Benson v. Casa De Capri Enters.

• Decision Date: 06 February 2023
• Docket Number: CV-18-00006-PHX-DWL
• Parties: Jacob Benson, et al., Plaintiffs, v. Casa De Capri Enterprises LLC, et al., Defendants.
• Court: U.S. District Court — District of Arizona

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Jacob Benson, et al., Plaintiffs, v. Casa De Capri Enterprises LLC, et al., Defendants.

No. CV-18-00006-PHX-DWL

United States District Court, D. Arizona

February 6, 2023

ORDER

Dominie W. Lanza, United States District Judge.

INTRODUCTION

Jacob Benson is a disabled vulnerable adult who received skilled nursing care at a now-defunct facility called Casa de Capri Enterprises LLC (“Capri”). In December 2012 Benson and other family members (together “Plaintiffs”) brought a negligence action against Capri in Arizona state court.

At the time, Capri had a “claims paid” insurance policy issued by Defendant Continuing Care Risk Retention Group Inc. (“CCRRG”). Under this unusual type of policy, the insurer is only responsible for indemnifying the insured against claims that become payable while the policy remains in effect. In contrast, under an “occurrence” policy or a “claims made” policy (which are more common), the insurer becomes responsible for indemnification so long as the liability-generating event occurred (or was disclosed to the insurer) during the policy term.

CCRRG initially assumed the defense of Plaintiffs' lawsuit against Capri pursuant to Capri's insurance policy. However, after Capri became insolvent, stopped paying its premiums, declared bankruptcy, and cancelled the policy, CCRRG withdrew the defense. Years later, after the bankruptcy stay was lifted, Plaintiffs obtained a $1.5 million judgment against Capri and then initiated this garnishment action against CCRRG.

Plaintiffs' theory is that because Capri's policy with CCRRG provided $1 million in coverage for the underlying claim, and thus CCRRG is effectively holding $1 million that belongs to Capri, Plaintiffs may rely on the law of garnishment to obtain that money from CCRRG. CCRRG's defense, meanwhile, is that the underlying judgment against Capri is not covered because it was not issued until years after the policy was cancelled and Capri ceased being a CCRRG member (which, under this “claims paid” policy, means there is no coverage). Plaintiffs challenge this defense on a number of grounds, including that (1) the policy included a so-called “Bankruptcy Clause” that should be construed as requiring coverage when the insured's reason for cancelling the policy is bankruptcy or financial insolvency; and (2) regardless of the Bankruptcy Clause's applicability, disallowing coverage under these circumstances-where the liability-generating incident occurred while the policy remained in effect and the insured cancelled the policy only because it could not afford the premiums-would be inequitable and violate Arizona's statutory law and public policy. And one of CCRRG's rejoinders to those arguments is that because it is a unique form of insurance company known as a risk retention group (“RRG”), the preemption provisions of a federal statute-the Liability Risk Retention Act of 1986 (“LRRA”)-preclude Plaintiffs from relying on Arizona law in an attempt to invalidate any of the policy's limitations on coverage.

As this summary makes clear (and is discussed in more detail below), this case presents unusually complicated insurance coverage issues. The resolution of those issues is further complicated by the dearth of judicial decisions, from any jurisdiction, analyzing “claims paid” insurance policies. The parties have now presented their positions via crossmotions for summary judgment. (Docs. 55, 125.) For the following reasons, Plaintiffs' motion is denied and CCRRG's motion is granted.

BACKGROUND

I. Facts

The facts summarized below, and detailed throughout this order, are taken from the parties' summary judgment submissions and other documents in the record. The facts are uncontroverted unless otherwise noted.

On December 10, 2012, Plaintiffs filed suit in Maricopa County Superior Court against Capri, alleging abuse and neglect of a vulnerable adult and negligence. (Doc. 65 ¶ 1.) At the time the lawsuit was served, Capri was insured under a “professional liability insurance policy” issued by CCRRG. (Doc. 65 ¶ 3.) The policy (the “2012 Policy”) provided coverage from January 1, 2012 to January 1, 2013 and had a policy limit of $1 million. (Doc. 56-1 at 36.) Capri renewed its policy with CCRRG the following year (the “2013 Policy”). (Doc. 65 ¶ 4.) The 2013 Policy provided coverage from January 1, 2013 to January 1, 2014. (Doc. 13-1 at 5.) Both policies incorporate by reference a 2009 subscription agreement (Doc. 13-1 at 53-73) and CCRRG's member bylaws (Doc. 65-4). (Doc. 13-1 at 6 [2013 Policy]; Doc. 56-1 at 37 [2012 Policy].)

The 2012 and 2013 Policies are “claims paid” policies. (Doc. 132 ¶ 1.) In the “Coverages” section of each policy, under the subheading “Insuring Agreement,” CCRRG agreed to pay “amounts within the policy limits for ‘Damages' . . . on behalf of a ‘Member' who becomes legally obligated to ‘Pay' ‘Damages' during the time they are a CCRRG Member.'” (Doc. 13-1 at 13, emphasis added.) In the subscription agreement, CCRRG elaborated that “[t]he terms and conditions of this type of coverage differ significantly from a typical occurrence or claims made indemnification insurance policy. In essence, . . . CCRRG has no responsibility for any portion of a claim not actually paid during the contract period. Under the Claims Paid policy losses are only covered by the Company if the insured is a Member of CCRRG when the payment is made . . . .” (Id. at 58.)

On its website and in a brochure, CCRRG further clarified that “[t]he average carrier collects higher premiums to protect itself in advance from the possibility you will change carriers, because their obligation to pay claims persist even after you leave. With [CCRRG], your claims are paid for by the group as long as you are a member. If you have an open claim and decide to leave [CCRRG], the group stops supporting the claim so your claim moves with you.” (Doc. 132 ¶ 16.) Similarly, in a checklist concerning the renewal of coverage, CCRRG explained: “The result of [a ‘claims paid' policy] is that Members pay less on average from year to year. In return for typically lower premium costs, the Member agrees either to remain with CCRRG until any pending claim is resolved or has the option to purchase an extended reporting period (ERP) coverage when they leave CCRRG. If a Member leaves CCRRG with an open claim and does not purchase ERP then the departing member is thus making the election to take the claim with them and handle defense and payment of indemnity out of their ‘own pocket.'” (Doc. 65-2.)

Before the 2013 renewal, CCRRG offered Capri two renewal options: (1) to continue with the existing “claims paid” policy for $256,169.32; or (2) to switch to a “claims made” policy for $292,345.45. (Doc. 132 ¶ 17.) Capri chose the less expensive “claims paid” option. (Id.)

At the time the policies were issued, CCRRG was domiciled in South Carolina. (Doc. 132 ¶ 7.) The South Carolina Department of Insurance approved the CCRRG “claims paid” policy form. (Id. ¶ 8.) Gregory Anderson served as Capri's President and CEO from 2008 through September 2013, when it ceased ongoing operations. (Doc. 56-9 ¶¶ 5, 15.) Before 2008, William Fay was Capri's “managing member.” (Doc. 132-2 ¶¶ 15.) Other relevant entities and individuals include Magnolia LTC Management Services (“Magnolia”), which served as the program manager for CCRRG, and Robert “Bob” Bates, who was Magnolia's president and CCRRG's corporate secretary. (Doc. 65 ¶ 13.)

On December 28, 2012, Capri was served in the Arizona state court lawsuit. (Doc. 65 ¶ 2.) Capri timely reported the lawsuit to CCRRG, as it was required to do under the 2012 Policy. (Id. ¶ 20.) CCRRG accepted Capri's tender under the 2012 Policy and appointed defense counsel to defend the lawsuit without a written reservation of rights. (Id. ¶¶ 21, 23.)

On an unspecified date after CCRRG began providing a defense of the lawsuit, Capri defaulted on its obligation to pay certain deductibles. (Id. ¶ 24.) As a result, Magnolia, through Bates, sent Capri a letter on July 15, 2013 informing Capri of its “seriously delinquent” status “in meeting its insurance deductible payment obligations.” (Doc. 56-6 at 1-2.) The letter stated that CCRRG's board of directors could terminate Capri's membership for the outstanding delinquencies and, if they did, “Capri's right to continued coverage of existing open claims . . . may be at risk if the outstanding default in payment is not cured to the satisfaction of the [board].” (Id. at 1.)

On July 19, 2013, CCRRG and Capri agreed to a payment plan concerning the outstanding deductible obligation. (Doc. 65 ¶ 25.) However, less than one month into that plan, Capri again defaulted. (Id.) As a result, CCRRG again threatened action against Capri. (Id.)

On August 13, 2013, CCRRG issued a notice of intent to cancel the 2013 Policy, which stated that the Policy would be cancelled if Capri did not pay $22,270.03 by August 27, 2013. (Doc. 56-8 at 1; Doc. 65 ¶ 26.)

On August 19, 2013, Capri filed for bankruptcy. (Doc. 65 ¶ 27.) Afterward, Plaintiffs' lawsuit against Capri was stayed. (Doc. 1-1 at 54-55, 58-59, 62.)

By August 22, 2013, CCRRG received notice of the bankruptcy. (Doc. 65 ¶ 33.) That same day, the bankruptcy court authorized a debtor in possession loan for Capri “to immediately pay the . . . monthly premium for liability insurance of approximately $30,000.” (Doc. 65-13 at 3 ¶ 7.)

On September 6, 2013, CCRRG rescinded its previously issued notice of intent to cancel. (Doc. 64 ¶ 35; Doc. 56-13.)

On September 20, 2013, the bankruptcy court approved the sale of Capri's assets to an unrelated party. (Doc. 65 ¶ 36.)

On September 25, 2013, Capri stopped payment on a pair of premium checks it had previously sent to CCRRG, which CCRRG...