First Horizon National Corporation et al v. Certain Underwriters at Lloyd's Syndicate Nos. 2987 et al
Filing
201
ORDER granting 101 Motion for Partial Judgment on the Pleadings; denying 139 Motion for Summary Judgment. Signed by Judge Samuel H. Mays, Jr on 3/28/2014.
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION
FIRST HORIZON NATIONAL
CORPORATION, et al.,
)
)
)
)
)
)
)
)
)
)
)
Plaintiffs,
v.
CERTAIN UNDERWRITERS AT
LLOYD’S, et al.,
Defendants.
No. 11-2608
ORDER GRANTING PLAINTIFFS’ MOTION FOR PARTIAL JUDGMENT ON THE
PLEADINGS
Plaintiffs
First
Horizon
National
Corporation,
FTN
Financial Securities Corp., and First Tennessee Bank National
Association
(collectively,
“First
Horizon”
or
“Plaintiffs”)
filed suit against Defendants Certain Underwriters at Lloyd’s,
specifically
Insurance
Federal
UK
Syndicate
Limited,
Insurance
Nos.
U.S.
Company
Defendants
denied
First
insurance
policies.
Defendants have answered.
2987
BRT
Specialty
and
Insurance
(collectively,
Horizon
(Second
coverage
Am.
2488
AGM,
Company,
“Defendants”)
under
Compl.,
Aspen
a
ECF
and
after
series
No.
of
79.)
(Def.’s Ans., ECF Nos. 80, 81, & 82.)
Before the Court is First Horizon’s April 1, 2013 Motion for
Partial Judgment on the Pleadings (the “Motion”).
Partial J. on Plead., ECF No. 101.)
(Mot. for
Defendants responded on May
2, 2013.
(Resp., ECF No. 102.)
20, 2013.
First Horizon replied on May
(Reply, ECF No. 103.)
First Horizon asks the Court
to determine that Defendants’ interpretation of the “Insolvency
Exclusion” (or the “Exclusion”), the principal basis for their
denial of coverage to First Horizon, is unreasonable as a matter
of law.
(Mot., ECF No. 101 at 2.)
the Motion is GRANTED.
For the following reasons,
Defendants’ December 13, 2013 Motion for
Summary Judgment on the Insolvency Exclusion and the Bad Faith
Count (“Defendants’ Motion”) is DENIED.
I.
(Mot., ECF No. 139.)
Background
Through a series of policies, First Horizon purchased error
and
omissions
Defendants.
(“E&O”)
(Second
professional
Am.
Compl.
¶
liability
24.)
E&O
insurance
from
policies
cover
financial institutions for loss arising from third-party claims
that allege wrongful acts related to an insured institution’s
rendering of professional services.
(Id. ¶¶ 2, 24.)
Sentinel
Management Group, Inc. (“Sentinel”) is a cash-management firm
and former customer of First Horizon.
(Id. ¶ 36.)
This dispute
arises from Defendants’ denial of coverage to First Horizon for
loss incurred as a result of alleged wrongdoing by First Horizon
in rendering professional services to Sentinel.
(Id. ¶¶ 36, 37,
44.)
The Motion addresses a narrow issue.
Defendants admit that
they issued the policies alleged in the pleadings.
2
(Def’s.
Ans.,
ECF
Nos.
80,
81,
&
82
¶¶
65.)
They
admit
that
the
policies indemnify First Horizon for loss arising from claims
for any “alleged Wrongful Act . . . in the rendering or failure
to render Professional services.”
(Id. ¶¶ 25.)
Defendants do
not dispute that they denied coverage, in part, based on the
Insolvency
Exclusion.
(Id.
¶¶
44.)
Although
the
parties
dispute its interpretation, the parties do not dispute that the
Insolvency Exclusion is binding and contained in each of the
relevant policies.
(See generally id.; Second Am. Compl.)
The
issue is whether Defendants’ interpretation of the Insolvency
Exclusion justified denial of coverage.
Defendant
Aspen
Insurance
UK
Limited
and
Certain
Underwriters at Lloyd’s, specifically Syndicate Nos. 2987 BRT
and 2488 AGM (the “Underwriter Defendants”) provided coverage to
First Horizon under Blended Insurance Programme Policy Number
QA51908/1 (the “Primary Policy), First Excess Blended Insurance
Programme Policy Number QA052008/1 (the “First Excess Policy”),
and
Fourth
Excess
QA052108/1
(the
Blended
“Fourth
“Underwriters’ Policies”).
Underwriter
First
Defendants
Horizon
providing
Insurance
to
Policy”)
Policy
Number
(together,
(Second Am. Compl. ¶¶ 5, 6, 7.)
issued
National
coverage
Excess
Programme
the
Underwriters’
Corporation
Plaintiffs
current and former employees.
(Id.)
3
and
as
the
certain
Policies
Named
of
the
The
to
Insured
Plaintiffs’
Defendant
U.S.
Specialty
Insurance
Company
(“U.S.
Specialty”) provided excess insurance coverage to First Horizon
under Excess Policy Number 24-MGU-08-A17157 (the “Second Excess
Policy”).
Policy
to
Insured,
(Id. ¶ 11.)
First
U.S. Specialty issued the Second Excess
Horizon
providing
National
coverage
to
Corporation
Plaintiffs
Plaintiffs’ current and former employees.
Defendant
Federal
Insurance
Company
as
and
the
Named
certain
of
(Id.)
(“Federal”)
provided
excess insurance coverage to First Horizon under Excess Policy
Number 7042-7157 (the “Third Excess Policy”) (together with the
Primary
Policy,
the
First
Excess
Policy,
the
Second
Policy, and the Fourth Excess Policy, the “Policies”).
14.)
Excess
(Id. ¶
Federal issued the Third Excess Policy to First Horizon
National Corporation as the Named Insured, providing coverage to
Plaintiffs
and
employees.
(Id.)
First
certain
Horizon
of
purchased
Plaintiffs’
the
current
Primary
Policy
and
former
from
the
Underwriter Defendants effective from August 1, 2008 to August
1, 2009 (the “Policy Period”).
(Id. ¶ 24.)
The Primary Policy
has an applicable limit of $10 million and is the first layer of
insurance
coverage
for
Plaintiffs
above
a
$15
million
self-
insured retention (similar to a deductible) maintained by First
Horizon.
(Id.)
The Professional Liability Coverage Section of
the Primary Policy contains the following insuring agreement:
4
This policy shall indemnify the Insured for Loss
arising from a Claim first made against the Insured
during the Policy Period . . . and reported in writing
to Underwriters pursuant to terms of this policy for
any actual or alleged Wrongful Act of any Insured (or
of any other person for whose actions the Insured is
legally responsible) in the rendering or failure to
render Professional Services.
(Primary Policy, ECF No. 6-1 at 66.)
If a particular claim
against First Horizon is covered under the Primary Policy, the
Underwriter
“Loss,”
Defendants
which
is
are
defined
obligated
to
settlements and Defense Costs.”
to
include
pay
First
“damages,
(Id. at 68.)
Horizon’s
judgments,
“Defense Costs”
are defined in the Primary Policy to include fees, costs and
expenses resulting from “the investigation, adjustment, defense
and/or appeal of a Claim, Loss or against [sic] an Insured.”
(Id. at 13.)
Except
Excess
Policy,
as
Policy,
and
otherwise
the
the
provided
Second
Fourth
Excess
Excess
in
each
policy,
Policy,
Policy
the
adopt
the
Third
all
First
Excess
of
the
conditions, limitations, and other terms of the Primary Policy.
(Second Am. Compl ¶¶ 28, 29, 30, 31.)
The First Excess Policy
provides First Horizon an additional $15 million of insurance
for the Policy Period, above the $15 million retention and the
$10 million first layer of insurance provided by the Primary
Policy.
(Id.)
The Second Excess Policy provides First Horizon
an additional $10 million of insurance for the Policy Period,
5
above the $15 million retention, the $10 million first layer of
insurance provided by the Primary Policy and the $15 million of
insurance provided by the First Excess Policy.
(Id. ¶ 29.)
The
Third Excess Policy provides First Horizon an additional $10
million
of
insurance
million
retention,
for
the
$10
the
Policy
million
Period,
first
above
layer
of
the
$15
insurance
provided by the Primary Policy, the $15 million of insurance
provided by the First Excess Policy, and the $10 million of
insurance provided by the Second Excess Policy.
(Id. ¶ 30.)
The Fourth Excess Policy provides First Horizon an additional
$20 million of insurance for the Policy Period, above the $15
million
retention,
the
$10
million
first
layer
of
insurance
provided by the Primary Policy, the $15 million of insurance
provided
by
the
First
Excess
Policy,
the
$10
million
of
insurance provided by the Second Excess Policy, and the $10
million of insurance provided by the Third Excess Policy.
¶
31.)
Together,
the
Policies
provide
Plaintiffs
(Id.
with
$65
million of insurance, above a $15 million self-retention, for a
third-party
claim
covered
under
the
Policies.
(Id.
¶
32;
Underwriter Def.’s Ans. ¶ 32.)
Sentinel filed for Chapter 11 bankruptcy in August 2007.
In 2008 and 2009, Sentinel’s Liquidation Trustee (the “Trustee”)
filed two cases against First Horizon, the “Estate Case” and the
“Customer Case” (collectively, the “Grede Lawsuits”).
6
(Second
Am. Compl. ¶ 34.)
In the Estate Case, the Trustee alleged that
First Horizon had sold Sentinel structured financial products
known as “PreTSLs” that were highly illiquid and that First
Horizon knew were unsuitable for Sentinel’s portfolio.
36.)
In
the
Customer
Case,
the
Trustee
alleged
(Id. ¶
that
First
Horizon had committed certain errors and omissions in rendering
or failing to render professional services for a fee in the
course of selling the PreTSLs to Sentinel, resulting in losses.
(Id. ¶ 37.)
First Horizon defended the Grede Lawsuits and incurred more
than
$20
million
in
defense
costs
Policy’s $15 million retention.
in
excess
(Id. ¶ 39.)
of
the
Primary
First Horizon kept
Defendants apprised of the material events in the defense of the
Grede
Lawsuits,
complaints,
providing
multiple
legal memoranda.
expert
Defendants
and
(Id. ¶ 41.)
the
rebuttal
various
expert
amended
reports,
and
Defendants also participated in
numerous of First Horizon’s quarterly claims-update conference
calls, during which First Horizon notified Defendants of the
accumulating costs of defending the Grede Lawsuits.
In
an
October
12,
2010
letter
to
First
(Id. ¶ 43.)
Horizon,
the
Underwriter Defendants stated that “coverage is unavailable for
the
Grede
Litigation,”
invoking
(Second Am. Compl. ¶ 44.)
the
Insolvency
Exclusion.
They reserved the right to raise
other defenses under the Policies.
7
(Underwriter Def.’s Ans. ¶
44.)
First Horizon responded in a letter dated April 25, 2011,
arguing that there was no sound basis for invoking the Exclusion
to preclude coverage for the Grede Lawsuits.
(Second Am. Compl.
¶ 45.)
In June and July 2011, First Horizon told Defendants that
First Horizon intended to participate in mediating the Grede
Lawsuits at the Trustee’s request.
(Id. ¶ 46.)
First Horizon
asked Defendants to authorize and fund any settlement that might
be reached with the Trustee up to $38.5 million.
In
July
2011,
the
Underwriter
Defendants
(Id. ¶ 47.)
authorized
First
Horizon to settle the Grede Lawsuits with First Horizon’s own
funds up to the limits of the Primary and First Excess Policies,
waiving the defense of consent but refusing to pay any amount.
(Id. ¶ 48.)
In separate letters on July 25, 2011, Federal and
U.S. Specialty informed First Horizon that they also would not
raise consent as a defense if First Horizon settled the Grede
Lawsuits, but that they also denied coverage.
(Id. ¶ 50; U.S.
Specialty Ans., ECF No. 81 ¶ 50; Fed. Ans., ECF No. 82 ¶ 50.)
By letter dated August 4, 2011, First Horizon demanded that
Defendants fulfill their legal obligations under the Policies by
agreeing to fund the settlement and defense costs of the Grede
Lawsuits.
(Second Am. Compl. ¶ 56; Def’s. Ans., ECF Nos. 80,
81, & 82 ¶¶ 56.)
After protracted litigation, First Horizon
8
settled
the
Grede
Lawsuits
for
approximately
$36.7
million.
(Second Am. Compl. ¶ 38.)
The Insolvency Exclusion provides that an insurer:
shall not be liable to make any payment for Loss in
connection with a Claim made against an Insured . . .
arising out of . . . the bankruptcy . . . of . . . any
. . . investment company . . .; provided, however,
this exclusion will not apply to Wrongful Acts solely
in connection with an Insured’s investment on behalf
of the claimant in the stock of one of the foregoing
entities.
(Primary Policy, ECF No. 6-1 at 73.)
According to Defendants,
First Horizon’s loss arose from the bankruptcy of Sentinel, an
investment company.
First Horizon argues that the Insolvency
Exclusion applies only to loss arising from the bankruptcy of
third-party investment companies, not the customer that alleged
the wrongful acts against the insured.
The dispute is one of
contractual interpretation, and First Horizon asks the Court to
determine that its interpretation is correct to “significantly
streamline
the
remaining
issues
to
be
tried
in
this
case.”
(Plaint. Mot. Mem. of Law, ECF No. 101-1 at 3.)
II.
Jurisdiction and Choice of Law
Under
28
U.S.C.
§
1332(a),
this
Court
has
original
jurisdiction of all civil actions between citizens of different
states “where the matter in controversy exceeds the sum or value
of
$75,000,
exclusive
of
interest
1332(a)(1).
9
and
costs”.
28
U.S.C.
§
Plaintiff First Horizon National Corporation is a Tennessee
corporation with its principal place of business in Memphis,
Tennessee.
(Second
Am.
Compl.
¶
2.)
Plaintiff
Financial
Securities Corp. is a Tennessee corporation with its principal
place of business in Memphis, Tennessee.
First
Tennessee
Bank
National
(Id. ¶ 3.)
Association
is
Plaintiff
a
banking
institution chartered by the Office of the Comptroller of the
Currency
with
Tennessee.
its
principal
place
of
business
in
Memphis,
(Id. ¶ 4.)
Defendant Syndicate 2987 BRT is managed by Brit Syndicates
Limited,
a
Kingdom.
company
organized
under
the
laws
of
the
(Def. Corp. Discl. Stat, ECF No. 25 ¶ 3.)
United
Syndicate
2987 BRT’s principal place of business is in the United Kingdom.
(Second
Am.
Compl.
¶
5.)
Defendant
Syndicate
2488
AGM
is
managed by ACE Underwriting Limited, a company organized under
the laws of the United Kingdom.
Syndicate
United
2488
AGM’s
Kingdom.
(Def. Corp. Disc. Stat. ¶ 4.)
principal
(Second
Am.
place
Compl.
of
¶
business
5.)
is
in
Defendant
the
Aspen
Insurance UK Limited is a company organized under the laws of
the United Kingdom with its principal place of business in the
United Kingdom.
(Id. ¶ 6.)
Defendant U.S. Specialty is a Texas
corporation with its principal place of business in Texas.
¶
10.)
Defendant
Federal
is
an
Indiana
principal place of business in New Jersey.
10
corporation
(Id. ¶ 13.)
(Id.
with
a
First
Horizon has alleged millions of dollars in damages.
The
parties
are
completely
diverse,
and
the
(Id. ¶ 84.)
amount
in
controversy requirement is satisfied.
In a diversity action, state substantive law governs.
See
Brocklehurst v. PPG Indus., Inc., 123 F.3d 890, 894 (6th Cir.
1997)
(citing
(1938)).
Erie
When
R.R.
the
Co.
parties
v.
Tompkins,
agree
that
304
a
U.S.
certain
64,
78
state’s
substantive law applies, the court will not conduct a “choice of
law” analysis sua sponte.
GBJ Corp. v. Eastern Ohio Paving Co.,
139 F.3d 1080, 1085 (6th Cir. 1998).
Tennessee substantive law applies.
The parties agree that
(See Mot. at 8; Resp, ECF
No. 102 at 7.)
III. Standard of Review
The standard of review governing a motion for judgment on
the pleadings under Federal Rule of Civil Procedure 12(c) is the
same
as
the
12(b)(6).
standard
for
a
motion
to
dismiss
under
Rule
Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d
274, 279 (6th Cir.
2009)
(internal
citation omitted).
“For
purposes of a motion for judgment on the pleadings, all wellpleaded material allegations of the pleadings of the opposing
party must be taken as true, and the motion may be granted only
if
the
moving
judgment.”
party
is
nevertheless
clearly
entitled
to
JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577,
581 (6th Cir. 2007).
11
To survive a plaintiff’s Rule 12(c) motion, a defendant’s
pleadings must contain sufficient facts “to ‘state a [defense]
that is plausible on its face’”.
See Ashcroft v. Iqbal, 129 S.
Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 570 (2007)).
Bare allegations without a factual
context do not create defenses that are plausible.
Ctr. For
BioEthical Reform, Inc. v. Napolitano, 648 F.3d 365, 374 (6th
Cir.
2011).
“The
plausibility
standard
is
not
akin
to
a
‘probability requirement,’ but it asks for more than a sheer
possibility that [the defendant] has acted []lawfully.”
Id.
(citing Twombly, 550 U.S. at 556).
IV.
Analysis
First
judgment
based
on
Horizon
on
an
Exclusion.”
the
argues
pleadings
unreasonable
that
it
because
is
entitled
Defendants
interpretation
(Mot., ECF No. 101-1 at 14.)
of
to
denied
the
partial
coverage
“Insolvency
According to First
Horizon, the purpose of the Insolvency Exclusion is to protect
Defendants from covering damages arising from loss to a First
Horizon customer resulting from the bankruptcy of third parties
with whom First Horizon invests a customer’s assets.
17.)
(Id. at
First Horizon argues that it is not sensible that it would
purchase
insurance
from
Defendants
that
covers
loss
to
a
customer only up to the point the customer enters bankruptcy.
(Id. at 16.)
12
Defendants
company,”
urge
arguing
a
broad
that
application
Sentinel,
of
First
“any
investment
Horizon’s
former
customer, is an investment company and that the loss arose from
its
bankruptcy.
(Resp.,
ECF
No.
102
at
7.)
According
to
Defendants, “‘[a]ny’ means ‘any.’ There is no carve out for
‘customers of First Horizon.’”
(Id.)
Interpreting an insurance contract “is a matter of law to
be determined by the Court.”
VanBebber v. Roach, 252 S.W.3d
279, 284 (Tenn. Ct. App. 2007).
Like other contracts, “the
terms of an insurance policy should be given their plain and
ordinary meaning.”
(Tenn.
2012)
language
(internal
“should
agreement.”
Garrison v. Bickford, 377 S.W.3d 659, 664
Id.
be
quotation
examined
marks
in
the
omitted).
context
of
Disputed
the
entire
If a provision of an insurance policy is
“susceptible to more than one plausible meaning, the meaning of
the
insured
controls.”
Id.
In
particular,
exclusions
and
limitations “in policies of insurance are to be most strongly
construed against the insurer.”
923,
925
(Tenn.
omitted).
“The
Ct.
App.
insurer
Warfield v. Lowe, 75 S.W.3d
2002)
must
(internal
establish
quotation
that
the
marks
exclusion
applies in the particular case and that it is subject to no
other reasonable interpretation.”
Blaine Constr. Corp. v. Ins.
Co. of N. Am., 171 F.3d 343, 354 (6th Cir. 1999) (en banc).
When
denied
coverage
based
on
13
an
exclusion,
a
plaintiff
is
entitled to a judgment on the pleadings against an insurer when
the
plaintiff
interpretation
can
of
“clearly”
the
exclusion
show
that
allows
for
a
reasonable
coverage.
See
JPMorgan, 510 F.3d at 581.
A plain reading of the text of the disputed provision,
including the exception to the Insolvency Exclusion, shows that
“any investment company”
does not
refer to customers of the
insured, but only to third-party investment companies in which
the
insured
invests
a
customer’s
money.
No
reasonable
interpretation justifies application of the Exclusion when the
loss arises from the bankruptcy of a customer of the insured.
The Exclusion provides that an insurer:
shall not be liable to make any payment for Loss in
connection with a Claim made against an Insured . . .
arising out of . . . the bankruptcy . . . of . . . any
. . . investment company . . .; provided, however,
this exclusion will not apply to Wrongful Acts solely
in connection with an Insured’s investment on behalf
of the claimant in the stock of one of the foregoing
entities.
(Primary Policy, ECF No. 6-1 at 73.)
four
categories:
Defendants,
The Exclusion contemplates
First
Horizon,
investment
companies in which an insured places a customer’s money, and
“claimants,” customers aggrieved by the loss of their money.
Placing their names in the Exclusion clarifies it:
[Defendants] shall not be liable to make any payment
for Loss in connection with a Claim made against . . .
[First Horizon] . . . arising out of . . . the
bankruptcy . . . of . . . any . . . investment company
14
. . .; provided, however, this exclusion will not
apply to Wrongful Acts solely in connection with . . .
[First
Horizon’s]
investment
on
behalf
of
the
[customer] in the stock of one of the [investment
companies].
(Id.)
The
investment
allegedly
text
of
companies
wronged
material.
by
the
and
the
Exclusion
customers.
insured
plainly
distinguishes
Whether
the
enters
customer
bankruptcy
is
not
Instead, the Exclusion excludes coverage when the
loss to the customer, and ultimately to the insured, arises from
the bankruptcy of an investment company in which
an insured
places a customer’s money.
Defendants’
interpretation
that
“any
investment
company”
includes a customer of the insured is not supported by the text
of the Exclusion.
It also makes little sense given the purpose
of the Policies.
The purpose of an E&O policy is to provide
insurance
for
loss
to
insureds
resulting
wrongdoing made by the insureds’ customers.
from
claims
of
Under Defendants’
interpretation, the Insolvency Exclusion would arbitrarily limit
coverage based on the ability of a customer to absorb the cost
of
an
insured’s
wrongdoing.
For
example,
if
an
insured’s
wrongdoing causes a $15 million dollar loss, but the customer
avoids bankruptcy, a policy would cover a $15 million settlement
between
the
insured
and
its
customer.
If
an
insured’s
wrongdoing causes a lesser loss, for example $10 million, but
15
that loss causes the customer to file for bankruptcy, a policy
would not cover the loss.
Even if Defendants’ interpretation of the Exclusion were
reasonable, First Horizon’s interpretation allows for coverage
and is also “clearly” reasonable.
581;
Blaine
Constr.,
171
F.3d
See JPMorgan, 510 F.3d at
at
354.
First
Horizon’s
interpretation is the more natural reading of the plain language
of the Exclusion and is consistent with the Policies’ purpose.
Defendants’
interpretation
requires
ignoring
words
in
the
Exclusion that narrow the meaning of “any investment company”
and
limits
coverage
on
the
arbitrary
basis
of
a
customer’s
ability to absorb an insured’s wrongdoing.
Defendants’ December 13, 2013 Motion for Summary Judgment
on the Insolvency Exclusion and the Bad Faith Count asserts that
(1)
First
Horizon’s
interpretation
of
the
Exclusion
is
unreasonable as a matter of law, and (2) First Horizon cannot
prove bad faith because the “plain language” of the Exclusion
supports denial of coverage.
19-20.)
Both
parts
of
(Mot. Mem. of Law, ECF No. 140 at
Defendants’
Motion
rest
on
flawed
assertions addressed above.
V.
Conclusion
For
the
Partial
foregoing
Judgment
on
the
reasons,
First
Pleadings
16
is
Horizon’s
GRANTED.
Motion
for
Defendants’
Motion for Summary Judgment on the Insolvency Exclusion and the
Bad Faith Count is DENIED.
So ordered this 28th day of March, 2014.
s/ Samuel H. Mays, Jr.______
SAMUEL H. MAYS, JR.
UNITED STATES DISTRICT JUDGE
17
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