Bailey v. Fed. Ins. Co.

• Decision Date: 30 September 2016
• Docket Number: Civil Action Number 2:15-cv-210-AKK
• Citation: 214 F.Supp.3d 1228
• Parties: C. Stanley BAILEY, et al., Plaintiffs, v. FEDERAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Alabama

214 F.Supp.3d 1228

C. Stanley BAILEY, et al., Plaintiffs,

v.FEDERAL INSURANCE COMPANY, Defendant.

Civil Action Number 2:15-cv-210-AKK

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

Signed September 30, 2016

Frances P. Quarles, Randall D. Quarles, Quarles Law Firm LLC, Birmingham, AL, for Plaintiffs.

Eddie T. Ramey, Jennifer M. Busby, Julien Mitchell Relfe, Burr & Forman LLP, Birmingham, AL, Cailin E. Lechner, David Newmann, Hogan Lovells US LLP, Philadelphia, PA, Ellen S. Kennedy, Hogan Lovells, Washington, DC, for Defendant.

MEMORANDUM OPINION

ABDUL K. KALLON, United States District Judge.

Plaintiffs C. Stanley Bailey, John Figlewski, Rick D. Gardner, George J. Hall, Rick Halloran, James M. Kent, Jr., Peter L. Lowe, Shannon Maddox, D. Dewey Mitchell, Robert R. Parrish, Jr., Kenneth Pomeroy, C. Marvin Scott (collectively "the Bailey Plaintiffs"), and Intervenor Plaintiffs James A. White and William Caughran (collectively "the Intervenor Plaintiffs") (collectively "the Plaintiffs"), pursue this action against Federal Insurance Company pursuant to 28 U.S.C. § 2201 seeking a declaration of rights and obligations under a liability insurance policy. Docs. 1 at 3; 24 at 5–6; 29 at 5–6.¹ Specifically, Plaintiffs allege that Federal breached the policy when it attached an endorsement that it had not first filed with the State of Alabama and then used that endorsement to limit coverage. Id. Plaintiffs have moved for partial summary judgment, docs. 33; 77, 91, and Federal has also moved for summary judgment on all claims, docs. 40; 79. The motions are fully briefed and ripe for review. Docs. 35; 38; 47; 78; 80; 91; 92; 106; 107; 108. Based on a review of the evidence, the law, and with the benefit of oral argument as to the issues related to Count I, Plaintiffs' motion for summary judgment is due to be denied in part, and Federal's motion for summary judgment is due to be granted in part.

I. SUMMARY JUDGMENT STANDARD OF REVIEW

Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." " Rule 56 [ ] mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (alteration in original). The moving party bears the initial burden of proving the absence of a genuine issue of material fact. Id. at 323, 106 S.Ct. 2548. The burden then shifts to the nonmoving party, who is required to "go beyond the pleadings" to establish that there is a "genuine issue for trial." Id. at 324, 106 S.Ct. 2548 (citation and internal quotation marks omitted). A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The court must construe the evidence and all reasonable inferences arising from it in the light most favorable to the non-moving party. Adickes v. S. H. Kress & Co. , 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970) ; see also Anderson , 477 U.S. at 255, 106 S.Ct. 2505 (all justifiable inferences must be drawn in the non-moving party's favor). Any factual disputes will be resolved in the non-moving party's favor when sufficient competent evidence supports the non-moving party's version of the disputed facts. See Pace v. Capobianco , 283 F.3d 1275, 1276, 1278 (11th Cir. 2002) (a court is not required to resolve disputes in the non-moving party's favor when that party's version of events is supported by insufficient evidence). However, "mere conclusions and unsupported factual allegations are legally insufficient to defeat a summary judgment motion." Ellis v. England , 432 F.3d 1321, 1326 (11th Cir. 2005) (per curiam) (citing Bald Mountain Park, Ltd. v. Oliver , 863 F.2d 1560, 1563 (11th Cir. 1989) ). Moreover, "[a] mere ‘scintilla’ of evidence supporting the opposing party's position will not suffice; there must be enough of a showing that the jury could reasonably find for that party." Walker v. Darby , 911 F.2d 1573, 1577 (11th Cir. 1990) (citing Anderson , 477 U.S. at 252, 106 S.Ct. 2505 ).

II. FACTUAL ALLEGATIONS

The Plaintiffs are former officers and directors of Superior Bancorp, a holding company for Superior Bank. Docs. 34 at 6; 81-2 at 15–17. In their capacity as officers and directors, Plaintiffs regularly purchased liability insurance coverage, including Directors and Officers insurance (D & O), for Superior Bancorp and Superior Bank from Federal. Id. D & O policies are used to protect the directors and officers of a corporation against claims that they allegedly failed to perform their duties. Docs. 35-2 at 10; 81-1 at 25.

The dispute in this case centers on a D & O policy Plaintiffs purchased through their broker, the Mailon Kent Agency, whose owner, Mailon Kent, was also a director of Superior Bancorp. Doc. 81-3 at 16. From April 2009 until April 2010, the D & O policy had a $10 million coverage limit that contained no regulatory limitations or exclusions resulting from regulatory claims. Docs. 35-2 at 16; 81-1 at 45. However, when the policy came up for renewal in April 2010, because of the economic climate Federal informed Plaintiffs that it intended to change the terms of the policy to offer liability coverage with a regulatory exclusion endorsement and defense carveback.² Doc. 82-1 at 40. The defense carveback meant that the D & O policy had a new sublimit of $1 million on defense coverage for a regulatory action against the bank. Doc. 35-2 at 19. Federal decreased the coverage because of its concerns about potential exposure if Superior Bank failed and the Federal Deposit Insurance Corporation instituted a civil action against the directors and officers. Doc. 35-9 at 2–3. Although Plaintiffs had the option to reject the new terms—i.e., Plaintiffs could have paid an additional amount to extend the old coverage for acts committed during the coverage period or obtain coverage with another carrier; Plaintiffs decided to renew with Federal under the new limitations of a regulatory exclusion endorsement. Docs. 35-8 at 2; 81-1 at 71–72.

As part of its operating practice and procedure, Federal has various standard endorsements or policies its underwriters may retrieve and insert into a policy. Doc. 35-2 at 12. In contrast, a manuscript endorsement is one that is created for a specific policy with the attendant language changes that may be necessary. Doc. 35-2 at 13. Basically, when an underwriter wishes to use language that is not standard, the underwriter sends the desired language to Federal's legal counsel for that department to create an endorsement, i.e., "manuscripted." Doc. 35-2 at 12–13. Federal utilized this practice for the new policy it issued to Plaintiffs because although Federal already had defense carvebacks in place for some financial institutions, it did not have a standard endorsement available with the exclusion that was widely used for banks. Docs. 35-2 at 20, 40; 86-4 at 12. As a result, Federal manuscripted an endorsement for the policy it issued Plaintiffs in April 2010.

Federal finally transmitted the final binders containing the policy to Plaintiffs in July 2010. Doc. 81-8 at 124. By then, Federal had created a standard version of the regulatory exclusion endorsement and placed this standard version in the policy. Doc. 35-12 at 2. However, apparently because it viewed the endorsement as "unique" and not subject to the filing requirement imposed by Ala. Code § 27–14–8, doc. 35-10 at 8, Federal waited until September 6, 2010 to file the endorsement with the Alabama Department of Insurance, docs. 35-4 at 4; 35-17 at 2–3.

Superior Bank failed a year after Federal issued the new policy and six months after Federal filed the endorsement. The FDIC takeover and its litigation against Plaintiffs triggered Plaintiffs to request coverage from Federal for defense costs. Doc. 39-1 at 28. By a letter dated May 11, 2011, Federal informed Plaintiffs it intended to cap the coverage for defense costs at $1 million because of the regulatory exclusion cap. Doc. 35-3 at 2–7. Although Plaintiffs never raised any objections to the policy or its endorsement, see, e.g., doc. 81-1 at 96; 81-7 at 63–64, Plaintiffs now seek to void the policy due to alleged deficiencies. Specifically, Plaintiffs maintain that the failure to file prior to issuing the policy that forms Plaintiffs contentions in this case that the defense carveback contained in the endorsement is null and void as a result and that Federal is obligated to provide coverage without the $1 million sublimit.

III. ANALYSIS

Plaintiffs seek to void the Endorsement and ultimately get coverage beyond the $1 million limit. In particular, in Counts I and II, Plaintiffs move for a Declaratory Judgment pursuant to 28 U.S.C. § 2201, declaring the Regulatory Exclusion Endorsement null and void due to Federal's failure to (1) file the endorsement in compliance with Ala. Code § 27–14–8, and (2) disclose the terms of the endorsement before materially altering the policy. Doc. 1 at 17. And, in Counts III and IV, Plaintiffs seek reformation of the insurance contract and state a claim for breach of contract, respectively.³ As a general matter, where, as here, the interpretation of a state statute is at issue, a federal court sitting in diversity must apply state substantive law. Allison v. Vintage Sports Plaques, 136 F.3d 1443, 1445 (11th Cir. 1998) (citing Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) ). Put differently, the court must "decide the case the way it appears the state's highest court would." Ernie Haire...