NetSpend Corporation v. AXIS U.S. Insurance et al

Filing 31

ORDER GRANTING 22 Motion for Summary Judgment; DENYING 24 Motion for Summary Judgment. Signed by Judge Sam Sparks. (dm)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION

NETSPEND CORPORATION,
Plaintiff,

FI
JUL 18

PH

2:

09

..)

-vs-

Case No. A-13-CA-456-SS

AXIS INSURANCE COMPANY and AXIS
SURPLUS INSURANCE COMPANY,

Defendants.

ORDER
BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause, and

specifically Defendants AXIS Insurance Company and AXIS Surplus Insurance Company
(collectively, AXIS)'s Motion for Summary Judgment [#22], Plaintiff NetSpend Corporation's
Response [#24], and AXIS's Reply [#29]; and NetSpend's Motion for Summary Judgment [#24],

AXIS's Response [#29], and NetSpend's Reply [#30]. Having reviewed the documents, the
governing law, and the file as a whole, the Court now enters the following opinion and orders
GRANTING summary judgment in favor of AXIS.

Background
This is a lawsuit about a lawsuit. The parties dispute whether AXIS has a contractual duty,
arising from certain insurance policies, to defend NetSpend in pending state court litigation brought

against NetSpend by Inter National Bank (INB). AXIS maintains it is not obligated to provide the
defense, and previously denied NetSpend' s claim. NetSpend disagrees, believing it is entitled to the
defense, and has sued AXIS for breach of contract, violating Texas Insurance Code section 541.060,

'A

breach of the duty of good faith and fair dealing, and for a declaratory judgment requiring AXIS to
fund NetSpend's defense up to the limits of the insurance policy.
A.

Policy Terms
AXIS issued two consecutive professional liability insurance policies to NetSpend. The first

was issued by AXIS Surplus Insurance Company and covered the one-year term from August 20,
2011 to August 20, 2012.1 The second was issued by AXIS Insurance Company and covered the one-

year term from August 20, 2012 to August 20, 2013 2 The two policies are, at least for purposes of
this litigation, identical in wording and coverage

scope.3

These policies are not general insurance policies, but rather claims-made-and-reported

policies. By their terms, they provide coverage for "Claims first made and reported to [AXIS] during
the Policy

Pl.'s Mot. Summ. J. [#24-7], Ex. F (2011 Policy), at

Period."4

1.

As relevant here, the

policies provide coverage for:

those sums.

which [NetSpend] becomes legally obligated to pay as Damages or
Claim Expense because of a Claim arising out of a Wrongful Act
committed. . . [b]y [NetSpend] in the performance of Professional Services for
others for compensation. . . when such Claim is first made against [NetSpend] and
reported to [AXIS] during the Policy Period or any Extended Reporting Period.

1

2

.

.

This first policy is labeled the AXIS Tecimet Solutions Insurance Policy No. MKN762362/0 1/2011.
This second policy is labeled the AXIS Tecimet Solutions Insurance Policy No. MCN7623 62/01/2012.

Because the policies are identical, this order cites to relevant language only iii the 2011 policy. Identical
language can be found in the 2012 policy, and both policies are in the summary judgment record.
The policies use boldface whenreferring to terms defmed elsewhere in the policy, such as "Claims" or "Policy

Period."

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Id. at 2;

see also

id. at 7

("This insurance applies when a Claim for Wrongful Acts is first made

against [NetSpend] and reported in writing to [AXIS] during the Policy Period [or the Extended
Reporting Period].").
This dense paragraph requires some unpacking to understand. A "Claim" is "a written
demand or written assertion of a legal right made against [NetSpend] seeking Damages or nonmonetary relief." Id. at 10. To be covered, claims must arise out of wrongful acts. A "Wrongful

Act," as relevant here, is any "[n]egligent act, error, or omission," or "[u]nintentional breach of
contract," allegedly committed by NetSpend. Id. at 15. The parties agree a lawsuit alleging NetSpend
committed some wrongful

acte.g., a lawsuit alleging NetSpend acted negligentlyamounts to a

covered claim, assuming all other coverage requirements are met. Those other requirements include

the making and reporting of the claim. The claim must be both made (against NetSpend) and
reported (to AXIS) within the Policy Period or the extended reporting period. The "Policy Period"
is the one-year coverage period from August to August of each year, for each respective policy. Id.

at 16. The extended reporting period applies when a claim is made against NetSpend in the last thirty

days of the Policy Period. Id. at 7. In that scenario, NetSpend has until thirty days after the end of
the Policy Period to timely report the claim. Id.

Adding yet another layer of complexity, the policies also contemplate multiple claims arising
from multiple wrongful acts. Specifically, the policies treat "[a]ll Claims arising from the same

Wrongful Act or Interrelated Wrongful Acts [as] a single Claim." Id. at 9. Such claims "will be
deemed to have been made" on either (1) the date the first claim is made against NetSpend, or (2)
the date AXIS receives NetSpend's written notice of any wrongful act, whichever is earlier. Id.

"Interrelated Wrongful Acts" are defined as "all Wrongful Acts that have as a common nexus any
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fact, circumstance, situation, event, transaction, cause or series of causally or logically connected

facts, circumstances, situations, events, transactions or causes." Id. at 13.

In sum, and as relevant here, the policies provide coverage for claims made against NetSpend
based on NetSpend' s unintentional conduct. If such claims occur within the Policy Period and are

reported to AXIS within the Policy Period, AXIS has a duty to defend NetSpend. Id. at 2. This duty
is triggered "even if the allegations are groundless, false or fraudulent." Id.

If the claim either occurs

outside the Policy Period or is not reported in a timely manner, there is no coverage and no duty to

defend is triggered.
B.

Factual Background
NetSpend sells prepaid, reloadable debit cards to consumers. Because NetSpend is not an

FDIC-insured bank, it contracts with third party banking institutions to serve as "issuing banks" for
its debit cards, which essentially hold the deposited funds and provide access to certain payment

services. One of the banks NetSpend worked with in this venture was INB. Disagreements between
INB and NetSpend concerning NetSpend's handling of the two parties' accounts gave rise to the

underlying state court lawsuit.
As far back as 2009, INB accused NetSpend of mishandling its accounts. INB, NetSpend,
and a third participating bank, MetaBank, entered into a settlement agreement regarding this dispute

in May 2009. In 2010, those parties executed a second agreement releasing one another from
liability. In June 2011, as [NB and NetSpend were preparing to end their business relationship, INB

alleged it discovered a "shortfall" of some $10.5 million in the depository accounts it was providing
for NetSpend customers. It is this dispute which gave rise to the underlying state court lawsuit, which

this Court will term the "Shortfall Litigation."
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The Shortfall Litigation officially began on July 13, 2012, when INB filed its Original

Petition against NetSpend in the 398th Judicial District Court of Hidalgo County, Texas.

See

Pl.'s

Mot. Summ. J. [#24-2], Ex. A (Shortfall Orig. Pet.). The Original Petition sought a declaratory

judgment as to the existence of the shortfall, its amount (if any), and the responsibilities ofthe parties
with respect to covering it. INB sought an accounting and injunctive relief, but no damages. On July
31, 2012, INB filed its First Amended Petition. See

id.

[#24-3], Ex. B (Shortfall 1St Am, Pet.). The

First Amended Petition made slight changes to the factual allegations, but primarily added a new
cause of action for breach of contract, alleging breaches of the 2009 settlement agreement and the

parties' License and Servicing Agreement. On September 21,2012, INB filed its Second Amended
Petition, again making changes to the factual allegations and adding new parties and claims. See

id.

[#24-4], Ex. C (Shortfall 2d Am. Pet.). Specifically, the Second Amended Petition added claims for

breach of fiduciary duty, fraud, negligence, and unjust enrichment.

NetSpend first notified AXIS of the Shortfall Litigation on September 12, 2012. After INB
filed its Second Amended Petition, NetSpend forwarded a copy to AXIS on October 1, 2012. AXIS

formally denied coverage and refused to defend the Shortfall Litigation by letter dated October 22,
2012. See Pl.'s Mot. Summ. J. [#24-5], Ex. D (Denial Letter). The denial letter acknowledged receipt

of the September 12, 2012 notice. Id. at

1.

While purporting not to take a formal position on when

the claim against NetSpend was first made by INB, the letter denied coverage based on the claimmade date of July 13,

2012the date the

Shortfall Original Petition was

filedand NetSpend' s

failure to timely notif AXIS of that claim. Id. at 2-5. The letter went on to note the claim would not
have been covered even if it was timely made, because breaches of contract were not covered under

the circumstances presented and the Shortfall Litigation did not present a claim for damages. Id. at

7-9. Faced with this denial of coverage, NetSpend filed this lawsuit against AXIS while proceeding
to defend the Shortfall Litigation at its own expense.

Analysis
I.

Legal Standards

A.

Summary Judgment
Summary judgment shall be rendered when the pleadings, the discovery and disclosure

materials on file, and any affidavits show that there is no genuine dispute as to any material fact and

that the moving party is entitled to judgment as a matter of law.
v.

FED. R.

Civ. P. 56(a); Celotex Corp.

Catrett, 477 U.S. 317, 323-25 (1986); Washburn v. Harvey, 504 F.3d 505, 508 (5th Cir. 2007).

A dispute regarding a material fact is "genuine" if the evidence is such that a reasonable jury could
return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). When ruling on a motion for summary judgment, the court is required to view all inferences

drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec.
Indus. Co.

v.

Zenith Radio, 475 U.S. 574, 587 (1986); Washburn, 504 F.3d at 508. Further, a court

"may not make credibility determinations or weigh the evidence" in ruling on a motion for summary

judgment. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Anderson, 477
U.S. at 254-55.

Once the moving party has made an initial showing that there is no evidence to support the
nonmoving party's case, the party opposing the motion must come forward with competent summary

judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere
conclusory allegations are not competent summary judgment evidence, and thus are insufficient to
defeat a motion for summary judgment Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343

(5th Cir. 2007). Unsubstantiated assertions, improbable inferences, and unsupported speculation are

not competent summary judgment evidence. Id. The party opposing summary judgment is required
to identify specific evidence in the record and to articulate the precise manner in which that evidence

supports his claim. Adams

v.

Travelers Indem. Co.

of Conn.,

465 F.3d 156, 164 (5th Cir. 2006).

Rule 56 does not impose a duty on the court to "sift through the record in search of evidence" to

support the nonmovant's opposition to the motion for summary judgment. Id. "Only disputes over
facts that might affect the outcome of the suit under the governing laws will properly preclude the
entry of summary judgment." Anderson, 477 U.S. at 248. Disputed fact issues that are "irrelevant

and unnecessary" will not be considered by a courtin ruling on a summary judgment motion. Id. If

the nonmoving party fails to make a showing sufficient to establish the existence of an element

essential to its case and on which it will bear the burden of proof at trial, summary judgment must
be granted. Celotex, 477 U.S. at 322-23.
B.

Insurance Policy Interpretation
"Under Texas law, insurance policies are construed as are contracts generally, and must be

interpreted to effectuate the intent of the parties at the time the contracts were formed." GulfChem.
& Metallurgical Corp. v. Associated Metals & Minerals Corp.,

1

F.3d 365, 369 (5th Cir. 1993). "To

determine an insurer's duty to defend, Texas courts follow the 'eight corners' rule." CULloyd's of
Tex. v.

Main Street Homes, Inc., 79 S.W.3d 687,692 (Tex. App.Austin 2002, no pet.) (citing Nat '1

Union Fire Ins. Co.

v.

Merchs. Fast Motor Lines, Inc., 939 S .W.2d 139, 141 (Tex. 1997)). Applying

the eight corners rule, a court must "consider only the allegations in the underlying complaint and
the terms of the insurance policy to determine whether a duty to defend exists, giving the allegations

in the petition a liberal interpretation and resolving any doubt in favor of the insured." Id. "If the
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underlying petition does not allege facts within the scope of coverage, the insurer has no duty to
defend." Id.

II.

Application
Although the parties' briefing discusses a range of discrete points, the rubber meets the road

with a single question: did the Shortfall Original Petition constitute a claim arising out of (or for) a
wrongful

act?5

See Defs.' Resp. [#29], at

1

("Thus, the only real issue before this Court is whether

the facts alleged in the Original Petition when viewed under the 'eight corners' rule assert a Claim
arising out of a wrongful act."); Pl.'s Reply [#30], at

1

("Thus, the question before this Court is

whether INB's Original Petition in Hidalgo County was a 'Claim for Wrongful Acts' within the
policies."). If the Shortfall Original Petition made a claim against NetSpend, there is no dispute

NetSpend did not timely report that claim and therefore forfeited coverage. If the Shortfall Original
Petition did not make a claim against NetSpend, there is no dispute any claim first raised in either
the Shortfall First Amended Petition or the Shortfall Second Amended Petition was timely reported

and therefore covered under the policies.

In analyzing the Shortfall Original Petition, the Court is mindful of its obligation to construe
the allegations liberally and resolve any doubt in favor of the insured, NetSpend. CU Lloyd's, 79

S.W.2d at 692. As the Texas Supreme Court has explained it, "in case of doubt as to whether or not

the allegations of a complaint against the insured state a cause of action within the coverage of a
liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in
the insured's favor." Nat'l Union, 939 S.W.2d at 141 (quoting Heyden Newport Chem. Corp.

v. S.

The Court's decision does not turn on this semantic distinction between claims "arising out of' wrongful acts
and claims "for" wrongful acts. The policies use both phrases to refer to the scope of the coverage provided.

Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)). The Court's focus must remain on "the factual

allegations that show the origin of the damages rather than on the legal theories alleged." Id. (internal

quotation marks omitted); see also Adamo

v.

State Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex.

App.Houston [14th Dist.] 1993, writ denied) ("It is not the cause of action alleged that determines
coverage but the facts giving rise to the alleged actionable

conduct.").6

Construing the Shortfall Original Petition in favor of coverage, as the Court must do, the
Court holds the Shortfall Original Petition stated a claim against NetSpend, and that claim arose out

of (or was for) wrongful acts. In the "Introduction" section of the Shortfall Original Petition, INB
alleges it was NetSpend' s contractual responsibility to "manage[] the movement ofthe cardholders'

funds." Shortfall Orig. Pet. at 2. INB then alleges "NetSpend's management of the movement of
those funds.

. .

has been riddled with errors." Id. Those errors are alleged to have resulted in a $10.5

million shortfall in INB's depository accounts. Id. INB additionally alleges NetSpend is actively
emptying its 1NB accounts and refusing to address the shortfall issue "in an effort to abandon its
contractual responsibilities and wrongly to make INB supply any funds that NetSpend' s errors have
depleted." Id. In short, INB alleged NetSpend had screwed up, and was attempting to force INB to
pay for NetSpend's mistakes.

The "Facts" section of the Shortfall Original Petition fleshes out these allegations. INB
describes in greater detail NetSpend' s contractual responsibilities. Id. at 4-5. INB again describes

the dispute over the alleged shortfall, and claims "if the shortfall exists, it is NetSpend's

6

The strange irony of this case is that NetSpend' s failure to provide timely notice of the Shortfall Original
Petition means it cannot prevail if that pleading made a claim against NetSpend. The insured is therefore fighting against
the legal standard which ordinarily leans heavily to its benefit, because a liberal construction in favor of coverage is also
a construction in favor of summary judgment for the insurer, AXIS. At the same time, AXIS is happy to indulge an
insured-friendly construction in favor of finding coverage despite previously denying coverage itself.

responsibility." Id. at 8. At the same time, INB represents "NetSpend takes the position that the
Alleged Shortfall is INB's problem even f it is NetSpend's fault." Id. (emphasis added); see also

Id.

at 9 ("These activities show that NetSpend is attempting to saddle INB with those possible liabilities

even though the evidence reflects that, if there are deficiencies, they are NetSpend' s responsibility.").

INB' s petition also contains additional allegations regarding potential breaches of the parties'
contracts. INB alleges NetSpend failed to comply with the parties' agreement to have NetSpend

transfer all of 1NB's rights and obligations, as well as all the funds in INB's accounts, to a successor
bank, thus facilitating INB' s exit from the relationship. Id. at 7-8. INB directly accuses NetSpend

of breaching the parties' Licensing and Servicing Agreement, and there is no suggestion that breach
was accidental. Id. at

8

("NetSpend has breached its obligations under the LSA."). Finally, INB

alleges NetSpend is wrongfully transferring funds away from INB accounts without following the

protocol agreed to by the parties in an effort to saddle INB with the liability for the shortfall. Id. at

8-9. As a remedy, INB seeks a "judgment declaring that the Alleged Shortfall, if any, falls within
the scope of the [parties' contracts] and that NetSpend is responsible for satisfying any and all
payments to cardholders, Network Providers, and other third parties." Id. at 10. INB also seeks an
accounting, a temporary restraining order, and a temporary injunction prohibiting NetSpend from

depleting INB's accounts below the amount needed to cover the shortfall. Id. at 10-11.

Read as a whole, and in the light most favorable to coverage, these allegations amount to a
claim arising out of wrongful

conductin the language of the policies, a written assertion of legal

rights against NetSpend seeking non-monetary relief arising out of negligent acts, errors, omissions,
or unintentional breaches of contract by NetSpend. NB alleges NetSpend' s fund management was

"riddled with errors." Nothing in the pleading suggests NetSpend intentionally mismanaged the
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funds, or concocted some intentional plan to create the shortfall. The only plausible inference to be
drawn from the facts

allegedand, coincidentally, an inference favorable to the insuredis that

NetSpend was negligent, or perhaps incompetent. To be sure, there are also allegations of intentional
conduct, including an intentional breach of contract no party asserts would be covered by the policy.
But those allegations are irrelevant to the Court's analysis. "Once coverage has been found for any

portion of a suit, an insurer must defend the entire suit." CU Lloyd's, 79 S.W.3d at 692 (emphasis
added).
AXIS makes much of the "riddled with errors" language, which admittedly appears only one

time in the Shortfall Original Petition. NetSpend naturally tries to minimize the import of those

words, arguing, for example, it is nonsensical to seek injunctive relief to prevent unintentional
conduct. This is not a case of "magic words," where pleading an "error" magically opens the door
to coverage. But the words are nevertheless important. INB's characterization ofNetSpend's account

management paints a picture of a company making mistakes, not intentionally defrauding its
business partner. Had INB asserted a fraud claim, there would have been no facts to support it. There
is simply no suggestion NetSpend intentionally created the shortfall. The only possible alternative
is that the shortfall was created unintentionally, accidentally, or negligently. This is especially

apparent when contrasted with the breach of contract allegations, whereby INB makes clear

NetSpend is acting intentionally to deplete its accounts and leave INB stuck holding the bill. It is that

intentional conduct INB sought an injunction to put an end to, not the negligence which already
occurred and created the shortfall. INB then sought an accounting and a declaratory judgment

holding NetSpend liable for its own negligence and requiring it to cover any shortfall.

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NetSpend argues it is impermissible to read the Shortfall Original Petition as sounding in
negligence because the parties' contractual obligations would prevent recovery on a tort theory for
losses suffered to the subject of the contract. Even granting NetSpend the latter half ofthat argument,
it does nothing to alter the analysis of the facts alleged by

NB. The policies obligated AXIS to

defend a suit even if the claims alleged were "groundless." If the petition sounded solely in
negligence and AXIS's defense was no more than filing amotionto dismiss citing the economic loss
rule, it would still be obligated to provide that defense. NetSpend does not cite any authority which

holds a legal rule prohibiting recovery on a negligence claim absolves an insurer of its obligation to
defend a negligence claim if one is made (or prohibits a plaintiff from pleading one in the first
instance). Indeed, in that scenario, NetSpend would no doubt want the defense it bargained for by
purchasing the policies.
NetSpend also focuses on the fact NB did not seek money damages. As the Texas Supreme
Court has held, a court analyzing a petition to determine if a duty to defend is triggered "must focus
on the factual allegations that show the origin of the damages rather than on the legal theories
alleged." Nat '1 Union, 939 S.W.2d at 141 (internal quotation marks omitted) (emphasis added). But
the Court does not read the language in National Union as literally requiring money damages be

pleaded. Rather, the Texas Supreme Court is explaining the analytical focus should be on what

caused the harm complained

of,

not what technical cause of action the plaintiff asserted. INB

certainly claimed NetSpend' s error-riddled management of its funds caused the shortfall, and sought
to hold NetSpend liable for that negligent conduct. Even if not styled as money damages, NB was

seeking to avoid more than ten million dollars in liability and place that liability squarely on

NetSpend.

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Having determined the Shortfall Original Petition made a claim against NetSpend on July
13, 2012, the various pieces of this case quickly fall into place. July 13, 2012 is within the coverage

period of the 2011 Policy, which ran from August 20, 2011 to August 20, 2012. It is more than thirty
days from the end of the Policy Period. Accordingly, NetSpend had until August 20, 2012 to timely

report the claim in order to secure coverage. There is no dispute NetSpend did not do so; it first
notified AXIS of the claim on September 12, 2012, during the coverage period of the 2012 policy.
Because the claim was not both made and reported under either policy, no coverage is required. The
Texas Supreme Court has held the reporting periods prescribed by claims-made-and-reported

policies are "essential to coverage," and therefore the insurer "need not demonstrate any prejudice
to deny coverage when an insured does not give notice of a claim within the policy's specified time

frame." Prodigy Commc 'ns Corp.

v.

Agric.

Excess &

Surplus

Ins. Co.,

288 S.W.3d 374, 381 (Tex.

2009). NetSpend's failure to timely report the claim thus ends the coverage dispute.

Because AXIS was not required to defend NetSpend in the Shortfall Litigation, it cannot be
liable for breaching its contract by failing to provide a defense. NetSpend does not dispute its second

count, alleging a violation ofTexas Insurance Code section 541.060 ("Unfair Settlement Practices"),
is derivative of and dependent upon its breach of contract claim. In other words, because NetSpend's

failure to timely report [NB's claim precludes coverage of that claim under either insurance policy,

there is no basis for holding AXIS committed any unfair settlement practices in violation of the
Texas Insurance Code. Similarly, the recovery provisions asserted by NetSpendnamely Texas
Insurance Code sections 541.151 and 541.152merely provide remedies for a violation of Chapter
541, which there cannot be under these circumstances. Although AXIS does not address NetSpend' s

fourth claim for breach of the duty of good faith and fair dealing, that claim is also derivative.
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NetSpend alleges AXIS improperly denied coverage without any reasonable basis. But because the
Court has determined coverage was not required under either policy, AXIS cannot be liable under
such a theory. Finally, NetSpend's declaratory judgment request is essentially satisfied by this

Court's order adjudicating the parties' coverage dispute. There are no issues left for trial, and this
case is concluded.

Conclusion
NetSpend purchased a specific type of insurance policy from AXIS. Central to the parties'
agreement was the requirement NetSpend timely report claims made against it within the Policy
Period of each policy. NetSpend failed to do so, and AXIS was therefore not required to provide a
defense for the claims made against NetSpend in the Shortfall Litigation. AXIS is therefore entitled
to summary judgment, and NetSpend is not.

Accordingly,
IT IS ORDERED that Defendants AXIS Insurance Company and AXIS Surplus

Insurance Company's Motion for Summary Judgment [#22] is GRANTED;
IT IS FINALLY ORDERED that NetSpend's Motion for Summary Judgment [#24]
is DENIED.

SIGNED this the

JcB

day of July 2014.

SPA'7D'

SAM
UNITED STATES DISTRICT JUDGE

456 msjs ord kkt.frm

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