State Auto Property & Casualty Insurance Company v. Highland Terrace Council of Co-Owners, Inc. et al

Filing 15

MEMORANDUM AND OPINION by Senior Judge Thomas B. Russell on 5/7/2015; State Autos motion for summary judgment is GRANTED. IT IS FURTHER ORDERED that State Auto is not required to provide a defense for Highland Terrace in the matter of Pitaya, Inc. v. Highland Terrace, No. 14-CI-003575, currently pending in Jefferson Circuit Court. All other motions are moot.cc:counsel (JBM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:14-CV-635-TBR

STATE AUTO PROPERTY &
CASUALTY INSURANCE COMPANY

PLAINTIFF

v.
HIGHLAND TERRACE COUNSEL
OF CO-OWNERS, INC., et al.

DEFENDANTS

MEMORANDUM OPINION
State Auto Property & Casualty Insurance Company (“State Auto”) disputes that it has a
duty to defend Highland Terrace Counsel of Co-Owners, Inc. (“Highland Terrace”) in a lawsuit
that Pitaya, Inc. filed against it in state court. State Auto refuses to defend Highland Terrace,
claiming that Highland Terrace is not covered under its insurance policy. As such, State Auto
brought this declaratory action and moved for summary judgment. Because the policy does not
require State Auto to provide a defense under these circumstances, the motion is granted.
I.
The state court dispute involves Highland Terrace (a condominium regime) and Pitaya
(the owner of a condominium within that regime). It began after Highland Terrace imposed a
$700,000 special assessment for building repairs. Pitaya says that Highland Terrace, through its
board, violated the master deed and by-laws in levying that special assessment. It sued Highland
Terrace in Jefferson Circuit Court, alleging five causes of action: (1) breach of contract; (2)
breach of fiduciary duties and the covenant of good faith and fair dealing; (3) negligent
representation and grossly negligent representation; (4) declaration of rights action and action to
quiet title; and (5) equitable relief. Specifically, the complaint alleges that Highland Terrace: (1)

elected its board of directors in violation of its by-laws; (2) passed the $700,000 special
assessment in violation of the master deed; (3) assessed non-incurred expenses; (4) assessed
more costs than were actually incurred; (5) failed to properly seek remuneration for the
negligence and fraud of a builder and prior Highland Terrace agents; (6) denied Pitaya access to
limited common elements in violation of the by-laws; and (7) failed to maintain a capital
replacement fund in violation of the master deed. DN 9-2, PageID # 194-99. Confronted with
this lawsuit, Highland Terrace turned to its insurer, State Auto, for a legal defense. Citing the
terms of the commercial general liability policy (the “CGL Policy”), State Auto declined.
The CGL Policy provides that State Auto “will pay those sums that [Highland Terrace]
becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to
which this insurance applies.” DN 1-1, PageID # 105, § I, ¶ 1(a). It further states that State Auto
“will have the right and duty to defend [Highland Terrace] against any ‘suit’ seeking those
damages. However, [State Auto] will have no duty to defend [Highland Terrace] against any
‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not
apply.” Id.
It only applies if the “bodily injury” or “property damage” “is caused by an
‘occurrence.’” Id. at § I, ¶ 1(b). “Occurrence” is defined: It “means an accident, including
continuous or repeated exposure to substantially the same general harmful conditions. Faulty
workmanship does not constitute an ‘occurrence,’ however, ‘property damage’ to property other
than ‘your work’ that directly results from faulty workmanship is an ‘occurrence’ under this
policy.” Id. at PageID # 143.
Highland Terrace also points to the “Directors, Officers, and Trustees Liability Coverage
Endorsement” (the “D & O Policy”). The relevant language provides:

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a. [State Auto] will pay on behalf of the named insured all “loss” in excess of the
deductible shown in the Declarations for which the named insured may be
required or permitted to indemnify its directors, officers, or trustees,
individually or collectively, arising out of their “wrongful acts.”
b. [State Auto] will pay on behalf of directors, officers, and trustees “loss”
arising from any claims made against them, individually or collectively, by
reason of their “wrongful acts.”
[State Auto] will have the right and duty to defend any “suit” seeking
“damages” and, at our discretion, investigate any “wrongful conduct” and
settle any “claim” or “suit” that may result . . . .
However, we have no duty to defend “suits” as a result of “wrongful acts” not
covered by this coverage form.
Id. at PageID # 132. The sole issue before the Court is whether State Auto must defend
Highland Terrace under either of those two provisions.
II.
State Auto has moved for summary judgment, which is appropriate where “there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). In analyzing a motion for summary judgment, a court views the
evidence in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255 (1986). But “[t]he mere existence of a scintilla of evidence in support of the
plaintiff’s position will be insufficient; there must be evidence on which a reasonable jury could
return a verdict for the non-moving party.” Id. at 248. The Court must ultimately determine
whether “the evidence presents a sufficient disagreement to require submission to a jury or
whether it is so one-sided that one party must prevail as a matter of law.” Id. The interpretation
of an insurance contract may be properly resolved as a matter of law. See Bituminous Cas. Corp.
v. Kenway Contracting, Inc., 240 S.W.3d 633, 638 (Ky. 2007).
III.

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“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). “[A]n insurer has a duty to defend if there is any
allegation which potentially, possibly or might come within the coverage terms of the insurance
policy.” Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 79 (Ky. 2010) (quotation
omitted). In analyzing the policy, courts must interpret unambiguous provisions according to
their plain and ordinary meaning. York v. Ky. Farm Bureau Mut. Ins. Co., 156 S.W.3d 291, 293
(Ky. 2005); U.S. Fid. & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d 31, 33 (6th Cir. 1988). But
any terms that are susceptible to multiple meanings must be resolved in the insured’s favor.
Stamper v. Hayden, 334 S.W.3d 120, 123 (Ky. App. 2011). “An ambiguity may either appear on
the face of the policy or . . . when a provision is applied to a particular claim.” St. Paul Fire &
Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 227 (Ky. 1994).
There are two policy provisions at issue: (A) the CGL Policy and (B) the D & O Policy.
The Court will address both in turn.1
A.
The language of the CGL Policy is unambiguous. It requires State Auto to provide a
defense when property damage is caused by an “occurrence.” This “means an accident.” DN 13, PageID # 143. “Inherent in the plain meaning of ‘accident’ is the doctrine of fortuity.”
Cincinnati Ins. Co., 306 S.W.3d at 74. “In short, fortuity consists of two central aspects: intent .
. . and control.” Id. “To be fortuitous, harm must be unintentional and also must be caused by a
chance event beyond the control of the insured.” Global Gear & Mach. Co., Inc. v. Capitol
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State Auto’s motion for summary judgment focused entirely on the CGL Policy. The response of
Highland Terrace did not address that argument and instead focused on the D & O Policy. In the interest of
completeness, the Court will address both.

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Indem. Corp., No. 5:07-cv-184-R, 2010 WL 3341464, at *2 (W.D. Ky. Aug. 23, 2010) (citing
Cincinnati Ins. Co., 306 S.W.3d at 74, 76)).
None of the unlawful conduct alleged in Pitaya’s complaint was accidental. The entire
complaint revolves around Highland Terrace’s decision to levy the $700,000 assessment. That
assessment was the intended result of an intentional act by the board. The same is true of the
remaining allegations—unlawfully electing directors, assessing more costs than were actually
incurred, failing to seek recovery from a builder, denying Pitaya access to common areas, and
failing to maintain a replacement fund. All were intentional acts or omissions, not accidents.
They fall outside CGL Policy, so that policy does not require State Auto to provide a defense.
B.
The language from the D & O Policy is also unambiguous. It requires State Auto to “pay
on behalf of directors, officers, and trustees ‘loss’ arising from any claims made against them,
individually or collectively, by reason of their ‘wrongful acts.’” Id. (emphasis added). Here, no
Highland Terrace directors are named as defendants in the state court litigation. There are
therefore no “claims made against them.” The policy also requires State Auto to “pay on behalf
of the named insured all ‘loss’ . . . for which the named insured may be required or permitted to
indemnify its directors, officers, or trustees, individually or collectively, arising out of their
wrongful acts.” DN 1-1, PageID # 132 (emphasis added). But without claims against the
directors, there is no need for indemnification.
Highland Terrace emphasizes the next line in the D & O Policy, which provides that State
Auto has the “duty to defend any ‘suit’ seeking ‘damages’ . . . .” Id. Because the policy defines
“wrongful act” to include acts attributed to both Highland Terrace and its directors, Highland
Terrace argues that it is entitled to a defense in the state court case. But this argument ignores

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another, common-sensical clause: State Auto has “no duty to defend ‘suits’ as a result of
‘wrongful acts’ not covered by this coverage form.” Id. Because Pitaya asserted the state court
lawsuit against Highland Terrace (a corporation) and not the directors (as individuals), State
Auto is not required to provide coverage under the D & O Policy. And because it is not required
to provide coverage, it need not provide a defense.
This result is consistent with the spirit of the D & O Policy. These kinds of policies
“exist to fund indemnification covenants that protect corporate directors and officers from
personal liability, not to protect the corporation by which they are employed.” Med. Mut. Ins.
Co. of Me. v. Indian Harbor Ins. Co., 583 F.3d 57, 59 (1st Cir. 2009). Pitaya sued Highland
Terrace, not its directors. Though the directors, and not the corporation, literally performed the
allegedly unlawful acts, no evidence suggests they could be personally liable in the state court
action. As such, the D & O Policy does not require State Auto to provide a legal defense.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that State Auto’s motion for summary judgment is
GRANTED.
IT IS FURTHER ORDERED that State Auto is not required to provide a defense for
Highland Terrace in the matter of Pitaya, Inc. v. Highland Terrace, No. 14-CI-003575, currently
pending in Jefferson Circuit Court.
All other motions are moot.

May 7, 2015

cc:

Counsel of Record

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