Mitchell et al v. State Farm Fire and Casualty Company
Filing
48
MEMORANDUM OPINION re 47 Order on Motion for Summary Judgment. Signed by District Judge Sharion Aycock on 6/29/2011. (kmc)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF MISSISSIPPI
EASTERN DIVISION
ROGER MITCHELL and
BILLIE ANN MITCHELL
PLAINTIFFS
V.
CIVIL ACTION NO. 1:10CV116-SA-JAD
STATE FARM FIRE AND CASUALTY CO.
DEFENDANT
MEMORANDUM OPINION
Before the Court is Defendant State Farm Fire and Casualty Company’s Motion for
Summary Judgment [17]. After reviewing the motion, responses, rules, and authorities, the
Court finds as follows:
FACTUAL BACKGROUND
A. The Current Lawsuit
On January 14, 1997, Aberdeen Auto Sales was incorporated pursuant to the laws of
the State of Mississippi. The corporate documents list Tony L. Owens as the president of
Aberdeen Auto Sales. Plaintiff Billie Ann Mitchell is identified in the corporate documents as
the treasurer and secretary of Aberdeen Auto Sales. It is undisputed that Plaintiff Billie Ann
Mitchell, in her individual capacity and in her capacity as an officer for Aberdeen Auto Sales,
executed a document entitled “Unconditional and Continuing Guaranty in favor of
Automotive Finance Corporation.” On January 17, 2007, Automotive Finance Corporation
instituted a suit against Aberdeen Auto Sales, Inc., Tony Owens, Billie Ann Mitchell, and
Performance Auto Sales, LLC, seeking payment of all sums due and owing to Automotive
Finance Corporations pursuant to the terms of a note executed by Aberdeen Auto Sales and
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the unconditional and continuing guaranty executed by Billie Ann Mitchell and Tony Owens.
On May 16, 2007, Tony Owens filed suit against Aberdeen Auto Sales and Billie Ann
Mitchell, seeking dissolution of the corporate entity known as Aberdeen Auto Sales, and
seeking an accounting against Billie Ann Mitchell for the assets of Aberdeen Auto Sales.
On or about June 28, 2007, both the Automotive Finance and the Owens lawsuits were
presented for defense and indemnification to the Defendant by Plaintiffs’ counsel. Defendant
opened claims under a Homeowners policy of insurance (“HO”) and a Personal Liability
Umbrella policy of insurance (“PLUP”) that it had issued to Roger Mitchell and Billie Ann
Mitchell.1 Defendant undertook an investigation concerning the two suits and determined that
there was a question as to whether there was coverage available for the allegations made in
the two suits against Billie Ann Mitchell. Thus, on July 17, 2007, Defendant issued its
reservation of rights letter advising that it would provide a defense for Billie Ann Mitchell in
both suits while it investigated whether coverage was available. Prior to presenting the two
claims to Defendant, Billie Ann Mitchell had already retained counsel to represent her in both
suits. As such, Defendant agreed to pay the fees of counsel already retained to represent Billie
Ann Mitchell during the pendency of the coverage issues, rather than retaining additional
panel counsel. On October 29, 2007, State Farm denied coverage pursuant to the HO and
PLUP policies of insurance for the claims made in both the Automotive Finance and Owens
lawsuits. Plaintiffs’ counsel in the Automotive Finance suit submitted billing statements for
his representation of Billie Ann Mitchell, and the Defendant paid his fees for such
1
Defendant also insured Roger Mitchell and Billie Ann Mitchell pursuant to various
automobile policies of insurance. However, those policies are not relevant to the present
action, as the Plaintiffs have not brought suit against Defendant seeking coverage pursuant to
those policies.
2
representation during the time the reservation of rights was in effect. It is undisputed that
counsel for Plaintiffs in the Owens case failed to provide the requested bill statements and
invoices to Defendant for the time the reservation of rights was in effect. It is also undisputed
that, as a result, Defendant did not pay for such representation.
On March 25, 2010, Plaintiffs brought suit against Defendant for alleged breach of
contract and bad faith stemming from Defendant’s denial of coverage for claims made against
Plaintiffs in the Automotive Finance and Owens lawsuits.2
Plaintiffs allege (1) that
Defendant’s denial of coverage was wrongful and without arguable basis, and (2) that the
Defendant failed to adequately investigate the claims presented, entitling Plaintiffs to punitive
and extra-contractual damages.
B. Claims Made in the Automotive Finance and Owens Lawsuits
Automotive Finance Lawsuit
The claims in the Automotive Finance lawsuit stem from an alleged failure to pay
monies to Automotive Finance pursuant to the guaranty entered by Billie Ann Mitchell.
Count I of the Automotive Finance complaint is for breach of note and security agreement,
and Count II is for breach of guaranty. Plaintiffs assert that a duty to defend on the part of the
Defendant exists due to the allegations in Count III. The allegations in Count III of the
lawsuit read as follows:
22. COUNT III
23. VICTIMS OF CRIME, DECEPTION AND FRAUD
2
Initially, Plaintiffs alleged that Defendant failed to provide a defense to an
additional lawsuit, Western Surety v. Roger Mitchell, Billie Ann Mitchell, et al. The Court
notes that all of the allegations related to the Western Surety lawsuit have been dismissed. See
Agreed Order [16].
3
27. Paragraphs 2.6 and 4.0 of the Note provide that proceeds received from the
disposition of motor vehicle(s) that were Purchase Money Inventory to AFC
are held in trust for the benefit of AFC and shall be paid to AFC within 48
hours after the disposition (by sale or otherwise) of an item defined as
Purchase Money Inventory.
28. Aberdeen, Owens, Mitchell and Performance misapplied the proceeds of
the sale of motor vehicles, which were Purchase Money Inventory and which
were held in trust by failing to make payment to AFC from said proceeds as
provided in the Note. The specific vehicles sold out of trust are identified on
AFC’s Write OFF Detail Report, attached hereto as Exhibit 4.
29. By misapplying entrusted property and property of a credit institution in a
manner that Aberdeen, Owens, Mitchell and Performance knew was unlawful
and knew involved substantial risk of loss or detriment to AFC, Aberdeen,
Owens, Mitchell and Performance committed criminal deception as that term is
defined by Ind. Code § 35-43-5-3.
30. By transferring the proceeds of the sales in derogation of the Note with
intent to defraud AFC, Aberdeen, Owens, Mitchell and Performance
committed criminal fraud as that term is defined by Ind. Code. § 35-43-5-4.
***
32. AFC has suffered a pecuniary loss as a result of the violations of Ind. Code
§ 35-43-5-4 by Aberdeen, Owens, Mitchell and Performance. Pursuant to Ind.
Code § 34-24-3-1, AFC is entitled to recover from Aberdeen, Owens, Mitchell
and Performance three (3) times AFC’s actual damages from such violations,
which is $307, 388.10, together with attorneys’ fees, interest, and other costs of
collection set out therein.
***
Count III basically alleges that Billie Ann Mitchell misapplied proceeds, sold vehicles out of
trust, misapplied entrusted property and property of a credit institution, and transferred
proceeds of the sales in derogation with the intent to defraud.
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Owens Lawsuit
The claims in the Owens suit seek dissolution of the corporate entity known as
Aberdeen Auto Sales and an accounting of its assets from Billie Ann Mitchell. The relevant
portions of the Owens complaint read as follows:
10.
Plaintiff has requested an accounting from his co-shareholder, Defendant
herein and has not received it nor has he been advised of the location of
corporation property or the receivables that have been collected by her in his
absence.
11.
Plaintiff has attempted to locate property of Aberdeen Auto Sales, Inc. and has
discovered property previously belonging to the Corporation that was allegedly
sold or transferred to them by the husband of Director, Billy Ann Mitchell.3
CLAIM FOR RELIEF
12.
A.) The Directors are deadlocked in the management of the corporate affairs
and are unable to break the deadlock. . . .
B.) The Director in control of the corporation has acted and is acting and will
continue to act in a manner that is illegal, oppressive and fraudulent.
C.) The corporate assets are being misapplied or wasted.
D.) Corporation assets have been sold and not applied to current obligations of
the corporation.
E.) That the assets of the Corporation have been used to pay debts that were
personally guaranteed by the stockholders to the detriment of others holding
3
Plaintiff Billie Ann Mitchell is referred to in the Owens lawsuit as “Billy Ann
Mitchell.”
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legitimate claims against the Corporation that were not personal liabilities of
the stockholders as well.
The Owens lawsuit, as it relates to Plaintiff Billie Ann Mitchell, raises allegations of fraud,
waste, misrepresentation, and misappropriation of funds.
C. The Insurance Policies
The insuring agreement of the HO policy provides:
SECTION IILIABILITY COVERAGES
COVERAGE L – PERSONAL LIABILITY
If a claim is made or a suit is brought against an insured for damages because
of bodily injury or property damage to which this coverage applies, caused
by an occurrence, we will:
1.
pay up to our limit of liability for the damages for which the
insured is legally liable; and
2.
provide a defense at our expense by counsel of our choice. We
may make any investigation and settle any claim or suit that we
decide is appropriate. Our obligation to defend any claim or suit
ends when the amount we pay for damages, to effect settlement
or satisfy a judgment resulting from the occurrence, equals our
limit of liability.
Thus, the HO policy provides insurance for “bodily injury” and “property damage” that is
caused by an “occurrence” that takes place during the policy period, and for which coverage
is not otherwise excluded. The HO policy defines the term “occurrence” as
7.
“occurrence”, when used in Section II of this policy, means an
accident, including exposure to conditions, which results in:
a.
bodily injury; or
b.
property damage; during the policy period. Repeated or
continuous exposure to the same general conditions is
considered to be one occurrence.
6
The insuring agreement of the PLUP, C‐1 provides:
COVERAGES
1.
COVERAGE L PERSONAL LIABILITY
If you are legally obligated to pay damages for a loss, we will pay your net
loss minus the retained limit. Our payment will not exceed the amount shown
on the Declarations as Policy Limits‐ Coverage L‐ Personal Liability.
2.
Defense and Settlement.
a.
We may investigate, negotiate and settle a claim or suit covered
by this policy.
b.
When the claim or suit is covered by this policy, but not
covered by any other policy available to you: (1) we will defend
the suit against you;
The insuring agreement of the PLUP, C‐2 provides:
COVERAGES
COVERAGE L – PERSONAL LIABILITY
If a claim is made or suit is brought against an insured for damages because of
a loss for which the insured is legally liable and to which this policy applies,
we will pay on behalf of the insured, the damages that exceed the retained
limit. The most we will pay for such loss is the Coverage L Limit of Liability,
as shown on the declarations page, regardless of the number of insureds who
may be liable, claims made, or persons injured.
The PLUP, C‐1 provides:
***
6.
“loss” means:
a. an accident, including injurious exposure to conditions,
which results in bodily injury or property damage during
the policy period. Repeated or continuous exposure to the
same general conditions is considered to be one loss; or
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b. the commission of an offense, or series of similar or related
offenses, which result in personal injury during the policy
period.
The PLUP, C‐2 provides defines the term “loss” as:
***
7.
“loss” means:
a.
an accident, including accidental exposure to conditions,
which first results in bodily injury or property damage
during the policy period. Repeated or continuous
exposure to the same general conditions is considered to
be one loss, or
b.
the commission of an offense which first results in
personal injury during the policy period. A series of
similar or related offenses is considered to be one loss.
Thus, in order to fall within the insuring language of the PLUP, the underlying suits must
make some allegation of a “loss” defined as “bodily injury” or “property damage” caused by
an “accident” or “personal injury” caused by an offense.
SUMMARY JUDGMENT STANDARD
Summary judgment is warranted under Rule 56(a) of the Federal Rules of Civil
Procedure when evidence reveals no genuine dispute regarding any material fact and that the
moving party is entitled to judgment as a matter of law. The rule “mandates the entry of
summary judgment, after adequate time for discovery and upon motion, against a party who
fails to make a showing sufficient to establish the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v.
Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986).
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The party moving for summary judgment “bears the initial responsibility of informing
the district court of the basis for its motion, and identifying those portions of [the record]
which it believes demonstrate the absence of a genuine issue of material fact.” Id. at 323, 106
S. Ct. 2548. The nonmoving party must then “go beyond the pleadings” and “designate
‘specific facts showing that there is a genuine issue for trial.’” Id. at 324, 106 S. Ct. 2548
(citation omitted). In reviewing the evidence, factual controversies are to be resolved in favor
of the nonmovant, “but only when . . . both parties have submitted evidence of contradictory
facts.” Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). When such
contradictory facts exist, the Court may “not make credibility determinations or weigh the
evidence.” Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S. Ct. 2097,
147 L. Ed. 2d 105 (2000). However, conclusory allegations, speculation, unsubstantiated
assertions, and legalistic arguments have never constituted an adequate substitute for specific
facts showing a genuine issue for trial. TIG Ins. Co. v. Sedgwick James of Wash., 276 F.3d
754, 759 (5th Cir. 2002); SEC v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1997); Little, 37 F.3d at
1075.
ANALYSIS AND DISCUSSION
“‘In any suit for a breach of contract, the plaintiff has the burden of proving by a
preponderance of the evidence: (i) the existence of a valid and binding contract; and (ii) that
the defendant has broken, or breached it; and (iii) that he has been thereby damaged
monetarily.’” Clifton v. Nationwide Gen. Ins. Co., 2010 WL 3274507, at *3 (S.D. Miss. Aug.
17, 2010) (citing Warwick v. Matheney, 603 So. 2d 330, 336 (Miss. 1992)). In this case, the
Plaintiffs’ breach of contract claim is two-fold. That is, Plaintiffs allege that Defendant
9
breached their contract of insurance by (1) failing to defend and indemnify them for the
claims made in the Automotive Finance and Owens lawsuits, and (2) failing to adequately
investigate the claims. Before the Court considers each allegation, the Court first discusses
Defendant’s summary judgment motion as it relates to Plaintiff Roger Mitchell.
A. Claims Made by Roger Mitchell
Plaintiffs’ Complaint alleges that the underlying lawsuits were brought against both
Roger Mitchell and Billie Ann Mitchell. However, both the Automotive Finance and Owens
lawsuits only name Billie Ann Mitchell as a defendant. Defendant State Farm’s obligation to
defend its insured only applies to those instances where a claim is made or suit is filed against
an insured that is otherwise covered. Given that there were no claims made in the two suits
against Roger Mitchell, the Defendant could not have breached any duty to Roger Mitchell
under either the HO or PLUP policies. For this reason, the Plaintiffs concede in their response
brief that summary judgment should be granted as to Roger Mitchell.
Accordingly,
Defendant’s Motion for Summary is granted as to all claims concerning Roger Mitchell.
B. Duty to Defend Claims Against Billie Ann Mitchell
An insurer “has an absolute duty to defend a complaint which contains allegations
covered by the language of the policy, but it has absolutely no duty to defend those claims
which fall outside the coverage of the policy.” Farmland Mut. Ins. Co. v. Scruggs, 886 So. 2d
714, 719 (Miss. 2004) (citations omitted). “Only if the pleadings state facts which bring the
injury within the coverage of the policy is the insured required to defend.” Shelter Mut. Ins.
Co. v. Brown, 345 F. Supp. 2d 645, 648-49 (S.D. Miss. 2004) (citing Mulberry Square
Productions, Inc. v. State Farm Fire & Cas. Co., 101 F.3d 414, 421 (5th Cir. 1996)).
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Therefore, in determining whether the insurer has a duty to defend the insured, the Court must
“look to the allegations in the underlying state court complaints.” Am. Guar. & Liab. Ins. Co.
v. The 1906 Co., 273 F.3d 605, 610 (5th Cir. 2001) (applying Mississippi law). “The insurer
has a duty to defend when there is any basis for potential liability under the policy.” Cullop v.
Sphere Drake Ins. Co., 129 F. Supp. 2d 981, 982 (S.D. Miss. 2001) (citations omitted).
As noted above, the Automotive Finance lawsuit stems from an alleged failure to pay
monies to Automotive Finance pursuant to the guaranty entered by Billie Ann Mitchell.
Count III of the lawsuit, the only count relevant to this proceeding, alleges that Billie Ann
Mitchell misapplied proceeds, sold vehicles out of trust, misapplied entrusted property, and
transferred proceeds with an intent to defraud. The claims in the Owens suit seek dissolution
of the corporate entity known as Aberdeen Auto Sales and an accounting of its assets from
Billie Ann Mitchell. As it relates to Plaintiff Billie Ann Mitchell, the Owens suit raises
allegations of fraud, waste, misrepresentation, and misappropriation of funds.
It appears undisputed that the HO policy provides insurance for “bodily injury” and
“property damage” that is caused by an “occurrence” that takes place during the policy period,
and for which coverage is not otherwise excluded. It also appears to be undisputed that in
order to fall within the insuring language of the PLUP the underlying suits must make some
allegation of a “loss” defined as “bodily injury” or “property damage” caused by an
“accident” or “personal injury” caused by an offense. The Plaintiffs appear to concede that
neither the Automotive Finance lawsuit nor the Owens lawsuit contain allegations of “bodily
injury” or some other “personal injury” as defined in the insurance policies. Instead, the
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Plaintiffs’ entire argument in this case hinges on the meaning of the term “property damage.”
The HO and PLUP policies define property damage as:
HO (2006-2007 and 2007-2008 policy periods):
8.
“property damage” means physical damage to or destruction of
tangible property, including loss of use of this property. Theft or
conversion of property by any insured is not property damage.
PLUP, C-1 (2006-2007 policy period):
11.
“property damage” means physical injury to or destruction of tangible
property. This includes the loss of use caused by the injury or
destruction.
PLUP, C-2 (2007-2008 policy period):
10.
“property damage” means physical damage to or destruction of
tangible property including the loss of such property. Tangible
property does not include computer programs or data or the
reconstruction of computer programs or data. Theft or conversion of
property by an insured is not property damage.
Specifically, Plaintiffs confine their discussion of property damage to the above-italicized
portion of the definitions. Plaintiffs assert that the allegations in Automotive Finance and
Owens are in fact claims of property damage because there are allegations that Billie Ann
Mitchell fraudulently sold property out of trust and wasted assets. According to Plaintiffs,
these allegations raise “loss of use” issues because (1) Automotive Finance could not initially
repossess the vehicles that served as collateral under the security agreement and guaranty and
(2) because the assets wasted in the Owens suit is loss of use of those assets. Plaintiffs never
allege that there has been “physical damage” or “destruction of tangible property” in this case,
instead asserting that the definition of property damage in the insurance policies provides
coverage for loss of use even if no physical damage or destruction has occurred. Defendant,
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on the other hand, contends that such a reading of the policies is flawed. Given this dispute
between the parties, the question before the Court concerns the proper interpretation of
“property damage” as it is defined in the policies.
Mississippi law provides a familiar standard for interpreting insurance policies:
[I]f a contract is clear and unambiguous, then it must be interpreted as written.
A policy must be considered as a whole, with all relevant clauses together. If a
contract contains ambiguous or unclear language, then ambiguities must be
resolved in favor of the non-drafting party. Ambiguities exist when a policy
can be logically interpreted in two or more ways, where one logical
interpretation provides for coverage. However, ambiguities do not exist simply
because two parties disagree over the interpretation of a policy. Exclusions and
limitations on coverage are also construed in favor of the insured. Language in
exclusionary clauses must be clear and unmistakable, as those clauses are
strictly interpreted. Nevertheless, a court must refrain from altering or
changing a policy where terms are unambiguous, despite resulting hardship on
the insured.
U.S. Fid. & Guar. Co. of Miss. v. Martin, 998 So. 2d 956, 963 (Miss. 2008) (citations and
quotation marks omitted). Neither side actually contends that the insurance policies at issue
here are ambiguous; however, as noted, both sides appear to advance contrary interpretations
of the “property damage” language.
The Court begins by noting that several courts have addressed the issue of whether
insurance policy language similar to the language in this case allows for loss of use damages
that are unaccompanied by physical damage. The Plaintiffs, despite the fact that they fail to
actually cite to any authority, appear to rely on a rationale similar to the one found in
American Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F.2d 22 (1st Cir. 1986) and
Gibson v. Farm Family Mutual Insurance Co., 673 A.2d 1350 (Me. 1996).
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In American Home Assurance Co., “property damage” was defined in the policy at
issue as “‘physical injury to, or physical destruction of, tangible property, including loss of
use thereof.’” 786 F.2d at 24. In that case, the court of appeals first noted that the 1973
revision of the comprehensive general liability policy (CGL), used by most insurance
companies, added the modifier “‘physical’” injury to the definition of “‘property damage’” in
order to restrict recovery for intangible losses. Therefore, under this policy language, some
physical injury to tangible property must be shown to trigger coverage. Id. at 25.
The court agreed with the district court’s finding that the policy did not require
tangible property to suffer physical injury in order for a loss of use claim to be covered,
stating as follows:
Because the American Home policy explicitly defined property damage as
‘physical injury’ to tangible property, and because none of Hancock’s claims
entailed or resulted from physical damage to the Hancock Building, the district
court concluded that none of Hancock’s claims for consequential damages
resulting from the breakage of [the defendant’s] windows were covered under
the policy. The court did find coverage for the loss of use claim because the
policy defined property damage as ‘physical injury to . . .tangible property,
including the loss of use thereof’ (emphasis added). The court noted that,
although the word ‘including’ could suggest that loss of use must be traced to
some physical injury, it was more reasonable to view the additional phrase
‘loss of use thereof’ as including any ‘loss of use of tangible property’,
independent of physical injury to that property. The court also noted that the
American Home policy was significantly different from other polices that
explicitly cover only ‘physical injury to tangible property . . . including loss of
use thereof resulting therefrom’ (emphasis added).
Id. at 25.
In Gibson, the policy defined “property damage” as “physical injury to or destruction
of tangible property, including the loss of use of this property.” Gibson, 673 A.2d at 1353.
Interpreting the language of the policy against the insurer, the court concluded that the policy
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included loss of use of tangible property with no accompanying physical injury to that
property. Gibson, 673 A.2d at 1353.
In contrast to these two cases, the majority of courts directly addressing the issue have
interpreted the same policy language that exists in this case to require physical damage or
destruction of tangible property before there is coverage for loss of use. See, e.g., Mutlu v.
State Farm Fire and Cas. Co., 337 Ill. App. 3d 420, 428-31, 785 N.E.2d 951 (2003);
Continental Ins. Co. v. Bones, 596 N.W.2d 552 (Iowa 1999); Coulter v. CIGNA Property &
Casualty Cos., 934 F. Supp. 1101 (N.D. Iowa 1996); Ehlers v. Johnson, 164 Wis.2d 560, 476
N.W.2d 291 (App.1991); Dixon v. National American Insurance Co., 411 N.W.2d 32 (Minn.
App. 1987); see also 43 AM. JUR. 2D INSURANCE § 705 (“Under a clause providing coverage
for “loss of the use of the property,” the loss-of-use damages must arise from physical damage
to or the destruction of tangible property.”); ALLAN D. WINDT, 3 INSURANCE CLAIMS &
DISPUTES 5TH § 11:1, n.2 (same). In Dixon, the policy at issue defined “property damage” as
“physical injury to or destruction of tangible property, including loss of use of this property.”
411 N.W.2d at 33. The court held that buyers’ claims against the sellers-insureds, that a septic
system was inadequate and outside the property’s boundary lines, did not constitute property
damage. The court noted that there were no allegations that the property was injured or
damaged in any way – the only damage being to the buyers and their interest in the property.
Id. at 33-34.
In Ehlers v. Johnson, the insurance company refused to defend its insureds against a
suit alleging that they had misrepresented the lot lines in a real estate transaction. The policy
in that case defined property damage to mean “physical injury to or destruction of tangible
15
property, including loss of use of this property.” Ehlers, 164 Wis.2d at 562, 476 N.W.2d at
292. The court rejected the insureds’ argument that no physical injury to the property was
required in order to trigger coverage. The court reasoned as follows:
The loss of use clause is introduced by the verb ‘including.’ The dictionary
defines ‘including’ as ‘to take in or comprise as part of a whole . . .,’ The loss
of use clause is thus introduced as a subset of ‘physical injury to or physical
destruction of tangible property.’ If the loss of use clause were interpreted as
the [insureds] would have it, i.e., as any nonphysical injury to tangible
property, the definition of property damage would effectively read: ‘physical
injury to . . . tangible property, including non-physical injury.’ We reject such
a contradictory reading.
Id. at 564, 476 N.W.2d at 293.
In Coulter, the policy at issue defined “property damage” as “‘physical damage or
destruction to tangible property, including the loss of the use of that property.’” 934 F. Supp.
at 1118. Because the Iowa courts had not directly addressed whether such policy language
required that the tangible property be physically damaged or destroyed for there to be
coverage for loss of its use, the district court reviewed cases from other jurisdictions. The
Coulter court noted that the definitions in both Ehlers and Dixon were virtually identical to
the definition of “property damage” in the policy before it, and the court ultimately followed
the rationale in those cases.
However, the Coulter court also discussed American Home Assurance Co. in some
detail. The Coulter court first questioned the American Home Assurance Co. court’s reliance
on the 1973 revision of the CGL policy. The Coulter court noted that the 1973 revision
defined “property damage” as either “(1) ‘physical injury to or destruction of tangible
property which occurs during the policy period, including the loss of use thereof at any time
resulting therefrom;’ or (2) ‘loss of use of tangible property which has not been physically
16
injured or destroyed provided such loss of use is caused by an occurrence during the policy
period.’” Id. at 1120. After further noting that American Home Assurance Co. cited the
revision but advocated an exception to the language requiring a physical injury or damage to
accompany the loss of use damages, the Coulter court stated as follows:
The court, however, fails to see how the 1973 revision lends itself to an
interpretation that loss of use damages unaccompanied by physical damage or
injury are covered as ‘property damage,’ where the second prong of the CGL
definition is not given as an alternative to the first prong. Clearly, the second
prong was added in 1973 to cover loss of use damages to tangible property that
are unaccompanied by physical damage or destruction. Thus, because the
drafters found a second prong was necessary for loss of use damages
unaccompanied by physical damage, the first prong defining property damage
as ‘physical injury to or destruction of tangible property . . . , including loss of
use thereof at any time resulting therefrom’ must require loss of use damages
to be accompanied by physical injury or destruction.
Id. at 1121.
The policy in Coulter resembled the first prong of the CGL definition and did not
provide the alternative definition for loss of use damages unaccompanied by physical damage.
The Coulter court concluded that the decisions in Ehlers and Dixon advocated a more logical
approach to analyzing the issue. Construing the language as a whole and giving the words
their ordinary meaning, the court determined that the policy’s definition of “property damage”
was not susceptible to two interpretations, and held that there was no coverage because there
were no allegations that the loss of use of tangible property was accompanied by physical
damage or destruction. Id. at 1122.
Similarly, in Continental Insurance Co. v. Bones, 596 N.W.2d 552 (Iowa 1999), the
insureds were sued for their refusal to honor a guarantee, which had resulted in the eviction of
a tenant. The insurance policy at issue defined property damage as “‘physical injury to or
17
destruction of real property or tangible personal property including loss of use of the
property.’” Id. at 556. The insureds claimed that the tenant’s eviction from the premises
resulted in his loss of use of the real estate, and therefore, there was an allegation of property
damage for which the policy provided coverage.
Noting that this was a case of first impression, the Iowa Supreme Court reviewed prior
decisions from other jurisdictions, including Coulter, Gibson, Ehlers, and American Home
Assurance Co. The court first rejected the reasoning in Gibson, stating as follows:
The Maine court’s analysis was very abbreviated; without any discussion of
the policy language, the court merely cited as support for its holding the
general principle that policies of insurance are interpreted ‘“most strongly’
against the insurer.” Unless there are two reasonable meanings from which to
choose, however, the rule that a contract must be construed against the party
who drafted it does not come into play. The Maine court failed to explain why
the interpretation it adopted was a reasonable meaning based upon the
language of the policy.
Id. at 558. The Bones court next criticized the decision in American Home Assurance Co. for
that court’s reliance on the differences in the language of the standard insurance form and the
abbreviated form used in that case. The Bones court pointed out that the difference gave rise
to a contrary, reasonable interpretation. The court concluded that the alternative interpretation
was neither reasonable nor consistent with the policy language. Thus, in accord with Ehlers,
the Bones court concluded that damages for loss of use of tangible property were covered by
the policy in that case only if the property had been physically injured or destroyed.
In this case, the Court agrees with the majority of courts that have addressed the issue
and finds that the definitions of property damage in both the HO and PLUP insurance policies
require physical damage or destruction of tangible property. Stated differently, the Court
concludes that there can be no coverage for the loss of use of tangible property
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unaccompanied by physical damage or destruction. The HO policy and the PLUP, C-2 policy
provide almost identical definitions of property damage: “property damage means physical
damage to or destruction of tangible property, including loss of use of this/such property.”4
The word “including” is defined as follows: “to take in or comprise as part of a whole.”
MERRIAM’S WEBSTER’S COLLEGIATE DICTIONARY 588. Thus, the clause, “including the loss
of use” is a subset of the clause “physical damage or destruction of tangible property.”
Further, the prepositional phrases – “of that property” and “of such property” – undoubtedly
refer to “tangible property.” Yet, to conclude that such phrases refer to tangible property,
independent of the physical damage or destruction language, ignores the fact that “to tangible
property” is also a prepositional phrase that modifies the subject of that first clause, “physical
damage or destruction to tangible property,” and neglects the significance of the word
“including.” The word “including” essentially links the two clauses. If the second clause of
the definition was intended to create a separate class of coverage that did not require physical
damage or destruction to tangible property, the word “or” would be substituted in the place of
the word “including.” That is, the definition would read: “property damage means physical
injury to or destruction of tangible property or the loss of use of this/such property.” The
definition, however, does not read this way.
The policies in this case also do not provide an alternative definition for loss of use
damages unaccompanied by physical damage. That is, some insurance policies, including the
1973 revision of the CGL, contain a definition similar to the one in this case and an
4
The PLUP, C-1 provides a slightly different definition of property damage:
“property damage means physical injury to or destruction of tangible property. This includes
the loss of use caused by the injury or destruction.” This definition is even more specific as to
the requirement that there be some physical injury or damage to tangible property.
19
alternative definition that defines property damage as loss of use of tangible property that is
not physically destructed or damaged. See, e.g., Architex Assn. Inc. v. Scottsdale Ins. Co., 27
So. 3d 1148 (Miss. 2010) (providing an example of such a policy); Selective Ins. Co. of
Southeast v. J.B. Mouton & Sons, Inc., 954 F.2d 1075, 1077-78 (5th Cir. 1992) (same). Here,
an alternative definition was excluded from this policy.
Furthermore, the Fifth Circuit’s decision in Selective Insurance supports the Court’s
reading of the policy in this case and illustrates the differences between policies that have
alternative definitions of “loss of use.” In Selective Insurance, the underlying complaint
alleged that the defendants committed various wrongs resulting in the loss of land and future
income from the operation or sale of partnership property. Id. at 1077. It was alleged that the
complaint asserted allegations of loss of land and loss of income, and that this qualified as
property damage under the applicable insurance policy. Id. The definition of property damage
in the Selective Insurance policy was as follows:
(1) physical injury to or destruction of tangible property which occurs during
the policy period, including the loss of use thereof at any time resulting
therefrom, or (2) loss of use of tangible property which has not been
physically injured or destroyed provided such loss of use is caused by an
occurrence during the policy period.
Id. (emphasis added). The court analyzed each definition of property damage separately. The
court started with the first definition – a definition that is similar to the one at issue in this
case. The court reasoned as follows:
The [ ] complaint indeed describes wrongful conduct by the defendants
resulting in the initial transfer of their land to the partnership (¶¶ 13, 27, 30,
32), in the allegations that defendants intentionally or recklessly made false
and misleading statements and omitted material facts (¶¶ 25-27, 29, 38, 42,
70), and aided and abetted each other in a scheme to sell the investment (¶¶ 30,
32-33, 45) and to defraud plaintiffs (¶ 76).
20
This loss does not fall within the first type of covered property damage,
however, for two reasons. First, Mouton has not suggested how a transfer of
the land can constitute a “physical injury to or destruction of” the land . . . .
Id. at 1078 (emphasis added). The court noted that the second, alternative definition – as
opposed to the first one – is the definition one would use for loss of use when the property is
not physically injured or destroyed. Id. at 1078 n.2; see also Siciliano v. Hudson, 1996 WL
407562, at *8 (N.D. Miss. April 3, 1996) (failure to show physical damage prohibited a
finding of property damage in an insurance policy that defined property damage as “physical
injury to or destruction of tangible property, including loss of use of this property”). In this
case, as noted, the policies at issue are void of such an alternative definition.
After an examination of the definition of “property damage” as defined in the HO and
PLUP policies, the Court here determines that such definitions are not susceptible to more
than one reasonable interpretation. In the absence of any ambiguity and affording the words
their plain, ordinary meaning, the Court concludes that there can be no coverage for the loss
of use of tangible property unaccompanied by physical damage or destruction. The claims in
both Owens and Automotive Finance are only pecuniary in nature, with allegations of breach
of contract and fraud/misrepresentation in Automotive Finance, and accounting and
dissolution in Owens. Billie Ann Mitchell even conceded in her deposition testimony that she
only alleges claims coverage related to the “loss of use” of monies allegedly sustained by both
Tony Owens and Automotive Finance:
***
Q:
So they didn’t allege in the Automotive Finance complaint that
you, for instance, took a baseball bat and beat in a windshield or
21
knocked out a headlight or anything like that. You didn’t cause
any physical damage to the cars.
A:
No, ma’am.
Q:
They just claimed that they didn’t get their money from you,
correct?
A:
Yes, ma’am.
Q:
Mrs. Mitchell, did you physically harm any vehicles?
A:
No, ma’am.
Q:
Did you physically harm any property that was owned by
Aberdeen Auto Sales?
A:
No, ma’am.
Q:
Did you physically harm any property that was owned by
Automotive Finance Corporation?
A:
No, ma’am.
***
Q:
Okay. Mrs. Mitchell, if you’ll take a look at the Owens—Tony
Owens versus Aberdeen Auto Sales complaint. Would you
please explain to me what claims in the Tony Owens versus
Aberdeen Auto Sales complaint you contend should be covered
by State Farm.
A:
I was accused of misusing assets or wasting assets, misapplied
or wasted assets. Individually.
As the Defendant aptly pointed out, under Mississippi law, such economic and monetary loss
does not qualify as a physical injury. See Rogers v. Allstate Ins. Co., 938 So. 2d 871 (Miss.
Ct. App. 2006) (holding that claims of financial loss and damages for loss of reputation do
not amount to “physical injury to or destruction of tangible property”); Audobon Ins. Co. v.
Stefancik, 98 F. Supp. 2d 751, 756 (S.D. Miss. 1999) (holding that financial losses and
22
tangible injuries to reputation are not injuries to tangible property); Shelter Mut. Ins. Co. v.
Brown, 2004 WL 2651249 (S.D. Miss. 2004) (damages suffered by purchaser of house arising
out of deficient foundation of home were pecuniary in nature and did not constitute ‘property
damage’). Similarly, the claims for fraud and deception (misrepresentation) do not constitute
claims for “property damage” under Mississippi law as they are economic and contractual in
nature. See Mendrop v. Shelter Mut. Ins. Co., 2007 WL 4200827, at *4 (N.D. Miss. Nov. 26,
2007). Accordingly, because there has been no claim of physical damage or destruction of
tangible property, the definition of property damage has not been met. Given this, there is no
coverage for the claims asserted against Plaintiffs and thus no duty to defend. Defendant’s
Motion is, for this reason, granted.
However, the Court notes that, even if it did conclude there was some allegation of
property damage in the underlying suits, Plaintiffs’ claims would still fail. According to
Plaintiffs, once a claim for “property damage” has been asserted, this triggers Section II –
Additional Coverages of the HO policy. Section II – Additional Coverages provides, in
relevant part, as follows:
***
3.
Damage to Property of Others
a.
We will pay for property damage to property of others
caused by an insured.
b.
We will not pay more than the smallest of the following
amounts:
(1)
(2)
(3)
c.
replacement cost at the time of loss;
full cost of repair;
$500 in any one occurrence
We will not pay for property damage
23
(1)
(2)
(3)
(4)
if insurance is otherwise provided in this policy
caused intentionally by an insured who is 13
years of age or older
to property, other than a rented golf case, owned
by or rented to an insured, a tenant of an insured,
or a resident of your household, or
arising out of
(a)
business pursuits
Section II – Additional Coverages does not apply to property damage that is “intentionally”
caused by the insured. All of the allegations in the Owens and Automotive Finance lawsuits
are intentional acts (i.e., fraud, misappropriation, waste, criminal deception). Thus, even if
the Plaintiffs could trigger Section II – Additional Coverages by alleging some form of
property damage, Plaintiffs have still failed to demonstrate how Section II would apply.
Along the same lines, a reading of the complete definition of “property damage” in the
HO and PLUP policies sheds light on some additional exclusions that, according to Plaintiffs’
own characterization of the case, would likely also exclude coverage. The HO and PLUP
policies both explicitly state that “conversion” and “theft” do not constitute “property
damage.” By Plaintiffs’ own argument, this exclusion would apply. That is, Plaintiffs
attempt to establish “loss of use” in their brief by saying that the vehicles at Aberdeen Auto
Sales were improperly sold, hidden, or not properly accounted. Such allegations made by
Plaintiffs, while not technically labeled as so, are akin to allegations of theft and conversion.
Thus, even if the Court concluded that an allegation of “property damage” existed, additional
exclusions under the policies of insurance would still exclude coverage in this case.
24
C. Duty to Investigate
Mississippi places a duty on insurers to properly investigate the claims of their
policyholders. See Pilate v. Amer. Federated Ins. Co., 865 So. 2d 387, 395 (Miss. Ct. App.
2004); Life & Cas. Ins. Co. of Tennessee v. Bristow, 529 So. 2d 620 (Miss. 1988); see also
McLendon v. Wal-Mart Stores, Inc., 521 F. Supp. 2d 561 (S.D. Miss. 2007) (Duty to
investigate workers compensation claim requires procurement of all relevant medical
information. No bad faith where insurer is actively investigating claim pursuant to that duty);
Washington v. Am. Heritage Life Ins. Co., 500 F. Supp. 2d 610 (N.D. Miss. 2007)
(Mississippi law imposes on insurer a duty to investigate claims and claimant has a duty to
cooperate in that investigation. An insurer who is actively investigating a claim is not liable
for bad faith for doing so.); Eichenseer v. Reserve Life Ins. Co., 682 F. Supp. 1355, 1366
(N.D. Miss. 1988), aff’d, 881 F.2d 1355 (5th Cir. 1989), cert. granted, judgment vacated on
other grounds by 499 U.S. 914, 111 S. Ct. 1298, 113 L. Ed. 2d 233 (1991) (“Mississippi
imposes a clear duty upon an insurance company to promptly and adequately investigate an
insured’s claim before denying it.”). “An adjuster has a duty to investigate all relevant
information and must make a realistic evaluation of a claim.” Dunn v. State Farm Fire & Cas.
Co., 711 F. Supp. 1359, 1360 (N.D. Miss. 1987).
Here, while Plaintiffs contend that Defendant did not adequately investigate the claims
made in the Automotive Finance and Owens lawsuits, they provide absolutely no evidence or
support for such an assertion. The Defendant here in fact actively conducted an investigation
into the coverage issues. The Defendant took the allegations in the complaint, as well as
additional facts known, and compared such allegations and facts to the policy language. The
25
Defendant also sent Plaintiffs a follow-up letter, informing Plaintiffs of Defendant’s
investigation and reasoning as to why there was no coverage available for the lawsuits. The
Plaintiffs have not produced any evidence concerning how the Defendant failed to adequately
investigate or what else the Defendant should have done. Further, the Court has already
concluded that the two underlying suits here are not the type for which coverage is provided
in the HO and PLUP insurance policies. Given this, there is no amount of additional
investigation that would have led Defendant to believe there was indeed coverage available.
For this reason, Defendant’s Motion is granted as to Plaintiffs’ failure to investigate claim.
D. Punitive Damages
Plaintiffs also bring a claim for punitive damages. Mississippi law recognizes a claim
of bad faith refusal of insurance coverage, and a corresponding chance to recover punitive
damages, if a plaintiff can prove that (1) there was no arguable or legitimate reason to deny
coverage and (2) the insurer acted willfully, maliciously, or with gross and reckless disregard
for the insured’s rights. Liberty Mut. Ins. Co. v. McKneely, 862 So. 2d 530, 533 (Miss. 2003).
Simply showing there is no arguable reason to deny coverage is insufficient to place a
punitive damages claim before the jury. Murphree v. Fed. Ins. Co., 707 So.2d 523, 530 (Miss.
1997).
The award of punitive damages under Mississippi law requires a plaintiff to prove “by
clear and convincing evidence that the defendant against whom punitive damages are sought
acted with actual malice, gross negligence which evidences a willful, wanton, or reckless
disregard for the safety of others, or committed actual fraud.” MISS. CODE ANN. § 11-1-65
(1972). Punitive damages are recoverable in a breach of contract case only “where the breach
26
results from an intentional wrong, insult, or abuse as well as from such gross negligence as
constitutes an independent tort.” Caldwell v. Alfa Ins. Co., 686 So. 2d 1092, 1095 (Miss.
1996). If the insurer had an arguable reason to deny coverage, punitive damages are
impermissible. Pioneer Life Ins. Co. of Ill. v. Moss, 513 So. 2d 927, 929 (Miss. 1987). The
Mississippi Supreme Court has defined an “arguable reason” as “nothing more than an
expression indicating the act or acts of the alleged tortfeasor do not rise to the heightened
level of an independent tort.” Caldwell, 686 So. 2d at 1096.
Here, not only does nothing in the summary judgment record suggest a cognizable
right by Plaintiffs to punitive damages against Defendant, but the Court has already
determined (1) that Defendant did not have a duty to defend, and (2) that Defendant did not
fail to investigate the claims in the underlying lawsuits. There is no independent cause of
action for punitive damages in Mississippi. In other words,
In order to recover punitive damages against an insurance company for badfaith refusal to pay a claim, or refusal to honor an obligation under an
insurance policy, the insured must first demonstrate that the claim or obligation
was in fact owed . . . . Second, the insured must demonstrate that the insurer
has no arguable reason to refuse to pay the claim or to perform its contractual
obligation. Finally, in order to recover punitive damages from the insurer for
bad faith, the insured must demonstrate that the insurer’s breach of the
insurance contract “results from an intentional wrong, insult, or abuse as well
as from such gross negligence as constitutes an intentional tort.”
Essinger v. Liberty Mut. Fire Ins. Co., 529 F.3d 264, 271 (5th Cir. 2008) (citing JACKSON,
MISSISSIPPI INSURANCE LAW § 13:2) (quoting Caldwell v. Alfa Ins. Co., 686 So. 2d 1092,
1095 (Miss.1996)). Given that the Plaintiffs have not demonstrated that a claim or obligation
was in fact owed, punitive damages are not available, and Defendant is entitled to summary
judgment as to this claim.
27
E. Extra-contractual Claims
Mississippi caselaw provides for “extra-contractual damages” when an insurance
company has tortiously breached its contract. Essinger, 529 F.3d at 270. This is because an
insurance company’s financial default is often less than the cost to the insured of judicially
forcing a correct payment. When an insurance company breaches its contract with an insured
but does not do so in a way that is so egregious as to permit the recovery of punitive damages,
the insured in some circumstances will have a right to attorneys’ fees and other expenses that
were reasonably foreseeable. Univ. Life Ins. Co. v. Veasley, 610 So. 2d 290, 295 (Miss.
1992). However, “[e]xtracontractual damages, such as awards for emotional distress and
attorneys’ fees, are not warranted where the insurer can demonstrate an arguable, good-faith
basis for denial of a claim.” United Servs. Auto Ass’n v. Lisanby, 47 So. 3d 1172, 1178
(Miss. 2010) (citations omitted). Moreover, the Mississippi Supreme Court has stated that,
The plaintiff’s burden in proving a claim for bad faith refusal goes beyond
proving mere negligence in performing the investigation. The level of
negligence in conducting the investigation must be such that a proper
investigation by the insurer would easily adduce evidence showing its defenses
to be without merit.
Id. (citations omitted).
In this case, there can be no claim for extra-contractual damages. The Court has
already determined that the Defendant did not have a duty to defend and that the Plaintiffs
failed to adduce any competent evidence that Defendant failed to properly investigate the
claims. As such, Defendant’s Motion is granted as to Plaintiffs’ claim for extra-contractual
damages.
28
CONCLUSION
For the foregoing reasons, the Defendant’s Motion for Summary Judgment is
GRANTED.
So ordered on this, the _29th__ day of June, 2011.
/s/ Sharion Aycock
UNITED STATES DISTRICT JUDGE
29
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