Alexander Mfg., Inc. v. Illinois Union Ins. Co.
| Citation | 666 F.Supp.2d 1185 |
| Decision Date | 15 October 2009 |
| Docket Number | No. Cv. 06-735-PK.,Cv. 06-735-PK. |
| Parties | ALEXANDER MANUFACTURING, INC., Employee Stock Ownership and Trust, Plaintiff, v. ILLINOIS UNION INSURANCE CO., Defendant. |
| Court | United States District Courts. 9th Circuit. United States District Court (Oregon) |
Elizabeth Farrell Oberlin, Attorney at Law, Hillsboro, OR, for Plaintiff.
Diane L. Polscer, Lloyd Bernstein, Gordon & Polscer, LLC, Portland, OR, Tae S. Um, Wilson Elser Maskowitz Edelman & Dicker LLP, Los Angeles, CA, for Defendant.
Michael Allen Maurer, Lukins & Annis, PS, Spokane, WA.
Plaintiff Alexander Manufacturing Inc. Employee Stock Ownership Plan and Trust (Trust) filed this suit against defendant Illinois Union Insurance Co. for breach of contract and breach of good faith and fair dealing. The Trust is the assignee of three former Alexander Manufacturing directors, who were insured under a policy issued by Illinois Union. Illinois Union moved for summary judgment on four coverage issues, no loss, settlement without consent, the fraudulent act exclusion and the common claim endorsement, and on the Trust's breach of good faith claim. The Trust filed a cross-motion for summary judgment on its breach of good faith claim. Although the parties do not characterize them as such, the motions on the common claim endorsement and breach of good faith are actually partial motions for summary judgment because they do not dispose of all the issues in the case.
The parties' motions for summary judgment are now before the court. This court has subject matter jurisdiction under 28 U.S.C. § 1332. For the reasons set forth below, Illinois Union's motions for summary judgment on the issue of no loss (# 54), settlement without consent (# 57), the fraudulent act exclusion (#51), and bad faith (#48) are denied. Illinois Union's motion for summary judgment on the common claim endorsement (#60) is granted. The Trust's cross motion for summary judgment on the bad faith claim (# 110) is denied.
The Trust is a pension plan as defined by 29 U.S.C. § 1002(2)(A) of the Employee Retirement Income Security Act of 1974. The Trust is the sole shareholder of Alexander Manufacturing, Inc, a manufacturer of custom cabinets. (Maurer 2d Aff., # 103, Ex. 1.) Illinois Union issued an insurance policy to Alexander Manufacturing for the policy period of January 1, 2003 to January 1, 2004. (Philip Aff., # 63, Ex. 1; Maurer Aff., # 72, Ex. 4.) The current suit arises out of that policy.
Alexander Manufacturing's insurance contract with Illinois Union includes directors and officers liability coverage and fiduciary liability coverage, each with a limit of $1,000,000. (Maurer Aff., Ex. 4, at 1.)
The directors and officers and company liability coverage includes the following provisions:
1. Insurer shall pay on behalf of the Directors and Officers Loss resulting from any Claim first made against the Directors and Officers during the Policy Period for a Wrongful Act.
2. Insurer shall pay on behalf of the Company Loss which the Company is required or permitted to pay as indemnification to any of the Directors and Officers resulting from any Claim first made against the Directors and Officers during the Policy Period for a Wrongful Act.
3. Insurer shall pay on behalf of the Company Loss resulting from any Claim first made against the Company during the Policy Period for a Wrongful Act.
In addition, the section defines wrongful act as, "[A]ny actual or alleged error, omission, misleading statement, neglect, breach of duty or act by: a) any of the Directors or Officers, while acting in their capacity as: (i) a director, officer or employee of the Company. ..." Id. at 7. The directors and officers provision exempts from coverage "any actual or alleged violation of the Employee Retirement Security Act of 1974, as amended, or any rules or regulations promulgated thereunder, or similar provisions of any federal, state or local statutory or common law." Id.
The fiduciary liability coverage provides, "Insurer shall pay on behalf of the Insureds Loss resulting from any Claim first made during the Policy Period for a Wrongful Act." Id. at 10. For the purposes of fiduciary coverage, wrongful act means:
a) with respect to a Sponsored Plan:
(i) any action or alleged breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by the Employee Retirement Security Act of 1974 as amended, or by similar or common law,
(ii) any other matter claimed against the Sponsor Company or any of the Insured Persons solely because of the service of the Sponsor Company or any of the Insured Persons as a fiduciary of any Sponsored Plan, and
(iii) any actual or alleged act, error or omission in the Administration of any Sponsored Plan, and
b) with respect to an Insured Plan, any act, error or admission in the Administration of such Insured Plan.
The directors and officers coverage section and the fiduciary section define certain terms in the same way. Both have a definition of claim that includes, "[A]ny written or oral demand for damages or other relief against any of the Insureds, and ... any judicial, administrative or arbitration proceeding initiated against any of the Insureds in which they might be subject to a binding adjudication of liability for damages or other relief." Id. at 6, 10. Both provide that "Loss means damages, settlements and Costs, Charges and Expenses incurred by" the insureds. Id. In addition, both the directors and officers coverage and the fiduciary coverage exclude claims brought about by "any dishonest, fraudulent or criminal act or omission" by any of the insureds, "as determined by a judgment or other final adjudication." Id. at 7, 11.
Both sections also separately provide that, "Interrelated Wrongful Acts means more than one Wrongful Act which have as a common nexus any fact, circumstance, situation, event, transaction or series of facts, circumstances, situations, events or transactions." Id. In addition, under the heading "Limit of Liability and Retention," both sections separately provide, "More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim ..." Id. at 8, 12.
Apart from the definitions provided in the directors and officers and fiduciary coverage sections, the policy also addresses interrelated wrongful acts generally. In the "General Terms and Conditions" section, under the heading "Limits of Liability and Retentions," the policy states:
In the event that any Claim or more than one Claim arising from Interrelated Wrongful Acts shall be covered, in whole or in part, under two or more Insuring Clauses or more than one Coverage Section, the total applicable Retention shall not exceed the single largest applicable Retention. Such largest applicable Retention shall apply only once to such Claim.
Id. at 3. The policy also includes a common claim endorsement, which provides:
IN CONSIDERATION of the premium charged for this Certificate, it is hereby understood and agreed that notwithstanding the provisions of this Certificate in respect of any Claim or more than one Claim which arises out of any Interrelated Wrongful Acts, which would, in whole or in part, be covered under the Directors and Officers Coverage Section and the Fiduciary Coverage Section, the Limit of Liability of Underwriters for all Loss incurred from all such Claims shall not exceed the sum of $1 million.
It is further agreed that the allocation of covered Loss between these Coverage Sections with respect to such Claim or Claims shall be made at the discretion of the Underwriters.
Finally, the policy includes a settlement and defense clause, which provides 1. No settlement shall be made or negotiated and no Costs, Charges and Expenses shall be incurred without Insurer's consent, such consent not to be unreasonably withheld. Insurer shall have the right to investigate and settle any Claim; provided, however, no settlement shall be made without consent of the Parent Company, such consent not to be unreasonably withheld.
2. Insurer shall have the right and duty to defend any Claim and such right and duty shall exist even if any of the allegations are groundless, false or fraudulent. The Parent Company shall have the right to assume the duty to defend any Claim provided Insurers consent in writing to such assumption. Costs, Charges and Expenses incurred by Insurer, or by the Insureds when defending or investigating with the written consent of Insurer, shall be paid by Insurer as a part of, and not in addition to, Insurer's Limit of Liability set forth in Item C of the Declarations for applicable Coverage Section.
Id. at 5. Item C indicates a $1 million limit of liability for directors and officers coverage and a $1 million limit of liability for fiduciary coverage. Id. at 1.
Although Alexander Manufacturing posted profits in excess of $1 million in 2001, in 2002 it received less revenue than it expected. (Maurer 2d Aff., Ex. 2, at 3-4.) By mid-2002, Alexander Manufacturing's chief executive officer, William Klutho, and two other Alexander Manufacturing officers, Donald Thoreson and Daniel Spofford, knew the company risked significant losses but withheld the company's financial condition from the board of directors and trustees. (Maurer Aff., Ex. 12, at 10, 12; Maurer 2d Aff., Ex. 1, at 3.) At the same time, Alexander Manufacturing incurred substantial costs and increased expenses for expected new work. (Maurer Aff., Ex. 12, at 6-7, 11; Maurer 2d Aff., Ex. 1, at 3.) Plaintiff's expert indicates that had Alexander Manufacturing known of the financial losses, it could have avoided further losses by implementing proper cost-cutting measures. (Maurer Aff., Ex. 2, at 8-10....
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