky Highlands and OVC again asserting that the insureds wrongfully repossessed
certain other inventory that belonged to him, not to LEEP. That action was later removed to
federal court in Pennsylvania, which transferred the case to this Court. See Blanken v.
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Kentucky Highlands Investment Corporation, et al., 6:14-cv-202-DLB (E.D. Ky. Removed
March 7, 2014).
Kentucky Highlands, OVC, Egnew, and Moncrief were insured by at least one of the
defendant insurers in this action: Grange Mutual Casualty Co., Scottsdale Indemnity
Company, or Auto-Owners/Owners Insurance Company (together, “Owners”).1 These
insurers asserted, however, that the claims brought by LEEP and Blanken against their
insureds were not covered under the applicable insurance policies. Grange refused to defend
their insureds at all. Owners offered to defend the insureds under a “reservation of rights”
and appointed counsel to represent them. Scottsdale did the same, except with regard to
Moncrief, who Scottsdale refused to defend at all. (DE 52-1, Mem. at 1.)
The insureds, however, retained their own counsel to represent them. With this action,
they seek reimbursement for the amounts they paid to defend themselves in the three
lawsuits. They assert a breach of contract claim and seek a declaratory judgment that the
insurance companies were obligated to defend them in the underlying actions. They also
assert claims for statutory bad faith and common-law bad faith against Scottsdale and
Grange.
Each of the insurance company defendants assert a counterclaim in which they ask the
Court to declare that they have no duty to reimburse their insureds for the costs incurred in
defending the underlying actions. In addition, Owners asks that Kentucky Highlands be
required to reimburse it for the costs of defending it in the underlying actions. None of the
insurers seek to recover any amounts paid by them to settle the underlying actions. (DE 521, Mem. at 2.)
The insureds’ claims against a fourth insurer, Philadelphia Indemnity Insurance Company, were
voluntarily dismissed by the insureds. (DE 39, Order.)
1
4
The insureds move for partial summary judgment, asking for judgment in their favor
that the insurance companies had a duty to defend them in the underlying actions. Each of
the insurance companies also moves for summary judgment, asking the Court to find that
they had no duty to defend the plaintiffs.
II.
Determining the Duty to defend
Kentucky law on the duty to defend is not completely clear. First, is the oft-quoted
principle that “[t]he insurer has a duty to defend if there is any allegation which
potentially, possibly or might come within the coverage of the policy.” James Graham
Brown Found., Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 279 (Ky. 1991). In
James Graham Brown Found., the Kentucky Supreme Court clearly states the duty to
defend is determined by the “language of the complaint” and not the “merit of the action.”
Id. This means, “Under Kentucky law, a court should determine at the outset of litigation
whether an insurance company has a duty to defend its insured by comparing the
allegations in the underlying complaint with the terms of the insurance policy.” Westfield
Ins. Co. v. Tech Dry, Inc., 336 F.3d 503, 507 (6th Cir.2003).
The insureds argue that a court may go beyond the allegations of the complaint and
“inquire into the underlying facts” to determine whether an insurer has a duty to defend.
(DE 64, Response/Reply at 3.) In making this argument, the insureds cite to the dissent in
an unpublished Kentucky Court of Appeals decision. Kentucky Sch. Boards Ins. Tr. v. Bd. of
Educ. of Woodford Cty., No. 2002-CA-001748-MR, 2003 WL 22520018, at *12 (Ky. Ct. App.
Nov. 7, 2003) (McAnulty, J., dissenting). The majority ruled that the trial court “did not err
in focusing on the nature of the allegations rather than the underlying facts as asserted by
KSBIT.” Id. at *7 (emphasis added).
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This would seem to indicate that the only matters relevant in determining the duty to
defend are the underlying complaint against the insured and the insurance policy.
However, another oft-quoted principle is that, under Kentucky law, in addition to the policy
and the allegations, the Court may also consider the “known facts.” Lenning v. Commercial
Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001). In support of this principle, Lenning cites
the Kentucky Supreme Court’s decision in James Graham Brown Found. In a more recent,
albeit unpublished, decision, the Sixth Circuit made clear that, under Kentucky law, “the
allegations in the complaint do not contain the only relevant facts” in determining the duty
to defend. KSPED LLC v. Virginia Sur. Co., 567 F. App'x 377, 383 (6th Cir. 2014). Instead,
the Court should also consider the “known facts.” Id. In KSPED, the court clarified that the
relevant “known facts” are the facts known to the insurer at the time it declined to defend
its insured. Id.
In KSPED, the issue was the applicability of an exclusion in an insurance policy for
liability arising out of the sale of alcoholic beverages if the insured was in the business of
selling or serving alcoholic beverages. In determining that the exclusion applied, the Sixth
Circuit looked beyond the allegations of the complaint to the facts known to the insurer. The
court noted that, at the time it declined to defend its insured, the insurer had copies of the
concession agreements between the insured and its concessionaires. Id. at 383. Thus, the
court could consider the facts established by those agreement in determining whether the
insured was in the business of selling alcohol.
There is one more thing that the Court should consider in certain policies: the subjective
intent of the insured. This is the holding in James Graham Brown Found. – the same case
that holds that “[t]he insurance company must defend any suit in which the language of the
complaint would bring it within the policy coverage regardless of the merit of the action.”
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James Graham Brown Found., Inc., 814 S.W.2d at 279. In that case, the policy provided that
the insurer would indemnify the insured for “all sums which the insured will become legally
obligated to pay as damages because of. . . property damage. . . caused by an occurrence.” Id.
at 275.
The policy defined an “occurrence” as an “accident . . .which result[s] in. . .property
damage, neither expected nor intended from the standpoint of the insured.” Id. (emphasis
added). The court held, “Whether an insured intended the consequences of its action is
normally a question of fact and not one of law. The determination of whether an insured
expected or intended the damage resulting in the claim is for the jury.” Id. at 276.
“Determination of intent is normally inappropriate for summary judgment.” Id.
Thus, James Graham Brown Found. instructs that determining the duty to defend in
some cases may stray far from merely looking at the allegations of the complaint against the
insured. In a policy providing that damages are covered if they are “neither expected nor
intended from the standpoint of the insured,” determining whether the insurer has a duty to
defend its insured may even require a jury trial.
Later, in Cincinnati Inc. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010), the
Kentucky Supreme Court made clear that the James Graham Brown Found. approach to
determining the duty to defend is limited to policies that explicitly reference the “expectations
and intentions of the insured.” Id. at 78 (“Upon reflection, we now recognize the crucial,
materially different definition of occurrence in this case renders James Graham Brown
Foundation, Inc. of, at most, limited value in determining whether there is an ‘occurrence’ in
the case at hand.”)
At a conference call in this matter, the insurers requested that the Court permit the
parties to brief the threshold issue of whether they had a duty to defend their insureds before
7
permitting the parties to engage in discovery. The insureds argued that discovery was
necessary to determine the “facts known” to the insurers. The Court agreed with the insurers
and ordered the parties to brief the “duty to defend” before engaging in discovery. However,
the Court advised the parties that, if it was unable to determine the duty to defend based
only on the complaints and policies, it would order the parties to engage in discovery.
Thus, in this opinion, the Court will begin by comparing the allegations of the complaint
to the policies to determine if there was any duty to defend. The Court will then determine
the need for any discovery regarding the facts known to the insurer and the intent of the
insureds.
III. Owners’ duty to defend
Owners issued various policies to the plaintiffs. Despite the extensive briefing on these
motions, there is some confusion about the very basic issue of which policies the insureds
claim provided them coverage. The Court will assume that the insureds claim coverage under
the insurance policies attached as exhibits to their motion for summary judgment. There are
three such Owners policies: a businessowners policy covering Kentucky Highlands and its
officers and directors (DE 52-7) and two “executive umbrella” policies, one of which covered
Egnew (52-10) and the other of which covered Moncrief (52-11). Late in their response/reply
brief, the insureds seem to confirm that these are the policies they claim covered them. (DE
64, Response/Reply at 23.)
The Kentucky Highlands businessowners policy covered Kentucky Highlands itself and
its officers and directors, “but only with respect to their duties as [Kentucky Highland’s]
officers or directors.” (DE 52-7, Policy, § C(1)(c).) According to the complaint, Moncrief was a
Kentucky Highlands officer and OVC director during the relevant time period, but Egnew
was president of OVC only. (DE 1, Complaint, ¶¶ 3, 4.) The insureds do not dispute this.
Thus, the businessowners policy covered only Kentucky Highlands and Moncrief.
8
A. The Policy Provisions
Determining the relevant provisions is somewhat confusing here because the policy that
the insureds attach to their motion and address in their briefings consists of 14 pages.
Meanwhile, Owners attaches 148 pages to its motion/response brief, which it identifies as the
“business owners policy.” (DE 53-10 to 53-15.) Within those 148 pages, however, are the same
14 pages that the insureds identify as the businessowners policy. (DE 53-11 at CM-ECF pp.
7-20.) Thus, the Court assumes that the 14-page document is the basic businessowners policy.
There are two additional problems with determining the relevant policy provisions. The
first problem is with the policy declarations. The insureds attach one page labeled
“Businessowners Policy Declarations.” (DE 52-7 at CM-ECF p. 1.) Owners attaches six pages
labeled “Businessowners Policy Declarations.” (DE 53-10 at CM-ECF pp. 2-7;)
The second problem is with the policy “endorsements.” The insureds attach none and do
not discuss any. Meanwhile, Owners attaches pages and pages of endorsements, including
one relevant to this action that will be discussed further below. (DE 53-10 at CM-ECF pp. 810; DE 53-11 at CM-ECF p. 25; DE 53-12 at CM-ECF pp. 1-25; 53-13 at CM-ECF pp. 1-25;
53-14 at CM-ECF pp. 1-25; DE 53-15 at CM-ECF pp. 1-14.)
Looking to the basic 14-page policy, in determining coverage, the place to start is
naturally with the section titled “coverages.” The policy provides coverage for “sums that the
Insured becomes legally obligated to pay as damages because of’ . . . ‘property damage,’
“personal injury,’ or ‘advertising injury’ to which this insurance applies.” (DE 52-7, Owners
KH Policy, § A(1).) Thus, in determining coverage, the policy directs that the Court look at
the kinds of damages or injury alleged in the underlying LEEP and Blanken actions.
The policy defines “property damage” as “physical injury to tangible property, including
all resulting loss of use of that property” or “loss of use of tangible property that is not
physically injured.” (DE 52-7, Owners KH Policy, § F(12).)
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The policy defines “personal injury” to include “wrongful entry into, or eviction of a person
from a room, dwelling, or premises.” (DE 52-7, Owners KH Policy, § F(10)(c).) It is also
defined to include “[o]ral or written publication of material that slanders or libels a person or
organization or disparages a person’s or organization’s goods, products, or services.” (DE 527, Owners KH Policy, § F(10)(d).)
As to advertising injury, the policy applies only to such an injury committed “[i]n the
course of advertising your goods, products or services.” (DE 52-7, Owners KH Policy,
§ A(1)(a)(3).) It includes injuries arising out of the “oral or written publication of material
that slanders or libels a person or organization or disparages a person’s or organization’s
goods, products or services.” (DE 52-7, Owners KH Policy, § F(1)(a).)
These are the relevant coverage provisions. The Court will now look to the allegations of
the LEEP and Blanken actions to determine if they allege “property damage,” “personal
injury” or “advertising injury” as those terms are defined in the policies.
B. The Allegations in the LEEP and Blanken Complaints
The LEEP complaint alleged that it manufactures certain insulated panels that have
been used by the U.S. Marine Corp. and U.S. Army for the construction of buildings. (DE 533, LEEP Complaint.) It alleged that OVC manufactures various outdoor equipment including
military tent systems for the Department of Defense. LEEP alleged that, in 2010, its
representatives met with Egnew, CEO of OVC, to discuss a joint venture with the goal of
preparing a response to a solicitation from the U.S. Army.
LEEP alleged that the parties entered into a memorandum of understanding, which
contained a confidentiality provision. That provision prohibited either party from using the
other party’s confidential or proprietary information for any purpose except for responding
to the Army’s solicitation.
10
Later, LEEP alleged, it and OVC began discussions about creating a new company
together to be called Stearns Manufacturing Corporation. The idea was that OVC would
contribute cash while LEEP would contribute “know-how.” LEEP alleged that, during these
negotiations, it provided certain confidential and proprietary information to Egnew and his
counsel, including information about LEEP’s creditors. One of those creditors was Fortress
Credit Corporation. LEEP alleged that it had negotiated a deal by which it would pay
Fortress $ 1.2 million to settle all its debt.
At some point, LEEP’s president, John Nordstrom, refused to disclose any additional
confidential information until the parties signed a non-disclosure agreement. The parties
signed that agreement in 2011. OVC again agreed to keep LEEP’s confidential and
proprietary information “in strict confidence as a fiduciary and not to make any use
whatsoever at any time [of] such proprietary and confidential information.” (DE 53-3, LEEP
Complaint, ¶42.) It also agreed not to contact any of “LEEP’s creditors or lenders or customers
or suppliers.” (DE 53-3, LEEP Complaint, ¶41.)
LEEP alleged that, in August 2012 – after Kentucky Highlands, Moncrief, Egnew, and
OVC had obtained all the confidential information that they needed to “circumvent LEEP,
strike a better deal with its lender and landlord, and take over LEEP’s business” – Egnew
informed Nordstrom that the deal was off. Then, in December 2012, Kentucky Highlands
informed LEEP that it had purchased Fortress’s rights in its financing agreements with
LEEP, that LEEP was in default under those agreements, and that Kentucky Highlands
intended to take immediate possession of all of LEEP’s property.
LEEP alleged that these events prove that, from early 2012 through December 26, 2012,
“the Defendants conspired, planned, organized, and schemed, to force LEEP out of business
and to take over LEEP’s business by virtue of obtaining LEEP’s confidential information and
then purchasing the Fortress note.” (DE 53-3, LEEP Complaint, ¶94.) LEEP explained that
11
Nordstrom told “the Defendants” about his negotiations with Fortress and then “the
Defendants . . . used that confidential information to approach Fortress to obtain an
assignment of the Note for only $750,000 and then give notice of default to LEEP, demand
over $7 million dollars to be paid immediately, take possession of former LEEP facility . . .
and wrongfully repossess all LEEP assets.” (DE 53-3, LEEP Complaint, ¶95.)
LEEP asserted that Kentucky Highlands “wrongfully entered” LEEP’s landlord’s
premises and took insulated panels and equipment, including a particular piece of equipment
called the Bradbury Roll Forming machine, which is used in the manufacturing of the panels.
LEEP alleged that Kentucky Highlands, using the confidential and proprietary information,
also “wrongfully hired away” LEEP’s key employees, took over LEEP’s business and
contacted LEEP’s customers, “all in an effort to destroy LEEP and to take over LEEP’s
business through unlawful means.” (DE 53-3, LEEP Complaint, ¶97.)
LEEP asserted claims for breach of contract, fraud, tortious interference with various
contracts and with prospective business, breach of fiduciary duty, defamation, conversion,
violations of RICO, and of the Kentucky Uniform Trade Secrets Act (KUTSA) and aiding and
abetting the breach of a fiduciary duty. (DE 53-3, 53-4, 53-8, LEEP Complaints.)
LEEP alleged that the defendants engaged in “intentional conduct” entitling it to punitive
damages. LEEP alleged that the defendants “maliciously breached” their confidentiality
agreements “with the intent to cause financial and economic damage and injury to LEEP.”
(DE 53-4, LEEP Complaint, ¶ 164.)
As to the Blanken actions, in the Kentucky action, Blanken alleged that he, not LEEP,
owned the Bradbury Roll Forming Machine, valued at $750,000, and that he had leased the
equipment to LEEP. He further alleged that, after Fortress assigned its rights under its
financing agreement with LEEP to Kentucky Highlands, he learned that Kentucky
Highlands intended to seize the Bradbury Roll Forming Machine. He alleged that he and
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LEEP both notified Kentucky Highlands that he was the sole owner of the machine and
directed Kentucky Highlands not to seize the machine. Blanken alleged that Kentucky
Highlands nonetheless seized the machine and removed it from LEEP’s facility. Blanken
alleged that Kentucky Highlands then sold the machine to OVC, who wrongfully possessed
it.
Blanken asserted claims against Kentucky Highlands and OVC for tortious interference
with a contract and conversion. Blanken alleged that OVC and Kentucky Highlands engaged
in “intentional conduct,” entitling him to punitive damages. He alleged that these insureds
seized the machine knowing it belonged to Blanken “with the intent to cause financial and
economic damage and injury to Blanken.” (DE 53-6, Blanken Kentucky Action, ¶¶ 88, 92.)
As to the Blanken Pennsylvania action, Blanken again sued Kentucky Highlands and
OVC, with allegations similar to the Kentucky action. This time he alleged that Kentucky
Highlands and OVC wrongfully seized certain additional inventory, despite knowing that
they had no right to it. Blanken asserted that he is the owner of the seized inventory. Blanken
asserted a conversion claim against Kentucky Highlands and a claim for replevin against
Kentucky Highlands and OVC. He alleged that the actions by Kentucky Highlands and OVC
were “extreme and outrageous and demonstrated their intentional, willful, wanton and/or
reckless disregard of the rights of others,” and, thus, entitled him to punitive damages. (DE
78-3, Pennsylvania action, ¶ 49.)
C. Coverage of Kentucky Highlands and Moncrief under the Owners
businessowners policy
Owners had no duty to defend Kentucky Highlands or Moncrief under the businessowners
policy.
The LEEP action does allege that the insureds caused it to suffer “property damage” as
that term is defined under the policy. LEEP alleged that it had a contract with a company
13
called Salzer GmbH to construct buildings but that it was not able to perform under that
contract because the insureds wrongfully seized LEEP’s assets. LEEP alleged that, pursuant
to a contract, Blanken had permitted it to use the Bradbury Roll Forming Machine owned by
Blanken but that the defendants wrongfully seized that equipment, prohibiting LEEP from
using it. LEEP also alleged that it had a business relationship or expectancy with the U.S.
government for the construction of anti-terroristic buildings but that the insureds interfered
with that relationship by improperly seizing equipment that LEEP had the right to use.
Likewise, LEEP alleged that Kentucky Highlands seized LEEP’s insulated panels, damaging
LEEP in its business because the panels were not available for LEEP’s use.
Thus, LEEP alleged that the insureds caused it to suffer the “loss of use of tangible
property,” which is “property damage” for purposes of the Owners policy.
The policy applies only to property damage, however, “[t]hat is caused by an ‘occurrence.’”
(DE 52-7, Owners KH Policy, § A(1)(a)(1)(b).) An “occurrence” is defined as “an accident.” (DE
52-7, Owners KH Policy, §F(9).) The term “accident” is not defined in the policy. In Cincinnati
Ins. Co., however, the Supreme Court of Kentucky held that, “[i]nherent in the plain meaning
of ‘accident’ is the doctrine of fortuity.” Cincinnati Ins. Co., 306 S.W.3d at 74. The doctrine of
fortuity, in turn “consists of two central aspects”: intent and control. Id. As to intent, “a loss
or harm is not fortuitous if the loss or harm is caused intentionally by the insured.” Id.
(brackets omitted). As to control, an accident for purposes of insurance law is a “’chance
event” that is “beyond the control of the insured.” Id. at 76. An insured has no “control” over
an event if it is beyond its power to cause or is within the control of third persons. Id. at 76.
In Cincinnati Ins. Co., the Kentucky Supreme Court determined that a claim against a
homebuilder for faulty construction was not caused by an “occurrence,” or accident. Id. at 71.
The Court of Appeals had determined that the damage was caused by an occurrence because
14
the homebuilder did not intend the damage and, thus, the damage was “undoubtedly
accidental.” Id. at 72. The Kentucky Supreme Court agreed that it was “highly unlikely” that
the homeowner “subjectively intended” to build a substandard house. Id. at 74. But the court
determined that the analysis should not end there. Instead, the court must also look at
whether the homebuilder had control over the building of the home. Id. at 76. Because the
homeowner clearly had control over the construction of the house, its substandard
construction of the home could not have been “a fortuitous, truly accidental, event.” Id.
The kind of property damage that LEEP alleged it suffered was the loss of use of its assets.
LEEP did not allege that this loss was caused by an “accident.” In fact, LEEP did not allege
any “accidental” conduct on the part of the insured. It alleged that each and every action
taken by the insureds was part of a planned, deliberate and organized scheme “to force LEEP
out of business and to take over LEEP’s business.” (DE 53-3, LEEP Complaint, ¶94.)
LEEP alleged that the loss of use of its assets was caused by Kentucky Highland’s
intentional actions of “obtaining LEEP’s confidential information and then purchasing the
Fortress note.” (DE 53-3, LEEP Complaint ¶ 94.) According to LEEP, the insureds “used that
confidential information to approach Fortress to obtain an assignment of the Note for only
$750,000 and then give notice of default to LEEP, demand over $7 million dollars to be paid
immediately, take possession of former LEEP facility without any legal foreclosure action
and wrongfully possess all LEEP assets.” (DE 53-3, LEEP Complaint ¶ 95.) Further, the
actions alleged were completely within Kentucky Highland’s control. Thus, LEEP did not
allege “property damage” for purposes of the policy because it did not allege that the damage
was caused by an “occurrence,” or “accident.”
As for any alleged “personal injury,” the policy defines personal injury to include
“wrongful entry into, or eviction of a person from, a room, dwelling, or premises that the
person occupies.” (DE 52-7, KH Policy, §F(10(c).) LEEP alleged that the insureds wrongfully
15
entered its landlord’s premises and wrongfully locked LEEP out of LEEP’s building in
Somerset, Kentucky. This is “personal injury” under the policy.
Unlike “property damage,” “personal injury” is covered regardless of whether it was
caused by an occurrence/accident. (DE 52-7, KH Policy, §A(1)(a).) And there is no applicable
exclusion. (DE 52-7, KH Policy, §B(1)(p).)
The problem, however, is that one of the endorsements that Owners attaches to its motion
provides that personal injury coverage under the businessowners policy is “deleted” unless
that coverage is “indicated in the Declarations . . . .” (DE 53-14 at CM-ECF p. 11.) “[W]hen a
court construes an insurance policy, it considers the policy's meaning in light of all riders and
endorsements attached to it, and when a conflict arises between an endorsement and another
policy provision, the endorsement controls.” 16 Williston on Contracts § 49:23 (4th ed.)
As to whether personal injury coverage is “indicated in the Declarations” as the
endorsement requires, while Owners and the insureds attach totally different declarations
pages to their motions, both sets of declarations state that personal injury coverage is
“excluded.” (DE 52-7, Policy at CM-ECF p. 1; DE 53-10, Policy at CM-ECF p. 2.)
The term “excluded” is not ambiguous. “The contents of a declarations sheet, or the
declarations page, of an insurance policy is regarded as part of the insurance contract.” 16
Williston on Contracts § 49:25. Further, because the declarations page “is the one page of the
policy likely to be read by the insured, and contains the terms most likely to have been
requested by the insured,” it is “held to define the coverage afforded the insured and to control
over more restrictive terms contained in the body of the policy.” Id.
As unambiguously expressed in the declarations page of the Owners businessowners
policy, personal-injury coverage is excluded.
16
As to “advertising injury,” LEEP alleged that defendant Egnew defamed it. It does not
make this same allegation against Kentucky Highlands or Moncrief. Again, Egnew is not
insured under the businessowners policy.
Thus, looking only to the allegations of the complaint, the businessowners policy did not
provide coverage for any of the damages claimed by LEEP. Owners had no duty to defend
Kentucky Highlands, Moncrief or Egnew in that action.
The outcome is the same regarding Owners’ duty to defend Kentucky Highlands in the
Blanken actions. With both actions, Blanken alleged that Kentucky Highlands took assets
belonging to him, depriving him of the use of those assets. He did not assert any claims
against Moncrief or Egnew in either action.
As discussed, Blanken’s allegation that Kentucky Highlands deprived him of the use of
his assets is “property damage” under the businessowners policy. The next issue is whether
Blanken alleged that the property damage was caused by an “occurrence” as the policy
requires, meaning that the insureds acted with the intent to cause the alleged property
damage and that they had control over the alleged acts leading to the damage.
In both actions, Blanken alleged Kentucky Highlands was notified that the equipment at
issue was not owned by LEEP, the sole debtor under the Fortress financing agreement. Thus,
Blanken alleged that Kentucky Highlands intended the property damage alleged – loss of use
of the assets – and that it had control over the actions leading to that damage. For this reason,
the property damage alleged by Blanken was not covered under the businessowner policy.
D. Coverage of Moncrief and Egnew under the executive umbrella policies.
Moncrief and Egnew also claim coverage under the executive umbrella policies attached
to their motion for summary judgment. (DE 52-10, 52-11, Executive Umbrella Policies.) Those
policies provide that Owners will pay on behalf of the insured “the ultimate net loss in excess
of the retained limit which the insured becomes legally obligated to pay as damages because
17
of personal injury or property damage. . .” (DE 52-10, Executive Policy at 3.) “Personal injury”
is defined to include “wrongful eviction” and “libel, slander, defamation of character.” (DE 5210, Executive Policy at 2.) Property damage is defined as “injury to or destruction of tangible
property. It includes the loss of use of such property.” (DE 52-10, Executive Policy at 2.)
Thus, in determining the duty to defend, the Court must look to the kinds of injuries and
damages that LEEP alleged. Again, Blanken did not assert any claims against Egnew or
Moncrief.
As discussed, LEEP alleged that all the insureds wrongfully entered LEEP’s place of
business and took its assets, depriving LEEP of the use of the assets. This is an allegation of
“property damage” under the executive umbrella policies.
LEEP further alleged that the insureds locked LEEP out of its premises to destroy LEEP’s
business and use its confidential information. (DE 53-3, Complaint ¶98.) It alleged that
Egnew slandered LEEP to a defense contractor and a German purchaser. (DE 53-3,
Complaint ¶159.) These are allegations of “personal injury” under the executive umbrella
policies.
Unlike the businessowners policy, the executive umbrella policies cover these injuries
regardless of whether they were caused by an occurrence/accident. But the policies do exclude
“personal injury or property damage expected or intended by the insured.” (DE 52-10,
Executive Policy at 4.)
As discussed, LEEP’s complaint alleges that the insureds intended to cause the property
damage and personal injury at issue. LEEP alleged a planned, deliberate scheme to destroy
it and take over its business, assets, and customers. It alleged that every action that the
insureds took was part of that scheme. Accordingly, looking only to the allegations of the
complaint, the damages alleged against Moncrief and Egnew are excluded from coverage
under the executive umbrella policies.
18
IV. Grange’s Duty to Defend
Grange issued a commercial policy covering OVC and its executive officers and directors,
“but only with respect to their duties as [OVC’s] officers and directors.” (DE 52-8, Grange
Policy, §II(1)d).) This would include Egnew (OVC’s president) and Moncrief (an OVC
director).
Under the coverage provision of the policy, Grange – like Owners in its businessowners
policy – agreed to pay the sums that its insureds become “legally obligated to pay as damages
because of . . . ‘property damage’” or “personal and advertising injury.” (DE 52-8, Grange
Policy, §I, Coverage A (1)(a), Coverage B(1)(a).)
Also like Owners, Grange agreed to pay only property damage caused by an “occurrence.”
(DE 52-8, Grange Policy, §I(1)(b)(1)). The Grange policy also defines property damage to
include “[l]oss of use of tangible property. . . .” (DE 52-8, Grange Policy, §V(17)). Occurrence
is again defined as an “accident.” (DE 52-8, Grange Policy, §V(13)).
For the reasons discussed with regard to the Owners businessowners policy, while LEEP
and Blanken alleged that the insureds intentionally seized assets, depriving LEEP and
Blanken of their use, they did not allege that the damage was caused by an accident. Instead,
they alleged the insureds intended to deprive them of the loss of use of their assets and that
the actions causing the alleged damages were completely within the insureds’ control. Thus,
looking only to the allegations of the complaints, neither LEEP nor Blanken alleged that the
insureds were liable for “property damage” for purposes of the policy because neither alleged
that the damage was caused by an “occurrence,” or “accident.”
As to “personal and advertising injury,” the Grange policy defines this to include the
“wrongful eviction from” or “wrongful entry into” a “room, dwelling or premises.” (DE 52-8,
Grange Policy, §V(14)(c).) It also includes the “oral or written publication. . . of material that
19
slanders or libels a person or organization or disparages a person’s or organization’s goods,
products or services.” (DE 52-8, Grange Policy, §V(14)(d).)
As discussed, LEEP alleged that the insureds wrongfully entered its landlord’s premises
and wrongfully locked LEEP out of LEEP’s building in Somerset, Kentucky. This is “personal
and advertising injury” under the policy. LEEP also alleged that Egnew slandered LEEP to
one of its customers and a defense contractor. This is also “personal and advertising injury”
under the policy.
Nevertheless, the Grange policy excludes personal and advertising injury “caused by or
at the direction of the insured with the knowledge that the act would violate the rights of
another and would inflict ‘personal and advertising injury.’” (DE 52-8, Grange Policy,
Coverage B, §2(a)). Again, LEEP alleged only intentional conduct by the insureds and alleged
that every action they took, from wrongfully entering LEEP’s premises to contacting LEEP’s
customers, was part of a planned and deliberate scheme to “destroy LEEP and take over
LEEP’s business through unlawful means.” (DE 53-3, LEEP Complaint, ¶¶ 94-97.)
Accordingly, looking only to the allegations of the complaint, the personal injury alleged
by LEEP is not covered under the Grange policy.
The Blanken complaints are asserted against OVC only and do not allege any personal or
advertising injury under the Grange policy.
Accordingly, neither the LEEP nor the Blanken complaints against the insureds allege
property damage or personal injury covered under the Grange policy.
V.
Scottsdale’s Duty to Defend
Like Grange, Scottsdale also insured OVC and its officers and directors, including
Moncrief (an OVC director) and Egnew (President of OVC.) (DE 52-9, Scottsdale Policy,
§B(5).)
20
The Scottsdale policy provides that it must pay the “loss” that its insureds become legally
obligated to pay because of a “claim” made for any “Wrongful Act.” (DE 52-9, Scottsdale
Policy, § A.) “Loss” includes damages, judgments, settlements and “costs, charges and
expenses” incurred by the insureds. (DE 52-9, Scottsdale Policy, § B(7).) Thus, while Owners
and Grange required the Court to look at the kind of “damages” or “injury” alleged by LEEP
and Blanken, the Scottsdale policy requires the Court to focus on the kinds of “claims”
asserted against the insureds. If the underlying actions assert a claim for a “wrongful act,”
then Scottsdale has a duty to defend its insureds, barring any applicable exclusion.
A “wrongful act” is defined as “any actual or alleged error, omission, misleading
statement, misstatement, neglect, breach of duty or act allegedly committed or attempted by
. . . any of the Directors and Officers. . . and the Company.” (DE 52-9, Scottsdale Policy, §
B(9).)
Scottsdale argues that it was not obligated to defend OVC or Egnew in the three
underlying actions because a “wrongful act” does not include intentional acts. Instead, it
includes only negligent acts.
In support of its argument, Scottsdale cites Matthew T. Szura & Co. v. Gen. Ins. Co. of
Am., 543 F. App'x 538, 542 (6th Cir. 2013). In that case, also, the insurance company was
required to defend the insured again claims made for “wrongful acts.” Id. at 542. Interpreting
Michigan law, the court determined that a “wrongful act” under the policy at issue included
only “negligent conduct.” Id. This was because the policy defined a “wrongful act” as “any
actual or alleged negligent act, error or omission, Personal Injury, or Advertising Injury.” Id.
at 541. The court noted that “courts around the nation are in general agreement that a policy
covering ‘negligent acts, errors or omissions’ does not cover intentionally wrongful conduct.”
Id. at 543.
21
Here, however, the policy does not define wrongful acts as only “negligent acts, errors or
omissions.” Instead, the policy defines a wrongful act as “any actual or alleged error,
omission, misleading statement, misstatement, neglect, breach of duty or act allegedly
committed or attempted by” OVC, its directors, or officers. (DE 52-9, Scottsdale Policy §B(9)
(emphasis added). Thus, under its plain language, the Scottsdale policy covers losses caused
by any claim for any act committed by OVC or its officers and directors, including intentional
ones.
Thus, looking to the allegations of the LEEP and Blanken complaints, LEEP and Blanken
asserted claims that fall within the coverage provisions of the Scottsdale policy.
The next issue is whether there are any applicable exclusions. The Scottsdale policy
excludes loss on account of any claim for actual or alleged damage to tangible property
including the loss of use of the property. (DE 52-9, Scottsdale Policy §C(1)(a).) Scottsdale does
not argue, however, that this exclusion is applicable to any claim asserted in the underlying
complaints. Accordingly, the Court will not address it.
Scottsdale does argue, however, that another exclusion is applicable. That exclusion
provides that Scottsdale is not liable for “[l]oss on account of any Claim. . . alleging, based
upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of,
or in any way involving the actual or alleged breach of any contract or agreement; except and
to the extent the Company would have been liable in the absence of such contract or
agreement.” (DE 52-9, Scottsdale Policy, § C(2)(a)).
Though Scottsdale argues this exclusion applies to all insureds, by its plain language, it
applies only to claims against OVC, not to claims against OVC’s officers and directors. (DE
52-9, Scottsdale Policy §C(2) (“Exclusions Applicable Only to Insuring Clause A.3.”)) As to
OVC, however, this exclusion is very broad.
22
Under Kentucky law, just the phrase “arising out of” is to be “construed expansively.”
Capitol Specialty Ins. v. Indus. Elecs., LLC, 407 F. App'x 47, 50 (6th Cir. 2011) (quoting
Hugenberg v. West American Insurance Company/Ohio Casualty Group, 249 S.W.3d 174, 186
(Ky.App.2006)). In Hugenberg, the Kentucky Court of Appeals determined that, where a
policy excludes damages “arising out” an action, “[a]ll that is required is some “[causal]
connection” between the damages and the action. Hugenberg, 249 S.W.3d at 186. “‘[A]rising
out of’ is ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out
of’ or ‘flowing from’ or in short, ‘incident to or having a connection with.’’’ Capitol Specialty,
Ins., 407 F. App’x at 50-51 (quoting Assurance Co. of Am. v. J.P. Structures, Inc., Nos. 95–
2384, 96–1010, 96–1027, 1997 WL 764498, at *5 (6th Cir. Dec. 3, 1997)).
The Scottsdale policy does not just exclude loss on account of any claim “arising out of”
the actual or alleged breach of contract, but more broadly excludes loss on account of any
claim “alleging, based upon, . . . attributable to, directly or indirectly resulting from, in
consequence of, or in any way involving the actual or alleged breach of any contract or
agreement. . . .” (DE 52-9, Scottsdale Policy, § C(2)(a)).
As to the LEEP action, this obviously would exclude coverage for the breach of contract
claims, which allege that OVC agreed in writing and orally not to use LEEP’s confidential
information for any purpose other than for the establishment of a joint enterprise between
LEEP and OVC. (DE 53-3, LEEP Complaint, Counts I, II.) This would also exclude coverage
for the fraud claim, which is also based upon the insureds’ promise that they would not use
LEEP’s confidential information for purposes “other than to determine the details of the
LEEP/OVC joint venture.” (DE 53-3, LEEP Complaint, Count III.)
In fact, this broad exclusion for any claim alleging, based upon, attributable to, directly
or indirectly resulting from, in consequence of, or in any way involving the actual or alleged
23
breach of any contract, would exclude all claims against OVC in the LEEP complaint except
for the tortious interference claims in Count VIII and XIII.
The tortious interference claim in Count IV is based upon the insureds’ use of LEEP’s
confidential information to purchase the financing agreement that authorized the seizure of
LEEP’s assets “in violation of the Non-Circumvention Agreement with LEEP.” (DE 53-4,
LEEP Complaint, ¶ 123.) The tortious interference claims in Count V and IX are based
upon the insureds’ improper seizure of LEEP’s assets and its promise that LEEP’s
confidential information “would not be used” and that the insureds “would not disclose nor
circumvent LEEP in dealing with its lender and with its prospective customers.” (DE 53-4,
LEEP Complaint, ¶ 150). Likewise, the conversion claim (DE 53-4, LEEP Complaint, Count
VI) is based on the insured’s alleged wrongful use of LEEP’s confidential information to
seize LEEP’s assets.
The breach of fiduciary duty claim (Count X) is based on the alleged “special
relationship” that existed between LEEP and the insureds “by virtue of LEEP sharing
confidential and proprietary information” with the insureds “for the purpose of forming a
partnership.” (DE 53-4, LEEP Complaint, ¶ 154.) LEEP alleged that “OVC agreed to hold
LEEP’s proprietary information in strict confidence as a fiduciary.” (DE 53-4, LEEP
Complaint, ¶42.)
Likewise, the claims for injunctive relief (Count XIV) and claims under RICO (Count
XVI) and the Kentucky Uniform Trade Secrets Act (Count XVII) are based on the insureds’
alleged wrongful scheme to use LEEP’s confidential information to seize LEEP’s assets and
facilities and take over LEEP’s business.
All of these claims at least “indirectly result[ed] from” or “in any way involve[ed]” the
“actual or alleged” breach of the agreements between the parties that LEEP’s confidential
24
and proprietary information would only be used only for the establishment of the joint
venture and that the insureds would not approach LEEP’s customers or lenders.
The insureds point out that this exclusion does not apply “to the extent [the insureds]
would have been liable in the absence of such contract or agreement.” (DE 52-9, Scottsdale
Policy, §C(2)(a).) But for each of these claims, LEEP asserts that the insureds’ actions were
wrongful because they allegedly used LEEP’s confidential and proprietary information for
purposes other than the establishment of a joint venture. And LEEP alleged that the
insureds’ use of the information in this way was wrongful because it violated the
confidentiality agreement between the parties.
LEEP alleged that the insureds seized its assets and its facilities pursuant to the
Fortress financing agreement. It did not allege that the insureds’ actions were wrongful
because the financing agreement was invalid. LEEP alleged that the insureds’ seizure of its
assets was wrongful because the insureds violated the confidentiality agreement in order to
purchase the financing agreement. Without the violation of the agreement to not use
LEEP’s confidential information to purchase the financing agreement, OVC would have no
liability on the claims discussed.
Accordingly, all of LEEP’s claims against OVC are excluded from coverage under this
provision except for the tortious interference claims in Count VIII and XIII of the
complaint. The claims in Count VIII and XIII allege that the insureds’ actions were
wrongful, not because they were in violation of any agreement, but because the insureds’
seized equipment pursuant to the financing agreement that did not belong to LEEP.
The request for a declaration of rights contained in Count VII of the complaint is
asserted against Kentucky Highlands only and, thus, is not covered under the Scottsdale
policy. The defamation claim in Count XI is asserted only against Egnew.
25
The breach-of-contract exclusion would also not apply to any of Blanken’s claims
against OVC. Blanken does not assert that OVC acted wrongfully because it violated any
agreement between the parties. In both Blanken actions, he asserts that OVC acted
wrongfully because it seized his assets pursuant to the financing agreement, knowing that
LEEP did not own the assets. These claims would exist even if there were no agreement
between OVC and the insureds.
Alternatively, Scottsdale argues that the claims are barred by the so-called “jointventure exclusion.” (DE 56-2, Mem. at 10.) That exclusion provides that Scottsdale is not
liable for loss on account of any claim “brought or maintained by, on behalf of, in the right
of, or at the direction of . . . any person or entity that is an owner of or joint venture
participant in any Subsidiary in any respect. . . .” (DE 52-9, Scottsdale Policy, § C(1)(e).)
The term “Subsidiary” is bold and capitalized in the policy indicating that it is a defined
term, and Scottsdale sets forth a definition of the term in its memorandum. (DE 56-2, Mem.
at 10.) Scottsdale does not provide a citation as to where this definition is found in the
policy. The policy attached to the insureds’ motion for summary judgment contains no such
definition. Neither does the policy attached to Scottsdale’s motion/response (DE 56-3,
Scottsdale Policy.)
The provision would appear to exclude coverage of any claim brought by a joint-venture
participant in any OVC subsidiary. Scottsdale argues that, looking to the allegations of the
LEEP complaint, LEEP was a joint-venture participant in Stearns, which was a subsidiary
of OVC.
The LEEP complaint alleges that it and OVC discussed creating a new company
together to be called Stearns Manufacturing Corporation, which would manufacture
insulated panels. (DE 53-3, LEEP Complaint, ¶¶35, 45, 50.) LEEP alleged that Stearns
would be 50 percent owned by OVC and 50 percent owned by LEEP. (DE 53-3, LEEP
26
Complaint, ¶82.) Nevertheless, LEEP alleges that, on August 17, 2012, Egnew sent a
message to Nordstrom of LEEP stating that the deal was off because the parties could not
find “common grounds.” (DE 53-3, LEEP Complaint, ¶87.) The complaint alleges that
Stearns was organized on January 18, 2013. (DE 53-3, LEEP Complaint, ¶ 17.) But it does
not allege that LEEP had any ownership in Stearns. Accordingly, the joint ventureexclusion does not apply to the claims asserted by LEEP.
Finally, Scottsdale argues that it has no duty to defend OVC, Egnew or Moncrief because
of the policy’s “other insurance” clause. That clause provides that if any loss is covered under
another insurance policy, then the Scottsdale policy covers the loss “only to the extent that
the amount of the Loss is in excess of the amount of such other insurance. . . unless such
other insurance is written only as specific excess insurance over the Limit of Liability for this
Coverage Section.” (DE 56-3, Scottsdale Policy, § G.) This is true whether the “other
insurance” is “stated to be primary, contributory, excess, contingent, or otherwise.” (DE 563, Scottsdale Policy, § G.)
Scottsdale argues that the Owners businessowners policy covers any losses incurred by
OVC, Egnew and Moncrief. It relies only on the businessowners policy for this argument. It
does not mention the Owners executive umbrella policies covering Egnew and Moncrief. (DE
56-2, Mem. at 13-14.)
Neither OVC nor Egnew, however, was insured under the Owners businessowners policy.
That policy insured only Kentucky Highlands and Moncrief, in his capacity as an officer of
Kentucky Highlands. Thus, the “other insurance” exclusion in the Scottsdale policy does not
exclude coverage for claims against OVC or Egnew. Nor does it exclude coverage for claims
against Moncrief, acting in his capacity as a director of OVC.
Further, as to the LEEP claims against Moncrief, the Court has determined that none of
these claims is covered under the Owners businessowners policy. Accordingly, the “other
27
exclusion” provision of the Scottdale policy does not exclude coverage for LEEP’s claims
against Moncrief.
As to Moncrief in particular, Scottsdale argues it had no duty to defend him because the
claims against him in the LEEP action were unrelated to his role as a director of OVC.
Moncrief was an “insured” under the policy. The policy defines the “Insured” as the “Company
and the Directors and Officers.” (DE 52-9, Scottsdale Policy, §B(5).)
Moncrief
is
a
director of OVC. As discussed, the policy provides coverage only for losses incurred “by reason
of a Claim . . . for any Wrongful Act.” (DE 52-9, Scottsdale Policy, §(A)(1).) Wrongful Act, in
turn, is defined as certain acts committed by the officers and directors, “while acting in their
capacity as such.” (DE 52-9, Scottsdale Policy, §B(9).) Scottsdale argues that the LEEP action
alleged that Moncrief was acting in his capacity as an officer of Kentucky Highlands – not
OVC – with respect to its claims.
The LEEP complaint describes Moncrief as the Vice President of Kentucky Highlands but
also as a director of OVC. (DE 53-3, LEEP Complaint, ¶ 13.) It is true, as Scottsdale points
out, that at times LEEP describes Moncrief as affiliated with Kentucky Highlands. But LEEP
alleges that Moncrief took various actions and it does not always clarify whether he was
acting on behalf of Kentucky Highlands or OVC at the time. Exclusions in an insurance policy
contract should be strictly construed “to make insurance effective.” Kentucky Farm Bureau
Mut. Ins. Co. v. McKinney, 831 S.W.2d 164, 166 (Ky. 1992). Given that Moncrief was affiliated
with OVC and Kentucky Highlands and given the ambiguities in the LEEP complaint
regarding which of the two entities he was representing for the various actions alleged, this
exclusion does not exclude coverage of claims against Moncrief.
VI.
Need for Discovery
Thus far, in determining each insurer’s duty to defend its insureds, the Court has
considered only the allegations of the LEEP and Blanken complaints. This is in keeping with
28
the Court’s conference call at which it was determined that the Court would first rule on the
threshold issue of whether any insurers had a duty to defend and that it would make that
ruling without permitting discovery. The Court advised the parties, however, that it would
order discovery if it found it necessary and appropriate to determine the duty to defend.
Looking only to the allegations of the LEEP and Blanken complaints, the Court has
determined the following:
A. Owners had no duty to defend under the businessowners policy because:
The Owners businessowner policy insured only Kentucky Highlands and Moncrief.
LEEP alleged “property damage” for purposes of the policy but it did not allege
that the property damage was caused by an “occurrence.”
LEEP alleged “personal injury” for purposes of the policy but, pursuant to an
endorsement and the declarations, the policy does not cover personal injury.
Blanken alleged “property damage” against Kentucky Highlands for purposes of
the policy but he did not allege that the damage was caused by an “occurrence.”
Neither Blanken nor LEEP alleged “advertising injury” against Kentucky
Highlands or Moncrief.
B. Owners had no duty to defend Moncrief or Egnew under the Executive
Umbrella Policies because:
LEEP alleged property damage and personal injury for purposes of the policies but
both were excluded under the exclusion for “personal injury or property damage
expected or intended by the insured.”
C. Grange had no duty to defend OVC, Moncrief, or Egnew because:
Grange insured OVC and Moncrief and Egnew.
LEEP and Blanken alleged property damage against the insureds but did not
allege that the damage was caused by an “occurrence.”
LEEP alleged personal injury against the insureds but this injury was excluded
from coverage because LEEP alleged that the insureds knew their alleged acts
would violate LEEP’s rights and would inflict the alleged injury.
Blanken did not allege personal injury against OVC and alleged no claims against
Moncrief or Egnew.
29
D. Scottsdale had a duty to defend OVC only on the claims of tortious
interference contained in Counts VIII and XIII of the LEEP complaint and
also had a duty to defend Moncrief and Egnew from all claims in that action
because:
Scottsdale insured OVC, Moncrief, and Egnew.
LEEP asserted that the insureds were legally obligated to pay loss by reason of
claims for wrongful acts.
All of LEEP’s claims against OVC except for Counts VIII and XIII are excluded
from coverage because they all arose out of, were at least indirectly resulting from
or in some way involved the actual or alleged breach of agreements with LEEP.
This exclusion does not apply to the claims against Moncrief or Egnew.
E. Scottsdale has a duty to defend OVC in the Blanken actions because:
Blanken asserted that OVC was legally obligated to pay loss by reason of claims
for wrongful acts.
As discussed above, however, in addition to the allegations of the complaints, the Court
may also consider the “facts known” to the insurer at the time it declined coverage for its
insured and the “intent” of the insured where a relevant policy provision references the
insured’s intent. The issue is whether discovery into these areas would produce any
information relevant to determining any insurer’s duty to defend in this case.
There is no reason for discovery in this case into the “facts known” to the insurers. The
insureds argue that they did not intend “to violate any legitimate rights of LEEP.” (DE 52-1,
Mem. at 17.) To the extent this means that the insureds deny they undertook any of the
actions alleged in the complaint, the insureds’ denials are not “facts” known to the insurer.
See Nationwide Mut. Ins. Co. v. Gum Tree Prop. Mgmt., L.L.C., 597 F. App'x 241, 245 (5th
Cir. 2015). “A contrary conclusion would allow an insured to ‘trigger the duty to defend merely
by denying the allegations in the complaint.’” Id. (quoting Am. States Ins. Co. v. Natchez
Steam Laundry, 131 F.3d 551, 553 (5th Cir.1998)). The same is true to the extent that the
insureds deny they intended to cause the damage alleged. The denial of intent is not “fact.”
It is only an assertion. Am. States Ins. Co., 131 F.3d at 553.
30
The next issue is whether there is a need for any discovery into the subjective intent of
the insureds. Again, pursuant to James Graham Brown Found., the subjective intent of the
insured is relevant where a policy provision references the insurers’ subjective intent.
Otherwise, the allegations of the complaint control.
There are only two provisions that reference the subjective expectations or intentions of
the insured that the Court has relied on in determining the duty to defend. First, is the
exclusion in the Owners executive umbrella policies for “personal injury or property damage
expected or intended by the insured.” (DE 52-11, Umbrella Policy, Exclusion (d).) This
exclusion is related to LEEP’s claims against Moncrief and Egnew.
Second, is the exclusion in the Grange policy for personal injury or advertising injury that
is “caused by or at the direction of the insured with the knowledge that the act would violate
the rights of another and would inflict ‘personal and advertising injury.’” (DE 52-8, Grange
Policy, Coverage B, §2(a)). This exclusion is related to LEEP’s claims against OVC, Moncrief,
and Egnew for personal and advertising injury.
Again, LEEP did not allege that the insureds took any actions or caused any injury by
accident. It alleged that the insureds intentionally orchestrated a scheme “to force LEEP out
of business and to take over LEEP’s business by virtue of obtaining LEEP’s confidential
information and then purchasing the Fortress Note.” (DE 53-3, LEEP Complaint, ¶ 94.)
LEEP alleged that the insureds used the confidential information to buy the note, declare
LEEP in default, take LEEP’s assets, take possession of LEEP’s facility, and contact LEEP’s
customers “all in an effort to destroy LEEP and to take over LEEP’s business through
unlawful means.” (DE 53-3, LEEP Complaint, ¶¶ 94-97.)
Assuming that the insureds undertook the actions alleged in the LEEP complaint, they
necessarily intended the alleged injury: depriving LEEP of the use of its assets, locking LEEP
out of its premises, and defamation. Accordingly, no discovery into the insureds’ subjective
31
intent is necessary. Whether the insureds actually took the actions alleged and whether any
actions or the results of their actions were actually wrongful goes to the merits of the
complaint and is irrelevant in determining coverage. James Graham Brown Found., Inc., 814
S.W.2d at 279.
The insurers cite Standard Const. Co. v. Maryland Cas. Co., 359 F.3d 846 (6th Cir. 2004)
In that case, the insured’s subcontractor dumped construction debris onto a homeowner’s
land, believing that it had a signed release from the homeowner permitting it to do so. The
homeowner asserted a trespass claim against the insured and the question was whether the
damages from the trespass were caused by an “accident.”
Interpreting Tennessee law, the Sixth Circuit held that the dumping was an “accident.”
The Court reasoned that, “while the dumping was intentional, the fact that it was done
without permission, thus making it wrongful was not intended by the insured.” Standard
Const. Co., 359 F.3d at 850. The insureds argue that this case stands for the proposition that
“an intentional act undertaken with a mistaken belief that it was authorized can be an
accident.” (DE 52-1, Mem. at 19.)
As will be explained further below, Standard Const. Co. is contrary to Kentucky law.
Regardless, the case would not call for discovery into the insureds’ intent in this case. LEEP
did not allege that the seizure of its assets was wrongful because it was not “authorized.”
LEEP alleged that the insureds’ seizure of its assets was wrongful because the insureds
seized the assets by obtaining LEEP’s confidential information and by using that information
to purchase the Fortress note, all in violation of the agreement between the parties that
restricted the use of the information and prohibited contact with LEEP customers and
lenders. (DE 53-3, LEEP Complaint¶¶ 94-96.)
LEEP did not allege that the insureds did not have authority to seize the assets under
the financing agreement. It alleged that they did not have authority to purchase the financing
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agreement because they did so by violating the terms of the agreement between the parties.
Whether the insureds’ purchase of the Fortress note and subsequent actions actually
breached the agreement between the parties goes to the merits of the LEEP action and, as
discussed, is irrelevant in determining coverage.
Further, Standard Constr. Co. was decided under Tennessee law. In that case, like the
Grange and Owners policies, the policy’s coverage provision included property damage caused
by an occurrence. Also like the policy at issue here, the policy defined occurrence as an
“accident.” In determining whether the property damage was caused by an occurrence, the
court applied Tennessee law and focused solely on the insurer’s intent. This is contrary to
Kentucky law. As discussed, pursuant to Cincinnati Ins. Co., Kentucky law also requires
consideration of whether the acts leading to the damage were within the insurer’s “control.”
Cincinnati Ins. Co., 306 S.W. 3d at 76 (“So focusing solely upon whether Elite intended to
build a faulty house is insufficient. Rather, a court must also focus upon whether the building
of the Mintmans' house was a ‘chance event’ beyond the control of the insured.”)
Where a policy, like that at issue in Standard Constr. Co. and like the Grange and Owners
policies, covers only damages caused by an “accident,” the insured’s “intent, or lack of intent,
to cause injury. . . does not determine whether the policy provides coverage.” Liberty Mut.
Fire Ins. Co. v. Harris, 513 F. App'x 563, 565 (6th Cir. 2013). In James Graham Brown
Found., the subjective intent of the insured mattered but that was because the definition of
“occurrence” in that case included “the expectations or intentions of the insured.” Id. Later,
in Cincinnati Insurace Co., the Kentucky Supreme Court made clear that it was this
distinction in the definition of “occurrence” that permitted a “broad, subjective standard.”
Cincinnati Ins. Co., 306 S.W.3d at 77-78. See also Liberty Mut. Fire Ins. Co., 513 F. App’x at
565.
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With a policy, like that of Grange and Owners, that covers damages caused by an
“occurrence” defined simply as an “accident” without reference to the insured’s subjective
expectations and intentions, “where either intent or control is present, the event is not an
accident. In fact, in Cincinnati Ins., the Kentucky Supreme Court found no intent, but
control, and concluded that the event at issue was not an accident.” Liberty Mut. Fire Ins. Co.
v. Harris, No. 3:10-CV-582-H, 2011 WL 1157745, at *3–4 (W.D. Ky. Mar. 28, 2011) (emphasis
added), aff'd, 513 F. App'x 563 (6th Cir. 2013); See Cincinnati Ins. Co., 306 S.W.3d at 74-76.
Accordingly, there is no need for discovery into the subjective intent of the insureds with
regard to the Grange and Owners policy provisions covering only property damage caused by
an “occurrence.”
VII.
Whether Scottsdale complied with its duty to defend by appointing
counsel to represent OVC and Egnew
For the reasons discussed, neither Grange nor Owners had a duty to defend their insureds
in the Blanken or LEEP actions. Scottsdale, did, however, have a duty to defend OVC,
Moncrief, and Egnew in the LEEP action and to defend OVC in the Blanken action. Scottsdale
sent OVC and Egnew a reservation of rights letter and appointed counsel to represent them.
It did not appoint counsel to represent Moncrief. The counsel that Scottsdale appointed to
represent OVC and Egnew was different than the counsel that represented Scottsdale on the
coverage issue.
Nevertheless, OVC and Egnew retained their own independent counsel to represent them
in the LEEP and Blanken actions. In their motion, the insureds argue that Scottsdale’s duty
to defend includes the duty to pay for the independent counsel they retained.
At the conference call in this matter, it was decided that the Court would first decide the
threshold issue of whether the insurers had a duty to defend their insureds under the
allegations of the complaint and whether any discovery on the issue was necessary.
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Nevertheless, both Scottsdale and the insureds have also briefed the issue of whether
Scottsdale was required to pay for the independent counsel retained by their insureds.
Accordingly, the Court will resolve that issue in these motions.
OVC and Egnew argue that Scottsdale must pay for the independent counsel they
retained because the “possible outcomes in the Underlying Cases could have materially
affected the coverage outcomes.” (DE 52-1, Mem. at 27.) It argues that, in such cases, there
would be “subtle incentives” for the insurer’s appointed counsel “to favor the insurer in every
decision . . . .” (DE 52-1, Mem. at 27.)
The insureds concede that there is no decision from a Kentucky court supporting this
position. Nevertheless, they cite a tentative draft provision of the Restatement of Liability
Insurance, which provides that, when “there are facts at issue that are common to the legal
action for which the defense is due and to the coverage dispute, such that the action could be
defended in a manner that would benefit the insurer at the expense of the insured, the
insurer must provide an independent defense of the action.” Restatement of the Law of
Liability Insurance § 16 Tentative Draft No. 1 (March 21, 2016).
As discussed, however, under Kentucky law, the duty to defend is determined by 1) the
allegations of the complaint; 2) the “facts known” to the insurer at the time it declined
coverage; and 3) where a policy provision makes it relevant, the subjective intent of the
insured. OVC and Egnew do not explain how the outcomes of the underlying litigation could
have been defended in a manner that would affect any of these factors.
“For independent counsel to be required, the conflict of interest must be ‘significant, not
merely theoretical, actual, not merely potential.’” Fed. Ins. Co. v. MBL, Inc., 160 Cal. Rptr.
3rd 910, 920 (Cal. Ct. App. 2013) (quoting Dynamic Concepts, Inc. v. Truck Ins. Exchange, 61
Cal. App. 4th 999, 1007 (Cal. Ct. App. 1988)). The insureds point to no actual conflict. Instead
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they argue that merely “potential conflicts required the insurance companies to pay for
independent counsel.” (DE 52-1, Mem. at 33.)
Facing a similar argument, the Fourth Circuit determined that it was “unable to conclude
that the Supreme Court of South Carolina would profess so little confidence in the integrity
of the members of the South Carolina Bar. Rigorous ethical standards govern South Carolina
attorneys.” Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., 433 F.3d 365,
373 (4th Cir. 2005). There, the court determined that the South Carolina Rules of
Professional Conduct and the possibility of sanctions, public reprimand or disbarment
coupled with “the threat of bad faith actions or malpractice actions if a lawyer violates these
rules, provide strong external incentives for attorneys to comply with their ethical
obligations.” Id.
It is also unlikely that the Kentucky Supreme Court would presume that insurance
defense counsel will behave unethically. Thus, the Court is unable to find that Kentucky
courts would require that insurers pay for independent counsel anytime there is a potential
conflict between a coverage issue and the merits of the underlying litigation.
Scottsdale complied with its duty to defend OVC and Egnew by appointing counsel to
represent them in the LEEP and Blanken actions. However, Scottsdale breached its duty to
defend Moncrief in the LEEP and Blanken actions.
VIII. Conclusion
For all these reasons, the Court herby ORDERS as follows:
1) Owners’ motion for summary judgment (DE 54) is GRANTED;
2) Grange’s motion for summary judgment (DE 55) is GRANTED;
3) Scottsdale’s motion for summary judgment (DE 58) is GRANTED in part and
DENIED in part as follows:
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a) The motion is GRANTED as to the insureds’ claim that Scottsdale breached its
duty to defend OVC and Egnew;
b) The motion is DENIED as to the insureds’ claim that Scottsdale breached its duty
to defend Moncrief in the LEEP action; and
4) The insureds’ motion for summary judgment (DE 52) is GRANTED in part and
DENIED in part as follows:
a) The motion is GRANTED as to the insureds’ claim that Scottsdale breached the
duty to defend Moncrief in the LEEP action; and
b) The motion is otherwise DENIED.
Dated September 27, 2018.
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