Bancinsure, Inc. v. U.K. Bancorporation Inc.

• Decision Date: 16 November 2011
• Docket Number: Civil Action No. 11–109–DLB–CJS.
• Citation: 830 F.Supp.2d 294
• Parties: BANCINSURE, INC., Plaintiff v. U.K. BANCORPORATION INC./UNITED KENTUCKY BANK OF PENDLETON COUNTY, INC., Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

830 F.Supp.2d 294

BANCINSURE, INC., Plaintiff

v.U.K. BANCORPORATION INC./UNITED KENTUCKY BANK OF PENDLETON COUNTY, INC., Defendant.

Civil Action No. 11–109–DLB–CJS.

United States District Court, E.D. Kentucky,Northern Division at Covington.

Nov. 16, 2011.

Daniel P. Cherry, Hayden, Craig & Grant PLLC, Timothy D. Martin, Ward Hocker & Thornton PLLC, Louisville, KY, for Plaintiff.

Beverly R. Storm, Mark G. Arnzen, Arnzen, Wentz, Molloy, Laber & Storm, P.S.C., Covington, KY, James M. Crawford, Crawford & Baxter, P.S.C., Carrollton, KY, M. Thurman Senn, Morgan & Pottinger, P.S.C., Louisville, KY, for Defendant.

MEMORANDUM OPINION AND ORDER

DAVID L. BUNNING, District Judge.

Plaintiff BancInsure, Inc. (“BancInsure”), commenced this action against Defendant U.K. Bancorporation Inc./United Kentucky Bank of Pendleton County, Inc. (“UKB”), pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaratory judgment that a Financial Institution Bond and Extended Professional Liability Policy issued to UKB are rescinded effective October 13, 2010 and rendered void ab initio, thereby precluding coverage for losses sustained as a result of UKB's President/CEO's embezzlement of funds totaling over two million dollars. Thereafter, UKB filed several Counterclaims against BancInsure seeking a declaratory judgment that UKB is entitled to coverage under the applicable policies and further alleging several state law claims, including a violation of the Unfair Claims Settlement Practices Act (UCSPA), K.R.S. § 304.12–230, failure to timely pay a claim in violation of K.R.S. § 304.12–235, and common law bad faith. This Court's jurisdiction is based on diversity, and Kentucky substantive law applies.

This matter is currently before the Court on Defendant's Motion for Summary Judgment (Doc. # 12) and Plaintiff's Cross Motion for Summary Judgment (Doc. # 22) on the declaratory judgment counts only. Both motions have been fully briefed, (Docs.# 21, 23, 24, 25), and the matter is now ripe for review. For the reasons stated herein, Defendant's Motion for Summary Judgment (Doc. # 12) is hereby GRANTED IN PART and DENIED IN PART, and Plaintiff's Cross Motion for Summary Judgment (Doc. # 22) is hereby DENIED.

I. FACTUAL AND PROCEDURAL BACKGROUND

UKB was established in 1992. Since that time, BancInsure provided insurance coverage to UKB under a Financial Institution Bond (FIB) and Extended Professional Liability Policy (EPL). UKB's former President and Chief Executive Officer (CEO), Ed McCandless, completed all applications for the policies prior to his death in 2008. Thereafter, the Board of Directors appointed Donna Wood as President and CEO of UKB and gave her the authority to manage the operations and affairs of the bank. Unbeknownst to UKB, or the Board of Directors, Wood had been embezzling funds, totaling over two million dollars, from the bank since approximately 2003.

A. Wood's Embezzlement

Pursuant to Fed.R.Evid. 201, the Court will take judicial notice of the details contained in Wood's Plea Agreement with the United States in Covington Criminal Case No. 2:11–cr–54–DCR (Doc. # 8). In her written plea agreement, Wood agreed to the following facts relevant to her criminal conduct.

Wood began working at UKB when it first opened in 1992. She was initially hired as the Vice President and Chief Operating Officer (COO). After McCandless' death, Wood became the interim President for approximately six months until the Board made her the President and CEO. At the time, Wood had twenty-seven years of experience in the banking industry. Upon review of the bank's records as they related to four accounts owned by the bank, UKB's outside auditing firm discovered that from approximately March 2003, and continuing through January 26, 2011, Wood transferred funds belonging to UKB to three accounts at the bank owned by Wood and/or Rick Wood, her husband, Thomas Wood and Brett Wood, her adult sons, in the amount of $2,244,506.08.

Each time Wood took money, she prepared a fraudulent General Ledger Debit Ticket and a Deposit Slip or General Ledger Credit Ticket to place the funds into one of the three accounts. An example of how she committed the fraud included the following: On January 26, 2011, Wood prepared a General Ledger Debit Ticket for $22,500, to account 1200450, Fifth Third account, and a corresponding deposit slip for the same amount to account 8000042, Rick Wood, Special Account. On the General Ledger Debit Ticket for description she wrote: “Int. sec 1–25 SWD4” which would appear to be interest received by the bank if the ticket was reviewed by someone. On January 27, 2011, Wood wrote a check to UKB for $22,500, deposited $3,500 into account 8023255, Tom Wood, and deposited $19,000 into account 8033366, Brett Wood. The General Ledger Debit Ticket recording caused the financial records of the bank to show the bank had an additional $22,500 in the bank account at Fifth Third Bank.

To cover the thefts from the auditors and bank examiners, Wood delayed preparing their reconciliation until the next month's bank statement was received. Wood took figures from that statement and recorded them as outstanding on her reconciliation. Wood used figures from the next bank statement so when the auditor or examiner reviewed that account, she could provide them with a document which appeared to agree to her figures. Wood then added the outstanding figures so the reconciliation showed the bank balance agreed to the balance in the bank's accounting records.

B. The Financial Institution Bond and Extended Professional Liability Policy Common Application

In 2010, Wood notified the Board that the current FIB and EPL Policy were set to expire in October 2010. While the specifics are unclear, the board members agreed that a general discussion took place in which the Board confirmed that UKB should continue to seek coverage from BancInsure.¹ The Board then gave Wood the exclusive authority to complete any applications or other documents on behalf of UKB that were necessary to obtain a renewal of the FIB and EPL policies.

On August 20, 2010, Wood completed a renewal application for the FIB and EPL Policy. Besides the interim anniversary applications completed on November 2, 2008 and October 6, 2009, this was the only such application that Wood ever completed and signed on behalf of UKB. In response to Question 1 of the renewal application, which asked for the “Officer designated as agent of the applicant and of all Directors & Officers to receive any and all notices from the Insurer or its authorized representative,” Wood stated that she was the designated agent in her capacity as President of UKB. (Doc. # 22–5, at 1). Wood also represented that she did not know any information about any act, error, or omission which might give rise to a claim by answering “No” to the following question:

35. Does any Director or Officer of the applicant have knowledge of or know information about any act, error, omission which might give rise to a claim under Directors and Officers Liability Coverage, Professional Liability Coverage, Employment Practices Liability Coverage, Lender Liability Coverage, Fiduciary Liability Coverage, a Financial Institution Bond or a Kidnap and Ransom Policy?

If yes, please attach full details.

It is agreed that if such knowledge or information exists, any resulting claims are excluded from coverage.²

(Doc. # 22–5, at 3). The renewal application was signed on behalf of UKB by Wood as President and CEO. Directly above Wood's signature, the following declaration appears:

THE UNDERSIGNED DECLARES THAT THE STATEMENTS SET FORTH HEREIN ARE TRUE. THE UNDERSIGNED AGREES THAT IF THE INFORMATION SUPPLIED ON THIS APPLICATION CHANGES BETWEEN THE DATE OF THIS APPLICATION AND THE EFFECTIVE DATE OF THE INSURANCE, HE/SHE (UNDERSIGNED) WILL IMMEDIATELY NOTIFY THE INSURANCE COMPANY OF SUCH CHANGES, AND THE COMPANY MAY WITHDRAW OR MODIFY ANY OUTSTANDING QUOTATIONS AND/OR AUTHORIZATION OR AGREEMENT TO BIND INSURANCE.

( Id. at 5).

Based on the renewal application, BancInsure wrote and issued to UKB the FIB No. 0011059 and EPL Policy No. 0010952 both effective from October 13, 2010 to October 13, 2013.

C. Financial Institution Bond

Pursuant to the Bond, BancInsure agreed to provide coverage to UKB for “[l]oss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others” and with the intent “to obtain improper financial benefit for the Employee or another person or entity.” (Doc. # 22–6, at 7). BancInsure was required to provide UKB with ninety days notice before BancInsure could cancel or terminate the Bond. The FIB also provided that “[a]ny intentional misrepresentation, omission, concealment or incorrect statement of a material fact, in the application or otherwise, shall be grounds for the rescission of this Bond.” ( Id. at 18).

D. Extended Professional Liability Policy

Pursuant to the EPL, BancInsure agreed to provide coverage to an “insured person,” except to the extent that UKB has indemnified them, for “loss that is a result of a claim for management practices wrongful act” first made during the policy period....” (Doc. # 22–7, at 5). A “management practices wrongful act” is defined as “any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by a director or officer acting solely in his or her capacity as a director or officer. ( Id. at 8). “Insured person” is defined as “any person who was, now is or shall be a director, officer, trustee, appointed member of an advisory board or committee, volunteer, organizer or employee of the company.” ( Id.). BancInsure also agreed to provide coverage to UKB for loss that is the result of a claim for a management practices wrongful act to the extent that UKB had indemnified any insured person. Additionally, BancInsure was required to pay public relations expenses to UKB that it incurred as...