Sturgill et al v. Beach at Mason Limited Partnership et al

Filing 20

MEMORANDUM OPINION AND ORDER signed by Judge William O. Bertelsman on 10/20/15.IT IS ORDERED that defendants 14 MOTION for Summary Judgment be, and is hereby, DENIED. Plaintiffs 15 MOTION for Summary Judgment be, and is hereby, GRANTED. Further, defendant Zurich American Insurance Company is hereby DISMISSED. A separate judgment shall enter concurrently herewith. (eh)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION

CIVIL ACTION NO. 1:14cv0784 (WOB)
JEFF STURGILL, ET AL.
VS.

PLAINTIFFS

MEMORANDUM OPINION AND ORDER

BEACH AT MASON LIMITED
PARTNERSHIP, ET AL.

This

matter

is

DEFENDANTS

before

the

Court

on

the

motions for summary judgment (Docs. 14, 15).
reviewed

this

unnecessary.

matter
It

and

concludes

therefore

issues

that
the

oral

parties

cross

The Court has
argument

following

is

Memorandum

Opinion and Order.
Factual and Procedural Background
A. Procedural Background

On August 28, 2011, Plaintiffs Jeff and Sandy Sturgill were

injured while patrons at The Beach Waterpark in Mason, Ohio.
In 2012, the Beach entities filed for bankruptcy protection
in

the

Southern

District

of

Ohio.

On

July

1,

2013,

the

bankruptcy court granted the Sturgills relief from the automatic
stay to pursue whatever insurance proceeds might be available to
The Beach, noting that their recovery would be limited to any
such proceeds.
1

On August 21, 2013, the Sturgills filed a personal injury
action against The Beach and its corporate owners in the Court
of Common Pleas for Warren County, Ohio.
defaulted.

On

July

3,

2014,

the

state

The Beach entities
court

entered

final

judgments in the Sturgills’ favor in the amounts of $224,282.48
(Sandy Sturgill) and $36,462.19 (Jeff Sturgill).1
On August 29, 2014, the Sturgills filed a “Supplemental
Complaint” in the state court personal injury action, adding
Steadfast and Zurich as defendants and asserting a right to the
proceeds

of

the

policy

issued

1:14cv784, Doc. 1-1 at 10-13).

to

The

Beach.

(Case.

No.

Steadfast and Zurich then timely

removed the action to this Court.2
B. The Steadfast Insurance Policy
Defendant Steadfast Insurance Company (“Steadfast”) issued a
Commercial General Liability Policy (“the Policy”) to The Beach
Waterpark, effective October 1, 2010 to October 1, 2011.

(Doc.

14-1).

1

There was a separate declaratory judgment action filed in state
court which was also removed to this Court, but plaintiffs have
voluntarily dismissed that action. (Doc. 11).
2

It is not disputed that it was Steadfast, rather than Zurich,
that issued the insurance policy in question.
The Court will
thus dismiss Zurich as a party.
2

The policy includes a “Self Insured Retention Endorsement”
with a $10,000 per claim SIR.

(Doc. 14-1 at PAGEID #210).

This

endorsement states:
SCHEDULE
SELF INSURED RETENTION AMOUNTS
$10,000 Per Claim
* * *
I. Self Insured Retention And Defense Costs – Your Obligations
A. The “self insured retention” amounts stated
Schedule of this endorsement apply as follows:

in

the

* * *
2.

If a Per Claim “self insured retention”
amount is shown in the Schedule of this
endorsement, it is a condition precedent to
our liability that you make actual payment
of all “damages” and “defense costs” for
each claim until you have paid “self insured
retention” amounts and “defense costs” equal
to the Per Claim amount shown in the
Schedule . . . . Payments by others,
including but not limited to additional
insureds or insurers, do not serve to
satisfy the “self insured retention.”
Satisfaction of the “self insured retention”
as a condition precedent to our liability
applies regardless of insolvency or
bankruptcy by you[.] The Per Claim amount
is the most you will pay for “self insured
retention” amounts and “defense costs”
sustained by any one person or organization
as a result of any one “occurrence” or
offense.
* * *

3

IV. Definitions
A. “Self insured retention” means:
the amount or amounts which you must pay for all
“damages” which you shall become legally obligated
to pay because of “bodily injury”, “property
damage”, “advertising injury”, “personal injury”,
medical payments or any
other such coverage
included in the policy, sustained by one or more
persons of organizations.
(Doc. 14-1 at PAGEID ##210-11, 213) (emphasis added).
It is not disputed that The Beach has not paid the $10,000
per claim SIR for the Sturgills’ judgments.
The Policy also contains a “bankruptcy clause” under the
heading “Commercial General Liability Conditions”:
1.

Bankruptcy
“Bankruptcy or insolvency of the insured or of the
insured’s
estate
will
not
relieve
us
of
our
obligations under the policy.”

(Doc. 14-1 at PAGEID #199).
Analysis
The present motions present the following question of law:
does the fact that The Beach has not paid the $10,000 per claim
deductible for the Sturgills’ judgments relieve Steadfast of its
coverage obligations under the Policy?

After a thorough review

of the law, the Court concludes that the answer to this question
is no.

However, Steadfast is not obligated to pay the first

$20,000 of the judgment amounts.

4

There appears to be no case law in Ohio directly on point
on the question of whether an insured’s failure to pay a SIR due
to bankruptcy relieves its insurer of providing coverage for
claims that are otherwise within the policy’s coverage.
However,
jurisdictions

the

great

holds,

weight

under

policy

of

authority

language

from

similar

to

other
that

contained in the Steadfast policy, that the insured’s failure to
pay a SIR does not relieve the insurer of its contractual duties
under the policy.

See Pinnacle Pines Cmty. Ass’n v. Everest

Nat’l Ins. Co., No. CV-12-08202-PCT-DGC, 2014 WL 1875166, at *5
(D.

Ariz.

May

9,

2014)

(holding

that,

due

to

policy

clause

stating that the insolvency of the insured would not relieve the
insurer of its insurance obligation, the insured’s bankruptcy
and resulting inability to pay SIR did not absolve insurer from
its

responsibility

to

provide

coverage

for

judgment

obtained

against insured by third party); In re FF Acquisition Corp., 422
B.R. 64, 67 (N.D. Miss. 2009) (debtor’s failure to fund its SIR
did not relieve insurer of its duty under policy to provide
defense in personal injury action pending against debtor); In re
Grace Ind., Inc., 341 B.R. 399, 403-04 (E.D.N.Y. 2006) (“[T]he
debtor’s failure to pay the retrospective premium claimed to be
due, or failure to fund the costs of, or any awards resulting
from, these personal injury actions to the extent to the self5

insured

retention

amount,

does

not

relieve

Admiral

of

its

obligation to pay claims under the Policy.”), aff’d as modified,
Admiral

Ins.

Co.

v.

Grace,

409

B.R.

275

(2009);

In

re:

Vanderveer Estates Holding, LLC, 328 B.R. 18, 25-26 (E.D.N.Y.
2005) (bankruptcy debtor’s failure to pay SIR under policy did
not relieve insurer of its obligations under policy); In re OES
Envtl.,

Inc.,

319

B.R.

266,

269

(M.D.

Fla.

Aug.

3,

2004)

(holding that insurer “is obligated to defend and indemnify the
Debtor for the portion of any judgment or settlement exceeding
[the SIR], irrespective of Debtor’s inability to pay the claimed
retention amount”); In re Keck, Mahin & Cate, 241 B.R. 583, 59697 (N.D. Ill. 1999) (insurer obligated to provide coverage even
though bankrupt insured could not make actual payment of SIR;
however, insurer would not be liable for any part of the SIR);
In re Firearms Import and Export Corp., 131 B.R. 1009, 1014
(S.D.

Fla.

relieve

1991)

insurer

(failure
of

of

insured

coverage

to

fund

obligation;

SIR

insured

does

not

paid

all

premiums and insurance contract was thus not executory); In the
Matter of Federal Press Co., Inc., 104 B.R. 56, 62 -64 (N.D.
Ind.

1989)

conflicted

(holding
and

that

created

SIR

clause

ambiguity

such

and
that

bankruptcy
policy

clause

would

be

construed in favor of insured, and its inability to satisfy SIR
due

to

bankruptcy

would

not

relieve
6

insurer

of

coverage

obligation); Gulf Underwriters Ins. Co. v. McClain Indus., Inc.,
Docket No. 273768, 2008 WL 3021134, at *2-*3 (Mich. Ct. App.
Aug. 5, 2008) (holding that requiring bankrupt insured to fund
SIR

before

insurer’s

coverage

obligation

would

be

triggered

would nullify bankruptcy clause); Home Ins. Co. of Illinois v.
Hooper,

294

(requiring

Ill.

App.3d

payment

of

SIR

626,

632-33

by

(Ill.

bankrupt

Ct.

insured

App.
as

1998)

condition

precedent violates Illinois public policy arising from statute
requiring bankruptcy clause in liability policies).3
As

the

Court

in

In

re

Grace

Ind.,

Inc.,

341

B.R.

399

(E.D.N.Y. 2006), explained:
Admiral’s declaratory judgment action is premised on
the notion that Admiral has no obligation to provide
any coverage unless and until the debtor performs all
of its obligations under the Policy.
This is an
incorrect premise. Where, as in this case, an insured
debtor has paid the initial premium in full, and the
policy period has expired, the insurance policy is not
an executory contract, despite continuing obligations
on the part of the insured.
In that event, the
insured’s failure
to perform those continuing
obligations does not excuse the insurer from being
required to perform, but gives rise to an unsecured
claim by the insurer for any damages incurred by
reason of the debtor’s breach of the policy.
Put
differently, courts interpreting Section 365 of the

3

Steadfast has cited to only one case that holds to the
contrary. See Pak-Mor Mfg. Co. v. Royal Surplus Lines Ins. Co.,
No. SA-05-CA-135-RF, 2005 WL 3487723 (W.D. Texas Nov. 3, 2005)
(holding that insurer has no obligation to provide coverage
until insured pays SIR).
7

Bankruptcy Code4 have made it clear that, for the
purposes of that provision, the debtor’s payment of
the initial policy premium constitutes substantial
compliance with its contractual obligations.
. . .
This is so whether the continuing obligation of the
bankrupt insured is the payment of a retrospective
premium or the payment of defense or other costs
within a deductible or a self-insured retention.
. . .
To hold otherwise would permit an insurer to avoid its
obligations under the insurance policy by reason of
the insured’s bankruptcy, a result which is at odds
with the [bankruptcy clause in] the Policy and with
applicable New York law. . . .
Implicit in this
agreement is the understanding that failure to pay
retrospective
premiums
due
to
the
plaintiff’s
bankruptcy would not excuse defendant from paying
claims arising from occurrences during the prepetition policy coverage period.
. . .
Admiral will not be required to pay the first $50,000
of any costs or recovery on a claim covered by the
Policy.
Its obligations will be exactly what they
would be in the absence of Grace’s bankruptcy — to pay
claims to the extent of the policy limits, and to the
extent the claims exceed the amount of the selfinsured retention.
Id. at 402-04 (emphasis added).

4

Section 365 of the Bankruptcy Code allows a trustee to assume
or reject certain executory contracts or unexpired leases of the
debtor. See 11 U.S.C. § 365. The issue of whether an insurer
can refuse to provide coverage on the grounds that the bankrupt
insured has not paid a SIR is often litigated in the bankruptcy
context where the insurer argues that the policy is an executory
contract.
8

In In the Matter of Federal Press Co., Inc., 104 B.R. 56
(N.D. Ind. 1989), the Court reached the same result under the
reasoning

that

the

SIR

“condition

precedent”

clause

and

the

bankruptcy clause were in conflict, creating an ambiguity:
In this case the dispute between the parties arises
not from an ambiguity in the language used in the
policies but from two provisions which seem to
contradict one another thereby creating an ambiguity
in the policies’ meaning.
The provision requiring
that Federal Press comply with all the terms of the
policies as a condition precedent to Columbia’s
liability apparently conflicts with the provision
stating that Federal Press’ bankruptcy or insolvency
shall not relieve Columbia of any of its obligations
under the policies. In resolving this conflict, the
court construes the provisions in favor of Federal
Press and interprets the policies to further the
policies’ purpose of indemnity.
The court thus
concludes that Federal Press and Columbia intended for
Federal Press to fulfill all of its obligations under
the policies as a condition precedent to Columbia’s
liability but for its inability to do so because of
bankruptcy or insolvency. The court further concludes
that Federal Press’ possible inability to satisfy its
retained limit of $300,000 due to its bankruptcy or
insolvency does not relive Columbia of its obligation
to indemnify Federal Press.
The court believes this
result is consistent with Indiana law and the equities
of this case.

Id. at 62. 

While

Steadfast

correctly

notes

that

some

of

these

decisions are based on public policy rationales arising out of
state statutes that require the inclusion of the “bankruptcy”
clause in applicable insurance policies – which Ohio does not
have – the reasoning in many of these cases does not depend on
9

such

statutes.

In

fact,

the

Court

in

Vanderveer

Estates

expressly stated that its ruling would be the same even in the
absence of the Illinois bankruptcy clause statute:
ASIC has not identified any case that supports its
assertion that an excess insurer need not indemnify a
bankrupt debtor that fails to pay defense costs
pursuant to a SIR endorsement. To the contrary, case
law interpreting § 365 of the Bankruptcy Code makes it
clear that even in the absence of an applicable
statutory provision such as [The Illinois Insurance
Code, Chapter 215,] § 5/388, the failure of a bankrupt
insured to fund a self-insured retention does not
relieve the insurer of the obligation to pay claims
under the policy.
In

re:

Vanderveer

Estates

Holding,

LLC,

328

B.R.

18,

25

(E.D.N.Y. 2005) (emphasis added).
Moreover,
liability

while

policies

Ohio

to

does

contain

not
a

have

a

statute

requiring

bankruptcy

clause,

the

fact

remains that the Steadfast policy does contain such a clause.
As

recognized

position

would

in

the

nullify

above

authority,

that

provision.

to

adopt

See,

Steadfast’s

e.g.,

Pinnacle

Pines Cmty. Ass’n v. Everest Nat’l Ins. Co., No. CV-12-08202PCT-DGC, 2014 WL 1875166, at *5 (D. Ariz. May 9, 2014) (“Such a
reading would mean that Everest can escape liability under the
policy

if

bankruptcy,

the
a

insured
result

is

unable

clearly

to

inconsistent

sentence of the bankruptcy provision.”).

10

pay

the
with

SIR
the

due

to

first

Further, this result is supported by an Ohio case which,
while

not

directly

situation here.
Ohio 1993).

on

point,

is

highly

analogous

to

the

See In re Sudbury, Inc., 153 B.R. 776 (N.D.

In that case, cited by neither party, the Chapter

11 debtor requested a declaration that its insurance policies
were not executory contracts which could be assumed or rejected
by the trustee under § 365 of the Bankruptcy Code.

The policies

contained

allowed

retrospective

premium

clauses

which

the

insurer to adjust the premiums based on claims experience and to
require

the

adjustments.
bankruptcy

insured
Id.

clause

at

to
777.

providing

pay

annual
The

that

retrospective

policies

“the

also

Debtor’s

premium

contained

insolvency

a
or

bankruptcy will not relieve the Insurer of its obligations under
the Policy.”

Id.

The Bankruptcy Court held that the debtor’s obligation to
pay retrospective premiums did not make the policy executory and
its failure to make those payments did not relieve the insurer
from its obligations:
The obvious purpose of the Bankruptcy Clause was to
make
clear
that
the
Debtor’s
failure
to
pay
retrospective
premiums
because
of
the
Debtor’s
bankruptcy
or
insolvency
would
not
excuse
the
insurer’s payment of claims arising out of occurrences
during the policy period.
. . .

11

Rejection would confer a windfall on the Insurers and
an economic loss on claimants that the Bankruptcy
Clauses were designed to avoid.
Id. at 778, 780 (emphasis added).
Finally, Steadfast’s reliance on In re Kismet Prod., Inc.,
Bankruptcy No. 04-25167, 2007 WL 6877250 (N.D. Ohio Aug. 28,
2007), is misplaced.

The Court there held that the insured, an

employer, was required to pay its medical plan participants’
benefits

as

a

condition

precedent

to

being

entitled

to

reimbursement under the insurance policy in question.
Kismet

is distinguishable in several important respects.

First, the policy in question was a reimbursement policy, not a
liability

policy,

whose

whole

purpose

and

structure

was

to

provide a vehicle for reimbursing the employer for plan benefits
it paid to participants in excess of their deductibles.
*2.

Id. at

Where the employer had not actually paid the benefits,

there was nothing to “reimburse.”
Second, the bankruptcy clause in the policy specifically
stated that any payments to the trustee or receiver would be
made only if the employer had, in fact, paid the benefits to
plan

participants.

Id.

at

*3.

Finally,

the

policy

also

specifically defined the term “paid” as it related to the plan
benefits as payment by check or similar conveyance, which makes

12

sense

given

the

reimbursement.

nature

of

the

policy

as

a

vehicle

for

Id.

Thus, Kismet does not support Steadfast’s position on the
issue before this Court.
For all these reasons, the Court holds that Steadfast is
not

relieved

of

its

obligation

to

provide

coverage

for

the

judgments obtained by the Sturgills against The Beach, although
Steadfast

is

not

be

liable

for

the

first

$20,000

which

represents that two $10,000 per claim SIRs.
Therefore,

having

reviewed

this

matter,

and

being

sufficiently advised,
IT IS ORDERED that defendant’s motion for summary judgment
(Doc. 14) be, and is hereby, DENIED.

Plaintiffs’ motion for

summary judgment (Doc. 15) be, and is hereby, GRANTED.

Further,

defendant Zurich American Insurance Company is hereby DISMISSED.
A separate judgment shall enter concurrently herewith.

This 20th day of October, 2015.

13