Auto-Owners Ins. Co. v. Toole

• Decision Date: 27 November 1996
• Docket Number: Civil Action No. 95-T-1153-S.
• Citation: 947 F.Supp. 1557
• Parties: AUTO-OWNERS INSURANCE COMPANY, etc., Plaintiff, v. Danny TOOLE, etc., et al., Defendants.
• Court: U.S. District Court — Middle District of Alabama

947 F.Supp. 1557

AUTO-OWNERS INSURANCE COMPANY, etc., Plaintiff, v. Danny TOOLE, etc., et al., Defendants.

Civil Action No. 95-T-1153-S.

United States District Court, M.D. Alabama, Southern Division.

November 27, 1996.

COPYRIGHT MATERIAL OMITTED

William C. Carn, III, Lee & McInish, Dothan, AL, for Auto-Owners Insurance Company.

Gary L. Weaver, Powell, Peek & Weaver, Andalusia, AL, for Danny Toole.

J.E. Sawyer, Jr., Enterprise, AL, for Sherry Lawson, Jimmy R. Parnell, Ruby M. Hill, Daniel Manrique, Glenda Manrique, Henry C. Jones, Kenneth A. Smith, Samuel L. Young, Mary Young, Michelle Smith, Sara Dale Jackson, Ruby C. Flowers, Rosalind S. Jackson, Dale McLaughlin, Jeannette McLaughlin, Bertha Johnson, Shelby Mims, Tammy Mims, Angela L. Deetion, Francia

Morales, Wilbert K. Maschmeier, Lamar Asbel, Carla Asbel, Brenda Guilford, Freddie Austin, Daniel Smith, Clarence L. Chaplin, Polly A. Chaplin.

MEMORANDUM OPINION

MYRON H. THOMPSON, Chief Judge.

Pursuant to the Declaratory Judgment Act, 28 U.S.C.A. § 2201, plaintiff Auto-Owners Insurance Company filed this action against defendant Danny Toole, d/b/a Rucker Auto Sales, seeking a declaration that it has no duty, under a commercial and garage liability insurance policy, to defend or indemnify Toole in an underlying state court action, Lawson v. Mercury Finance, Inc., civil action no. 95-380-H, pending in the Circuit Court of Houston County, Alabama. In the underlying lawsuit, the state plaintiffs claim, among other things, that Toole committed fraud and breach of contract in connection with the sale and financing of motor vehicles. Toole seeks coverage from Auto-Owners under commercial and garage liability policies in effect at the time the claims arose. Auto-Owners has properly invoked the diversity-of-citizenship jurisdiction of this court. 28 U.S.C.A. § 1332.

By agreement of the parties, this lawsuit has been submitted to the court for final judgment on the pleadings, the jointly-submitted evidentiary record, and the briefs of each of the parties. For the reasons that follow, the court grants declaratory relief in Auto-Owners's favor with respect to its duty to defend Toole and denies such relief as premature with respect to its duty to indemnify.

I. BACKGROUND

On April 21, 1995, Sherry Lawson and 27 others filed a lawsuit in state court against Toole¹ and others asserting fraud, breach of contract, and other state-law claims in connection with the sale and financing of motor vehicles.² The state plaintiffs claim that Mercury Finance Company instituted a "reserve system" in which it retained between $500 and $1,000 of the amount financed in each automobile loan.³ The state plaintiffs allege that this system amounted to fraudulent concealment of the true amount of the loans and associated fees.⁴ In addition, they allege that Toole and others, acting as agents of Mercury, sold cars to them and failed to disclose that the purchase price of the vehicles had been inflated to include the reserve amount.⁵

Auto-Owners is currently defending Toole in the state court action. Under reservation of right, Auto-Owners has undertaken Toole's defense pursuant to commercial liability and garage liability insurance policies with him. Auto-Owners contends that, under the terms of the policies, it is obligated neither to defend nor to indemnify Toole in the underlying state action.⁶

Toole contracted with Auto-Owners to provide liability coverage for himself, d/b/a Rucker Auto Sales.⁷ Auto-Owners issued two successive policies to Toole.⁸ The provisions of the policies are identical except for the coverage period. The policies provide that Auto-Owners would indemnify and defend Toole for amounts that the business was legally obligated to pay for "bodily injury" or "property damage" due to an "occurrence."⁹ The policies, however, contain a number of exclusions, some of which the court will explain later.

Auto-Owners filed the present lawsuit in federal court on September 1, 1995, seeking a determination of its obligation to defend and indemnify Toole in the underlying state action.¹⁰

II. DUTY TO DEFEND

Auto-Owners argues that it has no duty to defend Toole in the underlying state-court action because the allegations in the state-court complaint fall outside the scope of the insurance policies' coverage. An insurance company's duty to defend its insured from suit is determined by the language of the insurance policy and by the allegations in the complaint filed against the insured. Alfa Mutual Ins. Co. v. Morrison, 613 So.2d 381, 382 (Ala.1993); Ladner & Co. v. Southern Guar. Ins. Co., 347 So.2d 100, 102 (Ala.1977). "If the allegations of the injured party's complaint show an accident or occurrence which comes within the coverage of the policy, the insurer is obligated to defend regardless of the ultimate liability of the insured." Chandler v. Alabama Mun. Ins. Co., 585 So.2d 1365, 1367 (Ala.1991) (internal quotations omitted). Where the allegations of the complaint show that no injury alleged is within the coverage of the policy, however, or where the allegations are ambiguous, "the court is not limited to the bare allegations of the complaint ... but may also look to facts which may be proved by admissible evidence." Id.; see also Perkins v. Hartford Ins. Group, 932 F.2d 1392 (11th Cir.1991).

Under Alabama law, the insured bears the burden of establishing coverage by demonstrating that a claim falls within the policy, see Colonial Life & Accident Ins. Co. v. Collins, 280 Ala. 373, 194 So.2d 532, 535 (1967), while the insurer bears the burden of proving the applicability of any policy exclusion. See U.S. Fidelity & Guar. Co. v. Armstrong, 479 So.2d 1164, 1168 (Ala.1985). If an insurance policy is ambiguous in its terms, the policy must be construed liberally in favor of the insured, and exceptions to coverage must be interpreted as narrowly as possible in order to provide maximum coverage to the insured. Altiere v. Blue Cross & Blue Shield, 551 So.2d 290, 292 (Ala.1989). However, if there is no ambiguity, an insurance contract must be enforced as written, and courts should not defeat express provisions in a policy, including exclusions from coverage, by making a new contract for the parties. Id.

Lawson and the other state plaintiffs allege the following in the underlying state-court action:¹¹

Count One: Toole and the other state defendants fraudulently failed to disclose reserves on loans made to Lawson and the other state plaintiff purchasers even though they had a legal duty to disclose all financing arrangements.

Count Two: Toole and the other state defendants fraudulently failed to reveal that Mercury required the car dealerships to charge the state plaintiffs "unreasonably high" premiums to satisfy the loan reserve requirements.¹²

Count Three: Toole and the other state defendants fraudulently failed to reveal that the state plaintiffs were purchasing credit life insurance policies.

Count Four: Mercury Finance Company and the other state defendants forced the state plaintiffs to purchase unnecessary insurance for their vehicles, and Toole and the other state defendants fraudulently failed to disclose that they were charging the state plaintiff purchasers an unreasonably high premium for the coverage.

Count Five: Mercury Finance failed to give proper notice before repossessing the state plaintiffs' vehicles, and Mercury converted the vehicles and their contents.

Count Six: Toole and the other state defendants violated the Alabama Deceptive Trade Practices Act, 1975 Ala.Code § 8-19-1.

Count Seven: Toole and the other state defendants "willfully, wantonly, or negligently performed the acts in COUNT ONE through COUNT SIX" of the complaint.

Count Eight: Toole and the other state defendants fraudulently misrepresented the amount of the loans in loan documents.

Count Nine: Toole and the other state defendants entered a scheme to defraud Lawson and other purchasers by failing to disclose all charges, discounts, and percentage spreads after having represented to them that full disclosure had been made. Toole and the other state defendants acted with actual malice and as part of a pattern and practice of fraud and other intentional wrongful conduct.

Count Ten: Mercury Finance's acts were unconscionable.

Count Eleven: Toole and the other state defendants committed breach of contract.

A.

In this federal lawsuit for declaratory relief, Auto-Owners claims that it is not obligated to defend counts one, two, three, four, eight, and nine because they all sound in fraud. The court agrees. Auto-Owners's policies with Toole expressly provide that they do not apply to "any action or claim arising out of fraud, misrepresentation, deceit, suppression, or concealment of fact, whether intentional, unintentional, innocent, [or] negligent ... but not limited to an action or lawsuit based on direct liability, vicarious liability or agency principles."¹³ These counts — one, two, three, four, eight, and nine — are therefore excluded from coverage.

B.

Auto-Owners claims that it is not obligated to defend count five because Toole is not a defendant to that count. The court agrees. Rule 8 of the Alabama Rules of Civil Procedure provides that "[a] pleading which sets forth a claim for relief ... shall contain ... (1) a short plain statement of the claim showing that the pleader is entitled for relief and (2) a demand for judgment for the relief that the plaintiff seeks."¹⁴ It is evident that Toole is not a defendant to count five, as the count contains allegations directed against only Mercury Finance, and the state plaintiffs seek to recover from only Mercury.

C.

Similarly, in count six, although the state plaintiffs allege that "Defendants violated the Alabama Deceptive Trade Practices Act,"¹⁵ in their demand for judgment, the state plaintiffs seek relief only against Mercury Finance.¹⁶ Therefore, count six, according to the requirements of Rule 8, does not assert a claim for...