US HF Cellular Communications, LLC et al v. Scottsdale Insurance Company
Filing
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ORDER denying 38 Motion for Partial Summary Judgment; denying 39 Motion for Partial Summary Judgment; granting 40 Motion for Summary Judgment; denying 66 Motion for Leave to File. This case is DISMISSED in its entirety. Signed by Judge Algenon L. Marbley on 6/12/2018. (cw)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
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US HF CELLULAR
COMMUNICATIONS, LLC, et al.,
Plaintiffs,
v.
SCOTTSDALE INSURANCE COMPANY,
Defendant.
Case No. 2:17-cv-261
JUDGE ALGENON L. MARBLEY
Magistrate Judge Deavers
OPINION & ORDER
This matter is before the Court on three Cross-Motions for Summary Judgment: Motion
for Partial Summary Judgment by Plaintiffs ShipCom, LLC (“ShipCom”), US HF Cellular
Communications, LLC (“USHFCC”), and Virsenet, LLC (“Virsenet”) (collectively, the “US HF
Plaintiffs”) (ECF No. 38); Motion for Partial Summary Judgment by Plaintiff Global Wideband
HF Net LLC (“Global Wideband”) (ECF No. 39); and Motion for Summary Judgment by
Defendant Scottsdale Insurance Company (“Scottsdale”) (ECF No. 40). For the reasons set forth
below, the Court GRANTS Scottsdale’s Motion for Summary Judgment (ECF No. 40),
DENIES the US HF Plaintiffs’ Motion for Partial Summary Judgment (ECF No. 38), and
DENIES Global Wideband’s Motion for Partial Summary Judgment (ECF No. 39). Further,
Plaintiffs’ Motion for Leave to File Post-Submission Brief (ECF No. 66) is DENIED.
I.
A.
BACKGROUND
Factual Background
This is a case about the obligation of an insurance company—Scottsdale—to defend
Plaintiffs in an ongoing lawsuit in Alabama, captioned Robert Stiegler, III, et al., v. ShipCom,
1
LLC, et al., Case No. 2-CV-2015-901469 (the “Alabama Lawsuit”). Plaintiffs can be grouped
into two categories: (1) the US HF Plaintiffs (ShipCom, USHFCC, and Virsenet); and (2) Global
Wideband. Both sets of plaintiffs had insurance contracts with Scottsdale, and the issue is
whether, under those policies, Scottsdale has a duty to defend Plaintiffs in the Alabama Lawsuit.
1.
The Alabama Lawsuit
The plaintiffs in the underlying Alabama Lawsuit (“Alabama Plaintiffs”) are minority
shareholders of ShipCom. (ECF No. 35-6 at ¶¶ 1-2). ShipCom is a limited liability company
that operates a maritime communications network that facilitates ship-to-ship and ship-to-shore
communications using a spectrum of high frequency (“HF”) radio waves. (Id. at ¶¶ 3, 7). The
Federal Communications Commission (“FCC”) requires ShipCom to own licenses for the HF
spectrum ShipCom uses. (Id. at ¶ 10). ShipCom’s FCC licenses initially restricted ShipCom’s
use of the HF radio spectrum to maritime communications and prohibited it from using its
frequencies for land-based communication. (Id. at ¶ 11).
After Hurricane Katrina, however, the FCC granted ShipCom a waiver to allow it to use
its HF radio frequencies for “emergency backup communications for first responders in the event
of a catastrophic event that disrupts normal local wired and wireless communications.” (Id. at ¶¶
14, 17, 18). After ShipCom was granted the waiver, in addition to maintaining its usual ship-toship and ship-to-shore business, it began assembling equipment used in hospitals, nursing homes,
and other similar entities that could be activated as a means of back-up communication when a
catastrophe disabled other forms of communication—an “emergency button” of sorts. (Id. at ¶¶
22, 23). ShipCom entered into contracts with customers for its “emergency button” service and
charged the customers a monthly fee. (Id.).
2
Around October 2011, USHFCC1 was formed to acquire an 80% interest in ShipCom.
(Id. at ¶ 26). USHFCC is wholly owned and managed by Virsenet. (Id. at ¶¶ 4, 5). Virsenet’s
managing member is Mr. Edward Bayuk. (Id. at ¶ 5). In 2012, USHFCC and ShipCom entered
into a Membership Interest Purchase Agreement and a First Amended Membership Interest
Purchase Agreement (collectively, the “Purchase Agreements”), under which USHFCC acquired
an 80% interest in ShipCom. (ECF No. 45-1). The Alabama Plaintiffs, who had previously
owned 100% of ShipCom, retained a 20% interest in the company. (Id.). After the companies
entered into the Purchase Agreements, Mr. Bayuk purported to be the manager of ShipCom.
(ECF No. 35-6 at ¶ 29).
In December of 2012, USHFCC, Virsenet, and ShipCom, through Mr. Bayuk, entered
into a Network Management Agreement with Intrado, Inc. (“Intrado”), under which Intrado
became the “Manager of the Maritime Services and the Emergency Land-Based HF Services” in
exchange for a Management Fee. (ECF No. 45-1 at Ex. 3). According to the Alabama Plaintiffs,
USHFCC, Virsenet, and Mr. Bayuk, through Intrado, then cancelled all of ShipCom’s
“emergency button” contracts and fired all of ShipCom’s employees, though they later attempted
to rehire them. (ECF No. 35-6 at ¶¶ 33, 34).
The Alabama Plaintiffs subsequently filed the Alabama Lawsuit in the Circuit Court of
Mobile County, Alabama on May 29, 2015, against various defendants including ShipCom,
Virsenet, USHFCC, Mr. Bayuk, and Intrado.2
(ECF No. 35 at ¶¶ 7-12).
In their initial
Complaint, the Alabama Plaintiffs allege that Virsenet, USHFCC, and Mr. Bayuk never intended
1
USHFCC was originally named “US HF Communications Company LLC” but later amended its
certificate of formation to change its name to “US HF Cellular Communications LLC”—one of the
Plaintiffs in this action. (ECF No. 35-6 at ¶¶ 26, 30).
2
The Alabama Plaintiffs also sued Rockwell Collins, Inc. (“Rockwell”) and ARINC, Inc. (a subsidiary of
Rockwell), for allegations relating to an agreement Rockwell/ARINC entered into with USHFCC.
3
ShipCom to benefit from the Intrado contract, despite the fact that ShipCom’s FCC HF radio
spectrum licenses and related waiver “are the cornerstone of USHFCC’s . . . [and] Intrado’s . . .
service.” (Id. at ¶ 39). They further allege that USHFCC wrongfully claimed to own the
ShipCom FCC licenses and waiver itself. (Id. at ¶ 40). They thus brought various claims
individually and on behalf of ShipCom, including: breach of fiduciary duties, selfdealing/usurpation of corporate opportunity, unjust enrichment, squeeze out, conversion,
negligence, fraud, state law trademark infringement, and state law deceptive trade practices.
(ECF No. 35-6).
On August 19, 2015, the Alabama Plaintiffs filed a First Amended Complaint, which
was followed by a Second Amended Complaint on November 25, 2015. (ECF No. 35 at ¶¶ 13,
21, Ex. 8, 15). The Second Amended Complaint added Mr. John Richmond as an individual
defendant.
(ECF No. 35-15).
Mr. Richmond is the Chief Operating Officer of Global
Wideband. (ECF No. 39-1at ¶ 1). The Second Amended Complaint alleges that Mr. Richmond
purported to be the Chief Executive Officer of ShipCom following the execution of the Purchase
Agreements. (ECF No. 35-15 at ¶ 30). In addition to the factual allegations alleged in the
Complaint, the Second Amended Complaint also alleges the following:
USHFCC, Virsenet, Mr. Bayuk, and Mr. Richmond entered into an agreement
with Globe Wireless Radio Services Inc. (“Globe”)—a direct competitor of
ShipCom—for purchase of Globe’s business and assets (including licenses) to be
combined with ShipCom, but the transaction did not close, resulting in USHFCC
paying a $500,000 penalty to Globe;
USHFCC, Virsenet, Mr. Bayuk, Mr. Richmond, and others associated with them,
formed Global Wideband, “a sham entity formed for the improper purpose of
usurping ShipCom’s corporate opportunity” and Global Wideband then purchased
Globe;
The USHFCC entities ceased paying one of the Alabama Plaintiffs his salary for
work at ShipCom; and
Mr. Bayuk allowed valuable ShipCom FCC licenses to expire.
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(Id. at ¶¶ 46-50). The Second Amended Complaint brought the same causes of action as the
Complaint.
On April 4, 2016, the Alabama Plaintiffs filed a Third Amended Complaint, adding Global
Wideband as a defendant. (ECF No. 35 at ¶¶ 25-26). In addition to the allegations in the Second
Amended Complaint, the Third Amended Complaint alleges:
On June 23, 2015 (before Global Wideband purchased Globe’s assets), the USHFCC
Board of Directors voted to file suit against the Alabama Plaintiffs, put financial
pressure on one of them by no longer paying him his salary and forcing him to pay
certain expenses;
Global Wideband entered into a Network Management Agreement with
USHFCC/ShipCom giving Global Wideband access to the ShipCom frequencies and
effectively transferring 325 HF channels to Global Wideband; and
In August of 2015 USHFCC filed suit in Delaware against the Alabama Plaintiffs,
stopped paying one of them his salary, and demanded he pay certain expenses.
(ECF No. 35-16 at ¶¶ 48, 50, 51). The Third Amended Complaint contains the same causes of
action as the previous complaints (not all are alleged against Global Wideband) and one
additional cause of action seeking an equitable or constructive trust on Globe’s assets because of
alleged insufficient transfers that violated fiduciary duties. A Fourth Amended Complaint was
filed on November 23, 2016. (ECF No. 35 at ¶ 28, Ex. 17).
2.
The Insurance Policies
The USHF Plaintiffs were insured under three consecutive insurance policies from
Scottsdale: (1) Business Management and Indemnity Insurance Policy EKS31107211, covering
the policy period of July 31, 2013 to July 31, 2014 (the “First USHF Policy”); (2) Business
Management and Indemnity Insurance Policy EKS3135588, covering the July 31, 2014 to July
31, 2015 policy period (the “Second USHF Policy”); and (3) Business Management and
Indemnity Insurance EKS3165937 for the July 31, 2015 to July 31, 2016 policy period (the Third
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USHF Policy.”). (ECF No. 35, Ex. 3, 5, 13). The Continuity Date of the US HF Plaintiffs’
Policies is July 31, 2014. (Id. at Declarations, Item 3). Global Wideband had insurance with
Scottsdale through the Business and Management and Indemnity Policy No. EKS3169277 for
the September 24, 2015 to September 24, 2016 policy period (the “Global Policy”). (Id. at Ex.
14). The Global Policy also covers Jon Richmond, as the Chief Operating Officer of Global, and
Edward Bayuk, as the Director of Global. The Continuity Date of the Global Policy is July 31,
2015. (Id. at Declarations, Item 3).
Each of the four relevant policies contains an identical duty-to-defend provision which
provides: “[i]t shall be the duty of the Insurer and not the duty of the Insureds to defend any
Claim. Such Duty shall exist even if any of the allegations are groundless, false, or fraudulent.”
(ECF No. 35, Ex. 3, 5, 13, 14). Each policy also states that it “cover[s] only claims first made
against the insured during the policy period or, if elected, the extended period and reported to the
insurer pursuant to the terms of the relevant coverage section.” (Id. at Declarations). The
relevant coverage section is the Directors and Officers (“D&O”) Coverage Section which,
subject to certain exclusions, provides coverage to the Insureds for “Loss” that the companies or
their respective D&Os have become legally obligated to pay because of a “Claim” made during
the policy period and properly reported. (Id. at D&O Coverage Section ¶ A). “Claim” is defined
in relevant part as:
a.
a written demand against any Insured for monetary damages or non-monetary or
injunctive relief; . . .
c.
a civil proceeding against any Insured seeking monetary damages or nonmonetary or injunctive relief, commenced by the service of a complaint or similar
pleading.
(Id. at D&O Coverage Section ¶ B(1).). The policies require the Insureds to give Scottsdale
written notice of any Claim as soon as practicable, but in no event later than sixty (60) days after
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the end of the respective Policy Period. (Id. at D&O Coverage Section ¶ E(1).). A Claim is
“deemed to have been first made against the Insured on the date an Insured who is an executive
officer, director or general counsel becomes aware of such Claim.” (Id.).
Section D(3) of the D&O Coverage Section further provides that:
All claims arising out of the same Wrongful Act and Interrelated Wrongful Acts shall be
deemed to constitute a single Claim and shall be deemed to have been made at the earliest
of the following times, regardless of whether such date is before or during the policy
period:
a.
the time at which the earliest Claim involving the same Wrongful Act or
Interrelated Wrongful Act is first made; or
b.
the time at which the Claim involving the same Wrongful Act or Interrelated
Wrongful Acts shall be deemed to have been made pursuant to Section E.2 below.
(Id. at D&O Coverage Section ¶ D(3). “Wrongful Act” means:
any actual or alleged error, omission, misleading statement, misstatement, neglect, breach
of duty or act allegedly committed or attempted by:
a.
any of the Directors and Officers, while acting in their capacity as such, or any
matter claimed against any Director and Officer solely by reason of his or her
serving in such capacity;
b.
any of the Directors and Officers, while acting in their capacity as a director,
officer, trustee, governor, executive director or similar position of any Outside
Entity where such service is with the knowledge and consent of the Company;
and
c.
the Company, but only with respect to Insuring Clause 3. of this Coverage
Section.
(Id. at D&O Coverage Section ¶ B(9).). “Interrelated Wrongful Acts” means “all Wrongful Acts
that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series
of facts, circumstances, situations, events, transaction or causes.” (Id. at D&O Coverage Section
¶ B(6).).
Finally, the policies contain the following relevant exclusions:
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Prior and Pending Exclusion (D&O Coverage Section ¶ C(1)(k).): Scottsdale is not
liable for any Loss 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:
i.
ii.
any prior or pending litigation or administrative or regulatory proceeding,
demand letter or formal or informal governmental investigation or inquiry filed or
pending on or before the Continuity Date; or
any fact, circumstance, situation, transaction or event underlying or alleged in
such litigation or administrative or regulatory proceeding, demand letter or formal
or informal governmental investigation or inquiry.
Application Exclusion (Id. at General Terms & Conditions, ¶ D): By acceptance of this
Policy, the Insureds agree that:
1. The statements in the Application are their representation, that such
representations shall be deemed material to the acceptance of the risk or the
hazard assumed by Insurer under this Policy, and that this Policy and each
Coverage Sections are issued in reliance upon the truth of such representations;
and
2. In the event the Application, including materials submitted or required to be
submitted therewith, contains any misrepresentation or omission made with the
intent to deceive, or contains any misrepresentation or omission which materially
affects either the acceptance of the risk or the hazard assumed by the Insurer
under this Policy, this Policy, including each and all Coverage Sections, shall not
afford coverage to the following Insureds for any Claim alleging, based upon, or
arising out of, attributable to, directly or indirectly resulting from, in consequence
of, or in any way involving, any untruthful or inaccurate statements,
representations or information:
a. Any Insured who is a natural person and who knew the facts
misrepresented or the omissions, whether or not such individual knew of
the Application, such materials, or this Policy;
b. Any company or Sponsor Company to the extent it indemnifies any
Insured referred to in subsection a. above; and
c. Any Company, Sponsor Company, Plan, Employee Benefit Plan, or any
other entity that is an Insured, if any past or present chief executive
officer, chief financial officer, general counsel, risk manager or human
resources director (or equivalent positions) of the Parent Company knew
the facts misrepresented or the omissions, whether or not such individual
knew of the Application, such materials, or this Policy.
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Prior Knowledge Exclusion (Id. at D&O Coverage Section ¶ (C)(1)(1).): Scottsdale is
not liable for any Loss 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, any Wrongful Act, fact, circumstance, or situation which any of the Insureds
had knowledge of prior to the Continuity Date where such Insureds had reason to believe
at the time that such known Wrongful Act could reasonably be expected to give rise to
such Claim.”
B.
Procedural Background
On March 31, 2017, Plaintiffs initiated this action after Scottsdale denied them coverage
for the Alabama Lawsuit. (ECF No. 1). The Complaint alleges four causes of action against
Scottsdale: (1) breach of contract under the US HF Policies; (2) breach of contract under the
Global Wideband Policy; (3) breach of the implied covenant of good faith and fair dealing; and
(4) declaratory judgment. (Id.). Plaintiffs seek a declaratory judgment requiring Scottsdale to
pay any settlement in the Alabama Lawsuit and stating that they are free to negotiate settlement
in the suit without Scottsdale’s consent. (Id. at 8). Magistrate Judge King bifurcated the
damages and bad faith issues and deferred resolution of those issues until after resolution of the
coverage dispute. The US HF Plaintiffs and Global Wideband filed Motions for Summary
Judgment on the duty to defend issue on December 15, 2017. (ECF Nos. 38, 39). Scottsdale
filed a cross-motion for Summary Judgment on the same day. (ECF No. 40). These motions are
fully briefed and ripe for review. Additionally, Plaintiffs filed a Motion for Leave to File PostSubmission Brief on May 30, 2018. (ECF No. 66).
II.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 56(a) provides, in relevant part, that summary judgment
is appropriate “if the movant shows that there is no genuine issue as to any material fact and the
movant is entitled to judgment as a matter of law.” In evaluating such a motion, the evidence
must be viewed in the light most favorable to the nonmoving party, and all reasonable inferences
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must be drawn in the non-moving party’s favor. United States Sec. & Exch. Comm’n v. Sierra
Brokerage Servs., Inc., 712 F.3d 321, 327 (6th Cir. 2013) (citing Tysinger v. Police Dep’t of City
of Zanesville, 463 F.3d 569, 572 (6th Cir. 2006)). This Court then asks “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.’” Patton v. Bearden, 8 F.3d 343, 346 (6th Cir.
1993) (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 251-52 (1986)).
“[S]ummary
judgment will not lie if the dispute is about a material fact that is ‘genuine,’ that is, if the
evidence is such that a reasonable jury could return a verdict for the non-moving party.”
Anderson, 477 U.S. at 248.
III.
A.
ANALYSIS
Leave to File Post-Submission Brief
Plaintiffs seek leave under Federal Rule of Civil Procedure 56(e) to file a brief to address
two issues raised during oral argument. (ECF No. 66). Rule 56(e) provides that “if a party fails
to properly support an assertion of fact or fails to properly address another party’s assertion of
fact . . . the court may . . . give an opportunity to properly support or address the fact.” Fed. R.
Civ. P. 56(e). Local Rule 7.2 provides that after parties file reply memoranda, “[n]o additional
memoranda beyond those enumerated are permitted except upon leave of court for good cause
shown.” S.D. Ohio Civ. R. 7.2(a)(2).
Here, the Court finds that good cause has not been shown.
Plaintiffs had ample
opportunity through summary judgment motions, responses, and replies, as well as at oral
argument, to address all relevant facts and issues. The two issues Plaintiffs seek to address in an
additional brief—the relationship between Global Wideband and the underlying transactions
involved in the earlier Alabama Lawsuit, and the choice-of-law issue—have indeed been
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extensively briefed and discussed. Additional memoranda on these issues will not aid the Court
in its decision.
The Court therefore DENIES Plaintiffs’ Motion for Leave to File Post-
Submission Brief (ECF No. 66).
B.
Choice of Law
Scottsdale argues that California law governs the instant dispute, while Plaintiffs argue
that Ohio law should be applied. In a diversity case, this Court “appl[ies] the choice of law
principles of the forum State, here Ohio.” Sims Buick-GMC Truck, Inc. v. Gen. Motors LLC, 876
F.3d 182, 185 (6th Cir. 2017), reh’g denied (Nov. 30, 2017) (citing State Farm Mut. Auto. Ins.
Co. v. Norcold, Inc., 849 F.3d 328, 331 (6th Cir 2017)). Under Ohio law, a court must “apply
the law of the state with the most significant relationship to the contract when the parties have
not specified which state’s substantive law should govern the contract.”
Int’l Ins. Co. v.
Stonewall Ins. Co., 86 F.3d 601, 604 (6th Cir. 1996) (citing National Union Fire Ins. Co. v.
Watts, 963 F.2d 148, 150 (6th Cir.1992)). Ohio has adopted the test set forth in the Restatement
(Second) of Conflict of Laws § 188, which provides in relevant part:
(1) The rights and duties of the parties with respect to an issue in contract are determined
by the local law of the state which, with respect to that issue, has the most significant
relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties ... the contacts to be taken
into account in applying the principles of § 6 to determine the law applicable to an issue
include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicile, residence, nationality, place of incorporation and place of
business of the parties.
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Id. at 604-605 (citing Restatement (Second) of Conflict of Laws § 188 (1971)). The underlying
principles stated in § 6 are as follows:
(1) A court, subject to constitutional restrictions, will follow a statutory directive of its
own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable
rule of law include
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those
states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Restatement at § 6. These sections of the Restatement “only provide a broad general framework
for the resolution of choice of law issues” and “[w]ithin that framework, a judge must balance
principles, policies, factors, weights, and emphases to reach a result, the derivation of which . . .
does not proceed with mathematical precision.” Int’l Ins., 86 F.3d at 606.
Under this framework, the Court finds that California law applies. In considering the first
two contacts, the place of contracting and the place of negotiation, the Court finds these factors
inconclusive. As stated in the comments to Section 188, “the place of contracting is a relatively
insignificant contact” and the place of negotiation “is less importan[t] when there is no one
single place of negotiation and agreement, as for example, when the parties do not meet but
rather conduct their negotiations from separate states by mail or telephone.”
Restatement
(Second) of Conflict of Laws § 188 (1971). Plaintiffs stated at oral argument that the contract
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was negotiated in Ohio, “to the extent it’s negotiated at all.” Transcript from May 22, 2018
Hearing (“Transcript”) at 12. Defendants stated that the negotiations happened back and forth
by email, between the underwriting manager on behalf of the insurer—who is located in New
Jersey—and the insured’s agent—who is located in California. Transcript at 22. There is
therefore a dispute on this issue, but the Court finds these factors relatively insignificant in the
instant case. See Jamhour v. Scottsdale Ins. Co., 211 F. Supp. 2d 941, 950–51 (S.D. Ohio 2002)
(finding “[c]ontacts (a) and (b): the place of contracting and the place of negotiation are
inconclusive and relatively insignificant”); Int’l Ins. Co. v. Stonewall Ins. Co., 863 F. Supp. 599,
604 (S.D. Ohio 1994), aff’d, 86 F.3d 601 (6th Cir. 1996) (finding the first two factors
inconclusive when the negotiations were done by telephone in various locations).
Contact (c), the place of performance, favors California law. The Sixth Circuit has held
that “a D&O insurance policy is a unilateral contract-the insured has already performed by
paying the premium in exchange for the insurance company’s promise to provide insurance.”
Combs v. Int’l Ins. Co., 354 F.3d 568, 599–600 (6th Cir. 2004).
Therefore, the place of
performance is where Plaintiffs paid the premiums—California. See Transcript (Plaintiffs state
“I have no doubt that the premium emanated from California initially”); See also Jamhour at
950–51 (“[T]he place of Plaintiff[s’] performance is arguably in [California], by making
payment of the insurance premium from there.”); Pogue v. Principal Life Ins. Co., No. 3:14-CV00599-GNS, 2015 WL 5680464, at *5 (W.D. Ky. Sept. 25, 2015) (finding contact c favors state
where insured paid his premiums); Specialty Surfaces Int’l, Inc. v. Cont’l Cas. Co., 609 F.3d
13
223, 234 (3d Cir. 2010) (“Sprinturf was obligated to pay premiums to Continental, and, thus, it
performed where it paid the premiums.”).3
Contact (d), the location of the subject matter of the contract, is not particularly relevant
here. Applying Ohio choice of law principles, this Court has held that the location of the subject
matter is “wherever [the insured] was subject to liability,”—here, “throughout the country.” Int’l
Ins. Co. v. Stonewall Ins. Co., 863 F. Supp. 599, 606 (S.D. Ohio 1994), aff’d, 86 F.3d 601 (6th
Cir. 1996). Because there is not one principal location of the insured risk, this factor does not
favor either California or Ohio law. See id.; see also Specialty Surfaces Int’l, Inc., 609 F.3d at
234 (“The fourth factor, ‘location of the subject matter of the contract,’ does not favor the
application of either California or Pennsylvania law because the policy provided nationwide
coverage to Sprinturf, and thus there is no identifiable location for the risk insured by
the contract.”).
Finally, contact (e)—the domicile, residence, nationality, place of incorporation and place
of business of the parties—favors California law. Generally, “a corporation’s principal place of
business is a more important contact than the place of incorporation.” Restatement (Second) of
Conflict of Laws § 188, cmt. e (1971). Here, the insured LLCs are registered in Delaware,
Transcript at 13, but their principal place of business, as represented on the face of the insurance
3
Some courts find that an insurer performs under a contract where it is required to defend the
insured, i.e. where the underlying lawsuit was filed. See Specialty Surfaces Int’l, Inc., 609 F.3d
at 234 (3d Cir. 2010) (finding insurer “performs under the contract of insurance where it is
required to defend or pay benefits to” insured); Hartford Underwriters Ins. Co. v. Found. Health
Servs., Inc., 524 F.3d 588, 596 (5th Cir.2008) (concluding that the insurer’s performance took
place where it defended the underlying lawsuits). Even if it is necessary for the Court to
consider this factor in the Sixth Circuit, Scottsdale’s place of performance would be Alabama,
where the underlying lawsuit was filed. Thus, this does not lean in favor of Ohio or California,
and on balance this contact still favors California.
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contracts and policy documents, is California.
See, e.g., ECF No. 35-2 (2013 insurance
application for USHFCC LLC, Virsenet LLC, and ShipCom LLC, listing address as 668 North
Coast Hwy #517, Laguna Beach, CA, 92651), ECF No. 35-3 (First US HF Policy, listing same
California address), ECF No. 35-5 (Second USHF Policy, listing same California address), ECF
No. 35-13 (Third USHF Policy, listing same California address); ECF No. 35-14 (Global
Wideband Policy listing same California address). At least two individuals insured under the
policies, Mr. Bayuk and Mr. Richmond—both named defendants in the Alabama Lawsuit, reside
in California. Transcript at 12. The insurer, Scottsdale, is an Ohio company, but its principal
place of business is Arizona. Transcript at 23. On balance, then, giving more weight to the
place of business of the parties, as instructed by the Restatement, this factor favors California
law. See Jamhour, 211 F. Supp. 2d at 951 (finding contact (e) weighing heavily in favor of
Louisiana law when the “only Ohio contact in these factors is the residence of” one party).
The weight of the principles in §6 also favors the application of California law,
specifically the justified expectations of the parties and the need for certainty, predictability, and
uniformity of results. This dispute involves policy language that sets out the insureds and
insurer’s duties to each other, and the parties “have sound reason to expect a uniform and
consistent interpretation of the policy language setting out the [parties’] duties in the event of an
occurrence.” Mill’s Pride, Inc. v. Cont’l Ins. Co., 300 F.3d 701, 710 (6th Cir. 2002). “With
uniformity of interpretation, [both parties] would be able to foretell with accuracy their rights
and responsibilities under the contract.”
Id.
It thus makes sense to find that the law of
California—where the insureds under the policies have their principal places of business—
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applies, rather than applying the law of Ohio, where Plaintiffs just happened to file suit.4
Further, the ease in the determination and application of the law to be applied referenced in §
6(g), favors the application of California law given that this is “an insurance contract[] [that is]
national or international in scope.” Meijer, Inc. v. Gen. Star Indem. Co., 61 F. 3d 903 (6th Cir.
1995) (finding that this consideration favored the application of the law of the state where the
insured was incorporated and had its principal place of business, despite insurer being
incorporated and having its principal place of business in a different state).
Finally, the policies themselves contain provisions and endorsements specific to the state
of California, lending further credence to the decision to apply California law. See Byer v.
Wright, 827 N.E.2d 835, 837–38 (Ohio Ct. App. 2005) (“We also note that the insurance policy
contains a document notifying Ecolab of the requirements of Ohio law with respect to uninsuredmotorist and underinsured-motorist (“UM/UIM”) coverage. The policy also contains an Ohio
endorsement. While their decisions are not necessarily dispositive, other courts have found that
such changes evidenced intent by the parties to be bound by Ohio law.”); In re Buckeye
Countrymark, Inc., 251 B.R. 835, 839 (Bankr. S.D. Ohio 2000) (finding that an insurance
contract’s mention of Ohio law in the heading of an endorsement to the policy supported
conclusion that Ohio law applied).
In sum, while this is a difficult case and a close call, the weight of the factors tips in favor
of the application of California law. Ohio does not have a significant interest in this case. See
4
It is possible that Plaintiffs could argue that Ohio law applies no matter where a lawsuit is filed,
because Scottsdale is an Ohio company. Ohio courts have held, however, that “where
nationwide coverage is provided . . . a large insurer . . . has no legitimate expectation that the law
of its residence will apply in other states” so the insurers’ location in a state is not sufficient to
create justified expectations. See Byer v. Wright, 827 N.E.2d 835, 837–38 (Ohio Ct. App. 2005).
16
Mill’s Pride, 300 F.3d at 709 (finding that Michigan did not have most significant relationship to
insurance contract when “[t]he parties’ insurance policy . . . makes no mention of Michigan law;
[and] it covers no insured that is incorporated in Michigan or that has a place of business in
Michigan”). Indeed, Plaintiffs admitted at the hearing that the only interest Ohio has in the case
is that it is the home of one of the parties, Scottsdale. Transcript at 14-15. The Court finds that
this is not enough.
Plaintiff attempts to avoid the application of California law by arguing that there is no
real conflict between Ohio and California law, and thus this Court need not resort to choice-oflaw principles. (ECF No. 45 at 12-13). This case, however, turns on the question of whether
timely notice was given and what impact late notice has on the insurer’s duty to defend, and as
evidenced by the parties’ briefs and arguments, the answer to these questions differs under Ohio
law and California law. Plaintiffs can make no persuasive argument to the contrary—in fact,
they admitted at oral argument that “the only area where there might be a conflict, if the Court
were to look to California law and compare that to Ohio law, would be in the area of whether late
notice . . . vitiates coverage. That is the only area where there might be a true conflict.”
Transcript at 15.
There is, indeed, a true conflict, and thus the choice-of-law analysis is
necessary.
C.
Applicable Law
In California, interpretation of an insurance policy is a question of law. Cal. Traditions,
Inc. v. Claremont Liab. Ins. Co., 197 Cal. App. 4th 410 (Cal 4th App. Dist. 2011). Insurance
policies are construed under the same rules that govern interpretation of other contracts, and thus
courts attempt to give effect to the mutual understanding of the parties at the time of contracting,
which is ascertained from the “clear and explicit” language of the contract. St. Paul Mercury
17
Ins. Co. v. Frontier Pac. Ins. Co, 111 Cal. App. 4th 1234, 143 (Cal. 4th App. Dist. 2003). The
words of the contract are to be interpreted “according to the plain meaning which a layman
would ordinarily attach to them.” Id. “An insurance policy provision is ambiguous when it is
capable of two or more constructions both of which are reasonable.” Id. (internal citations
omitted) (emphasis in original).
A duty to defend arises when a suit “potentially seeks damages within the coverage of the
policy.” Fed. Ins. Co. v. MBL, Inc., 219 Cal. App. 4th 29, 49 (Cal. 6th App. Dist. 2013). Under
the eight corner rule, “the determination of whether a duty to defend exists is made, in the first
instance, by comparing the allegations of the complaint and the terms of the policy.” Id. “As
long as the underlying complaint contains language creating the potential of liability under an
insurance policy, the duty to defend is implicated.” Hirschberg v. Lumbermens Mut. Cas., 798
F. Supp. 600, 602 (N.D. Cal. 1992). When “the extrinsic facts eliminate the potential for
coverage, the insurer may decline to defend even where the bare allegations in the complaint
suggest potential liability.” Waller v. Truck Ins. Exh., Inc., 11 Cal. 4th 1 (Cal. 1995).
“In other words, if any facts stated or fairly inferable in the complaint, or otherwise
known or discovered by the insurer, suggest a claim potentially covered by the policy, the
insurer's duty to defend arises and is not extinguished until the insurer negates all facts
suggesting potential coverage [but] . . . [o]n the other hand if, as a matter of law, neither the
complaint nor the known extrinsic facts indicate any basis for potential coverage,
the duty to defend does not arise in the first instance.” Saarman Constr., Ltd. v. Ironshore
Specialty Ins. Co., 230 F. Supp. 3d 1068, 1076 (N.D. Cal. 2017). The existence of the duty to
defend “turns not upon the ultimate adjudication of coverage under its policy of insurance, but
upon those facts known by the insurer at the inception of a third party lawsuit.” Carlson v.
18
Century Sur. Co., 832 F. Supp. 2d 1086, 1090–91 (N.D. Cal. 2011). Thus, an insurer “may not
rely on later developer evidence to show that it was ultimately correct about its denial of
defense.” Id. at 1091 (emphasis in original). The relevant question is “what the insurance
company knew when it denied coverage.” Id. at 1093.
The insured bears the burden of establishing that a loss comes within the basic scope of
coverage, thereby triggering the duty to defend, while the insurer bears the burden of proving
that an exclusion to coverage applies. Intel Corp. v. Hartford Acc. & Indem. Co., 952 F.2d 1551,
1557 (9th Cir. 1991) (citing Royal Globe Ins. Co. v. Whitaker, 181 Cal.App.3d 532 (Cal 1986)).
The insurer has a “high burden” to “prove” that the underlying claim “cannot fall within the
policy coverage.” Saarman Constr., 230 F. Supp. 3d at 1076. In interpreting an insurance
policy, “insurance coverage is interpreted broadly so as to afford the greatest possible protection
to the insured, [while] exclusionary clauses are interpreted narrowly against the insurer.”
MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 636 (2003).
D.
Scottsdale’s Duty to Defend the US HF Plaintiffs
There is no dispute that the type of claims at issue would be covered under the US HF
Policies if they were made after the inception of the policies, timely reported, and not barred by
any exclusion. Scottsdale contends, however, that the claims are not covered for a number of
reasons, including that the Claim was first made prior to the inception of the US HF Policies, the
Claim was not timely reported, and three exclusions bar coverage: the Prior and Pending
Exclusion; the Application Exclusion; and the Prior Knowledge Exclusion. This Court agrees
that the Claim was not timely reported, and thus need not address the remaining arguments.
Scottsdale argues that it has no duty to defend because the Claim was not timely reported,
which is a condition precedent to a claims-made-and-reported policy. “A ‘claims made’ policy
19
requires a claim to be made against the insured during the specified policy period.” PIMG, Inc.
v. Carolina Cas. Ins. Co., No. 09-CV-2022 BEN (CAB), 2010 WL 11594809, at *3 (S.D. Cal.
Mar. 5, 2010). “A ‘claims made and reported’ policy includes the added requirement that a
claim be reported during the policy period.” Id. These policies “only cover claims reported to
the insurer during the policy period. Timely reporting of the claim is thus the
event triggering coverage; this condition is enforceable according to its terms.” KPFF, Inc. v.
California Union Ins. Co., 56 Cal. App. 4th 963, 972 (Cal. Ct. App. 1997) (internal citations
omitted) (emphasis in original). An insurer need not show prejudice from an insured’s delayed
reporting in order to reject coverage for claims not timely reported. See PIMG, 2010 WL
11594809, at *3 (“The Notice-Prejudice Rule provides that an insurer cannot assert lack of
timely notice as a defense unless the insurer was actually prejudiced by the delay. . . . Courts
have consistently held, however, that the Notice-Prejudice Rule does not apply to
claims made and reported policies.”). Finally, California Courts “consistently recognize[] that,
absent an agreement to the contrary, the renewal of a policy does not extend a policy’s reporting
period.” Id. at *2.
The US HF Policies are claims-made-and reported policies that require the Insured to
give Scottsdale written notice of any Claim as soon as practicable, but in no event later than sixty
days after the end of the Policy Period. (ECF No. 35, Ex. 3, 5, 13, 14 at D&O Coverage Section
¶ E(1).); see also PIMG, 2010 WL 11594809, at *4 (finding that insurance contract with nearly
identical reporting language was a “claims made and reported” policy). The Alabama Lawsuit
was filed on May 29, 2015, during the Policy Period of the Second USHF Policy. (ECF No. 25
at ¶ 7). The Second USHF Policy Period ended on July 31, 2015. The US HF Plaintiffs did not
report it until January 8, 2016—nearly eight months after it was filed and four months after the
20
60-day reporting deadline. (Id. at ¶ 23). Therefore, like in the PIMG case, the claims were not
timely filed in accordance with the contractual provisions.
Plaintiffs cite Helberg v. National Union Fire Ins. Co. for the proposition that because
the coverage was renewed, the fact that the Alabama Lawsuit was filed during the Second Policy
Period but not reported until the Third Policy period should not “precipitate a trap wherein
claims spanning the renewal are denied.” 102 Ohio App.3d 679 (1995). This argument is not
persuasive for a few reasons. First, the Helberg case is an Ohio case, and as discussed above,
California law applies to this action. California courts, and many other courts, strictly enforce
the reporting requirements, even when a policy is renewed. See Westrec Marina Mgmt., Inc. v.
Arrowood Indem. Co., 163 Cal. App. 4th 1387 (Cal Ct. App. 2008) (finding no coverage when
insured failed to notify insurer of the claim within 30 days after the expiration of the first policy,
as required, despite fact that coverage was renewed and claim was reported during second
policy); Checkrite Ltd., Inc. v. Illinois Nat. Ins. Co., 95 F. Supp. 2d 180, 194 (S.D.N.Y. 2000)
“[M]ost courts that have confronted [the issue] have concluded that a renewal does not extend
the reporting period for claims made during the earlier policy period.”).
Further, the insurance contract in Helberg required the insured to notify the insurer
during the policy period and did not have the sixty-day timeframe language that the US HF
Policies had. 102 Ohio App.3d at 680-81. The Helberg contract also explicitly included
“continuously renewed” language excluding “acts or omissions occurring prior to the effective
date of the first policy issued . . . and continuously renewed thereafter.” Id. at 834.; see also
Checkrite, 95 F. Supp. 2d at 196 (distinguishing Helberg on the basis of its continuous coverage
language). Thus, the US HF Plaintiffs’ argument that the claim was timely reported since it was
reported during the Third Policy are not persuasive.
21
Scottsdale does not have a duty to defend the US HF Plaintiffs in the Alabama Lawsuit
because the US HF Plaintiffs did not report their claims timely under the language of the policy.
The Court therefore DENIES the USHF Plaintiffs’ Motion for Summary Judgment.
E.
Scottsdale’s Duty to Defend Global Wideband
Scottsdale argues that it does not have a duty to defend Global Wideband because both
the Prior and Pending Exclusion and the Application Exclusion apply. Because the Application
Exclusion bars coverage here, the Court need not reach the applicability of the Prior and Pending
Exclusion.
Scottsdale contends that the Application Exclusion bars coverage for the Alabama
Lawsuit as a result of misrepresentations on the Global Wideband Application. The “Prior
Activities” question asked if “the Applicant or any person proposed for this insurance in his or
her capacity as an employee, officer, or director of the Applicant or another entity [has] been the
subject of or involved in any . . . litigation” within the last three years. (ECF No. 35, Ex. 12)
(emphasis added). Mr. Bayuk, who filled out the application on behalf of Global Wideband,
answered in the negative, despite the fact that the Alabama Lawsuit had been filed against US
HF and Mr. Bayuk months before the application was filled out. (ECF No. 35) (Mr. Bayuk
executed the Revised Global Wideband Application on August 31, 2015, and the Alabama
Complaint was filed on May 29, 2015, naming him as a defendant). Mr. Bayuk, as CEO of both
US HF and Global Wideband, constituted a person who was proposed for insurance under the
Global Policy, and he was involved in a lawsuit within the last three years in his capacity as an
officer of another entity—US HF.
Global Wideband contends that “another entity” could refer to an entity who was
applying for insurance under the application, and since no entity applying for insurance was
22
involved in litigation, the statement was truthful. (ECF No. 51 at 11). “[A]nother entity” is not
defined in the application or policy, but “Applicant” is defined in the application as “all
corporations, organizations or other entities set forth in Question 1. of the General Information
section of this Application, including any subsidiaries, proposed for this insurance.” Global
Wideband’s proposed interpretation of “another entity” as “an entity who was applying for
insurance” would render the addition of “another entity” superfluous—“another entity” would
always fall under the “Applicant” umbrella. Under the plain, unambiguous language, “another
entity” means any other entity—not just one applying for insurance under the Application.
Plaintiffs contend that whether an officer of the insured had been involved in litigation in
his capacity as an employee or director of another entity is irrelevant but the Court disagrees—it
could be relevant to the insurers’ decision of whether or not to insure a company. If the insurer
knows, for example, that one officer or director has a history of being sued for business-related
actions at previous companies that employed him, the insurer may not want to insure the
proposed insured company, for fear that the particular employees’ actions will lead to another
suit.
Global Wideband also argues the misrepresentation was not material, but the plain
language of the contract states that any misrepresentations in the Application are deemed
material. ECF No. 35, Ex. 3, 5, 13, 14 at General Terms & Conditions, ¶ D (By acceptance of
this Policy, the Insured agree that . . . the statements in the Application are their representations,
that such representations shall be deemed material to the acceptance of the risk or the hazard
assumed by the Insurer under this Policy, and that this Policy and each Coverage Section are
issued in reliance upon the truth of such representations”) (emphasis added).
Thus, the
Application Exclusion applies and Scottsdale does not have a duty to defend Global Wideband in
23
the Alabama Lawsuit.5
Global Wideband’s Motion for Summary Judgment is therefore
DENIED.
F.
Bad Faith
In addition to the causes of action relating to Scottsdale’s duty to defend, Plaintiffs also
bring a claim for breach of the implied covenant of good faith and fair dealing. (ECF No. 1).
Plaintiffs argue that the issue of whether Scottsdale acted in bad faith cannot be decided at this
time because the Magistrate Judge bifurcated the issues of coverage and bad faith. Defendants
contend that because there is no coverage for the Alabama Lawsuit under any of the Policies, the
Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing fails as a
matter of law.
If there is “no duty to defend under the terms of [an insurance] policy, there can be no
action for breach of the implied covenant of good faith and fair dealing.” Waller v. Truck Ins.
Exch., Inc., 900 P.2d 619, 639 (Cal. 1995), as modified on denial of reh’g (Oct. 26, 1995); see
also Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1153 (Ct. App. 1990) (holding that “a bad
faith claim cannot be maintained unless policy benefits are due is in accord with the policy in
which the duty of good faith is rooted.”). This is “because the covenant is based on the
contractual relationship between the insured and the insurer” and is used to supplement the
express contractual provisions to prevent a contracting party from engaging in conduct that
frustrates the other party’s rights to the benefits of the agreement. Walker, 900 P.2d at 639.
5
Scottsdale also argues that there was another misrepresentation that falls under the Application
Exclusion. In the Global Wideband Warranty, Mr. Richmond affirmatively represented that he had “no
knowledge of any wrongful act, fact, circumstance or situation which might reasonably be expected to
give rise to a claim under the above captioned coverage,” despite his knowledge that the Alabama
Lawsuit had already been filed. The Warranty was signed on August 27, 2015, after the original
Complaint was filed but before the Second and Third Amended Complaint were filed. Given the Court’s
decision that the Application Exclusion was triggered as a result of the Prior Activities question, this issue
need not be decided here.
24
Without an insured “primary right to receive the benefits of his contract . . . the auxiliary implied
covenant has nothing upon which to act as a supplement, and should not be endowed with an
existence independent of its contractual underpinnings.”
Love, 221 Cal. App. 3d at 1153
(emphasis in original).
For the reasons discussed above, Scottsdale does not have a duty to defend Plaintiffs in
the Alabama Lawsuit. Plaintiffs cannot, therefore, maintain an action for breach of the implied
covenant of good faith and fair dealing. Thus, Scottsdale’s Motion for Summary Judgment (ECF
No. 40) is GRANTED and the case is dismissed in its entirety.
IV.
CONCLUSION
Plaintiffs’ Motion for Leave to File Post-Submission Brief (ECF No. 66) is DENIED.
Because the US HF Plaintiffs did not timely report the Alabama Lawsuit within sixty days of the
end of the Second US HF Policy, this Court DENIES the US HF Plaintiffs’ Motion for
Summary Judgment (ECF No. 38). And because there was a misrepresentation on Global
Wideband’s Application triggering the Application Exclusion, this Court DENIES Global
Wideband’s Motion for Summary Judgment (ECF No. 39).
The Court hereby GRANTS
Scottsdale’s Motion for Summary Judgment (ECF No. 40).
IT IS SO ORDERED.
/s/ Algenon L. Marbley
ALGENON L. MARBLEY
UNITED STATES DISTRICT JUDGE
DATED: June 12, 2018
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