Carter v. Westport Ins. Corp.

Decision Date23 October 2013
Docket NumberCivil No. B–09–99.
Citation997 F.Supp.2d 590
PartiesBrent A. CARTER, Plaintiff, v. WESTPORT INS. CORP., Defendant.
CourtU.S. District Court — Southern District of Texas

OPINION TEXT STARTS HERE

Norton A. Colvin, Jr., Attorney at Law, Alison Diane Kennamer, Colvin Chaney et al., Brownsville, TX, for Plaintiff.

Ellen Lewis Van Meir, Mariah Baker Quiroz, Thompson Coe et al., Dallas, TX, for Defendant.

MEMORANDUM OPINION AND ORDER

ANDREW S. HANEN, District Judge.

This case concerns the extent of coverage of a professional liability insurance policy issued by Westport Insurance Corporation (Westport) to the insurance agency Smith–Reagan & Associates, Inc. (“Smith–Reagan”). Plaintiff Brent A. Carter (Plaintiff or “Carter”), an employee of Smith–Reagan, was a defendant in an action filed by Valley Baptist Health System (“Valley Baptist”) (“the underlying lawsuit”), in which Valley Baptist alleged that Carter and another insurance agent, Michael N. Swetnam, individually and d/b/a Swetnam Insurance Services, had defrauded Valley Baptist into paying premiums for non-existent policies, as well as excess commissions hidden within inflated premiums on another two, otherwise legitimate, policies.1 Valley Baptist sought to recover compensatory damages—specifically, the return of the full premium amounts for the non-existent policies and the return of the amounts by which the premiums for the legitimate policies had been inflated. Additionally, under certain causes of action, Valley Baptist sought interest, exemplary damages, and attorneys' fees. When Westport refused to defend him in the underlying suit, Carter instigated the current action in state court, seeking damages, pre-judgment interest, a declaratory judgment that Westport was obligated to defend and indemnify him for the costs incurred in defending the Valley Baptist suit and any resulting damages. Westport timely removed the matter to this Court.

This is the second in a series of competing summary judgment motions with which this Court has been faced. In the first set, similar to the current set, this Court was asked to resolve whether Carter was a proper insured under the policy given the then-existing allegations made by Valley Baptist in its First Amended Petition. This Court held that, given the allegations at the time that Carter was not an “insured” as defined by Westport's policy, the company had no duty to defend him.

In the current summary judgment motion, Carter seeks a ruling that Westport was obligated to defend and indemnify him in the Valley Baptist suit under the terms of the professional liability insurance policy Westport had issued to his employer, Smith–Reagan. As before, Westport cross-moved for summary judgment seeking a declaration that Westport has no duty to defend Carter in the underlying suit because Carter is not an “insured;” that Westport has no duty to defend or indemnify Carter because the claims asserted against him by Valley Baptist are excluded from coverage; and that an insurer cannot be liable for extra-contractual claims for denying a claim that is not covered by the relevant insurance policy.

I. BACKGROUND
A. Factual Background

Westport issued professional liability insurance Policy Number WED4TX006532302, a “claims made” policy in effect from April 1, 2008 to April 1, 2009, to Smith–Reagan. This policy was to cover any ‘loss' for which the insured is legally liable caused by a ‘wrongful act’ committed by an insured arising out of ‘professional services' rendered to others.” [ See Doc. No. 46–2 at 15]. “Insured” was defined in the policy to include Smith–Reagan's “employees and former employees but only for acts within the scope of their employment by [Smith–Reagan] and while performing duties related to the conduct of [Smith–Reagan's] insurance operations.” [ Id. at 16]. The term “wrongful act” was defined to mean “any negligent act, error, omission or ‘personal injury’ of an insured or any person for whose acts the insured is legally liable in rendering services for others.” [ Id. at 18]. In addition to the duty to indemnify an insured for such a loss, Westport agreed to undertake the “duty to defend, investigate, and conduct any settlement negotiations arising from ‘claims' first made based upon alleged ‘wrongful acts' of an insured.” 2 [ Id. at 16].

Specific provisions that excluded certain “claims” from coverage under the policy limited these general terms outlining coverage. Most notably for the purposes of this suit, the following two categories of “claims” were excluded:

This “policy” shall not apply to any “claim” based upon, arising out of, attributable to, or directly or indirectly resulting from:

G. PERSONAL PROFIT. Any insured having gained, in fact, any personal profit or advantage to which he or she was not legally entitled.

* * *

C. FUNDS. “Claims” for commissions, fees, taxes, reimbursement, or the failure to collect, pay, or return premiums or commingling of funds.3

[ Id. at 8 & 17]. On February 4, 2009, Valley Baptist filed its First Amended Petition in state court against Carter and Michael N. Swetnam (Swetnam), individually and d/b/a Swetnam Insurance Services. [ See Doc. No. 12–2]. The gravamen of Valley Baptist's suit was the return of funds it had paid to Swetnam, who “paid the money he received from Valley Baptist to himself and to Carter ... for non-existent and inflated premiums....” [ Id. ¶ 2]. Specifically, Valley Baptist alleged that two insurance policies from 20062007 and 20072008 (the “Hurricane Policies”), for which Valley Baptist had remitted funds as premium payments to allegedly protect against hurricane damage, were entirely fabricated. Another two umbrella policies from 20062007 and 20072008 (the “Zurich Policies”), issued by Zurich Health Care, were also allegedly misrepresented and their premiums inflated to hide excess commissions, but were otherwise legitimate. According to Valley Baptist, Swetnam had collected the funds from it and split the fabricated and/or inflated premium amounts with Carter.4 The First Amended Petition alleged various causes of action against Swetnam including violations of the Texas Insurance Code, the Texas Theft Liability Act, conversion, fraud, negligent misrepresentation, and breach of contract. As against Carter, the First Amended Petition alleged only negligence. It also specifically and unequivocally asserted that “the insurance agent services at issue in this First Amended Petition were presented, invoiced and allegedly confirmed solely by Swetnam, or by Carter on behalf of Swetnam Insurance Services.” [ Id. ¶ 13]. This was the pertinent state of affairs at the time this Court granted the first summary judgment referenced above.

Valley Baptist later amended its state court petition several times. In its Fourth Amended Petition, [ see Doc. No. 46–2], filed on September 7, 2011, Valley Baptist maintained its prior factual allegation that the insurance agent services at issue “were presented, invoiced and allegedly confirmed solely by Swetnam, or by Carter on behalf of Swetnam Insurance Services [,] but inserted for the first time the following sentence at the end of the allegation: “However, according to Carter, all of Carter's actions at issue in this case were performed in the course and scope of his employment with Smith–Reagan and not on behalf of Swetnam Insurance Services.” [ Id. ¶ 13]. On November 4, 2011, Valley Baptist filed its Fifth Amended Petition without making any substantial changes to this particular language. Both the Fourth and Fifth Amended Petitions alleged that Carter (or Carter and Swetnam) was liable for violations of the Texas Insurance Code, conversion, “money had and received,” fraud, fraud by non-disclosure, negligent misrepresentation, conspiracy, breach of contract, and negligence.

Valley Baptist then filed its Sixth Amended Petition, [ see Doc. No. 46–6], on December 7, 2011, in which Valley Baptist amended the preceding language to read as follows: “The insurance agent services at issue in the Sixth Amended Petition were presented, invoiced and allegedly confirmed by Swetnam or Carter. However, all of Carter's actions at issue in this case were performed in the course and scope of his employment with Smith–Reagan and not on behalf of Swetnam Insurance Services.” [ Id. ¶ 13]. This final amended petition maintained that Swetnam and Carter had split the fabricated and/or inflated premium amounts allegedly pertaining to the Hurricane and Zurich policies, but its factual allegations as against Carter alone differed between these two policy categories. With respect to the Hurricane policies, Valley Baptist alleged that “Carter improperly retained such payment that he knew or should have known was for a non-existent insurance policy.” [ Id. ¶ 22 (20072008 Hurricane policy); id. ¶ 29 (20062007 Hurricane policy) ]. With respect to the Zurich policies, in addition to alleging that Carter maintained funds that he knew or should have known was for unauthorized ‘excess commissions,’ [ id. ¶ 34 (20072008 Zurich policy); id. ¶ 39 (20062007 Zurich Policy) ], the Sixth Amended Petition unequivocally stated that “Swetnam, with Carter's knowledge, participation and consent, improperly inflated” the premium amounts, [ id. ¶ 32 (20072008 Zurich policy); id. ¶ 36 (20062007 Zurich Policy) ].

Based on these factual allegations, in the Sixth Amended Petition, Valley Baptist asserted against Swetnam alone the following causes of action: violations of the Texas Insurance Code and the Texas Theft Liability Act, conversion, fraud, and fraud by non-disclosure. Valley Baptist additionally accused both Carter and Swetnam of negligence and/or negligent misrepresentation. As part of its pleading for negligent misrepresentation, Valley Baptist repeated the allegation that “Swetnam, with Carter's knowledge, participation and consent, inflated the Zurich Policies premiums charged to Valley Baptist by hiding ‘excess commissions'...

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