Columbus Life Ins. Co. v. Arch Ins. Co.
| Decision Date | 17 May 2016 |
| Docket Number | NO. 3:14-CV-01659,3:14-CV-01659 |
| Parties | COLUMBUS LIFE INSURANCE COMPANY, Plaintiff, v. ARCH INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Northern District of Indiana |
This matter is before the Court on the Motion for Partial Summary Judgment filed by Plaintiff Columbus Life Insurance Company ("Columbus"), on May 15, 2015 (DE #29), the Motion for Summary Judgment filed by Defendant Arch Insurance Company ("Arch") on June 8, 2015 (DE #34), and the Request for Hearing on Defendant's Motion for Summary Judgment filed by Arch on June 8, 2015 (DE #37). For the reasons set forth below, Columbus's Motion for Partial Summary Judgment (DE #29) is GRANTED IN PART AND DENIED IN PART. Arch's Motion for Summary Judgment (DE #34) is DENIED, and its Request for Hearing on its Motion for Summary Judgment (DE #37) is DENIED. Arch's Counterclaim (DE #27) is DISMISSED. Further proceedings will involve the following remaining issues: (1) the reasonableness of the settlement in the Jesta Action; (2) issues of fact regarding Columbus's claim for attorneys' fees in litigating the instant action; (3) Columbus's claim of bad faith; and (4) the amount of Columbus's damages.
For the purposes of these motions for summary judgment, the facts below are undisputed:
On March 1, 2008, Columbus entered into a contract for errors and omissions insurance coverage with Arch ("Policy") for the period of March 1, 2008, to March 1, 2009. Thereafter, the Policy was renewed annually through the policy period of March 1, 2012, to March 1, 2013. The Policy was a claims made and reported policy. Under the terms of the Policy, Columbus was a "Sponsoring Company" and a "First Named Insured," and as such, was entitled to coverage for vicarious liability claims arising out of the acts or omissions of its agents. (DE #31-1 at 2.)
On October 24, 2011, Victor and Eugenia Villagra ("Villagras"), filed a lawsuit against Angelo M. Papalia ("Papalia") and others in Connecticut state court entitled, Villagra v. DiClemente ("Villagra Action"). The complaint in the Villagra Action ("Villagra complaint") alleged that Papalia was the Villagras' trusted financial and tax advisor. Papalia allegedly recommended that the Villagras establish a "Section 419 Plan" under the Internal Revenue Code ("IRC"). Papalia allegedlyrepresented that under a Section 419 Plan, (1) a life insurance policy would be created for the Villagras' benefit, (2) contributions to the plan would be tax deductible, and (3) the Villagras would be permitted to withdraw money from the plan on a tax-free basis. (DE #31-4 at 6.) Following Papalia's recommendation, the Villagras allegedly established a Section 419 Plan, and subsequently contributed funds to it. The Villagra complaint alleges that Papalia knew that the Internal Revenue Service ("IRS") considered a Section 419 Plan to be an abusive tax shelter and a "listed transaction" for which contributions were not permissible deductions, and that Papalia intentionally withheld this information from the Villagras. (Id. at 8-9.) Papalia later advised the Villagras to "roll over" the Section 419 Plan to a new "Section 79 Plan," asserting that it had similar tax advantages as the Section 419 Plan. (Id. at 10.) The Villagras allegedly did so, and contributed funds to the Section 79 Plan thereafter. The IRS allegedly concluded that the Section 79 Plan was substantially similar to the Section 419 Plan, and thus was also considered a listed transaction. The Villagras were allegedly audited by the IRS, and anticipated the assessment of taxes, interest and penalties. The Villagra complaint also alleged damages in the form of early termination fees and surrender charges associated with terminating the insurance policies used to fund the plans.
The Section 419 and 79 Plans at issue in the Villagra Action were funded by two Columbus insurance policies. (DE #35-4 at 4.) At the time the Villagra complaint was filed, Papalia was contracted as an agent of Columbus, and was an Insured under the Policy. Papalia's counsel informed Arch of the Villagra Action in a letter dated October 31, 2011. (Id. at 2.) Arch found Papalia to be an Insured under the Policy in the 2011-12 policy period, and agreed to defend Papalia in the Villagra Action, subject to a reservation of rights under the terms and provisions of the Policy. (DE #31-5.)
On February 28, 2013, Papalia's counsel notified Arch that Papalia had established 419 Plans for other clients, which could give rise to additional claims similar to those made by the Villagras ("Notice Letter"). (DE #31-6 at 2.) The letter provided a list of 18 clients for whom Papalia had set up similar plans, including the "Jesta Rx Group." (Id. at 3.)
On May 22, 2013, Arch responded that the Notice Letter did not qualify as valid notice of a potential claim under the Policy. Arch requested a description of the circumstances in which Papalia first became aware of a potential wrongful act involving each of the 18 clients' Section 419 Plans, as well as other information. On July 9, 2013, Papalia's counsel notified Arch that Papalia had become aware of the potential claims after receiving the summonsand complaint in the Villagra Action "[o]n approximately October 24, 2011," when Papalia reviewed "prior actions performed to identify any other clients who may have or had similar plans." (DE #35-9 at 2 ("July 2013 Letter").)
On August 15, 2013, Arch responded to the July 2013 Letter, noting that Papalia had provided no circumstances detailing how Papalia had become aware of a wrongful act, or details regarding the wrongful act, involving each of his 18 clients. Arch also indicated that no claims had been made by any of these clients, and that it was without information to assess whether or not any such claim would qualify as "Related Claims" under the Policy. (DE #31-7 at 4.)
In August 2013, the Jesta Rx Group and its owners (together, the "Jesta Rx Group") made a monetary demand on Papalia, asserting that Papalia had misrepresented the tax treatment of the Jesta Rx Group's Section 419 Plan, causing them to incur damages. Papalia submitted this claim to Arch for coverage under the Policy. Arch denied the claim in October 2013, maintaining that it had no duty to defend or indemnify Papalia because he did not qualify as an agent or insured under the Policy. (DE #31-9 at 6.)
On November 26, 2013, the Jesta Rx Group and others filed a Texas state court action entitled, Smeeding v. Papalia, in which Columbus, Papalia, and several other insurers and individuals werenamed as defendants ("Jesta Action"). (DE #31-8.) The petition in the Jesta Action ("Jesta petition") alleged that the defendants made misrepresentations to induce the plaintiffs into participating in 419 Plans, and later Section 79/Section 83 Plans (the "Plans"). The Plans, which were funded by the purchase of insurance contracts, were allegedly "just a clever way to sell millions of dollars['] worth of life insurance and generate significant commissions for the salesman and related profits for the insurance companies." (Id. at 4-5.) The insurer defendants allegedly provided their agents with training and marketing materials that "essentially provided a scripted presentation regarding the investment, the purported tax benefits of setting up [the Plans], and the funding such plans with life insurance policies specifically designed by the insurance companies for such purpose." (Id. at 20.) Each defendant was alleged to be a co-conspirator and "a cog in the machine" that induced the plaintiffs to participate in the Plans, and each defendant allegedly "knowingly aided and abetted" the other defendants. (Id. at 19.) The Jesta petition also alleged that Papalia was "acting as the agent of various insurance companies, including Columbus," and "was acting with either express, implied, apparent and/or ostensible authority and Columbus . . . subsequently ratified and benefitted financially from [Papalia's] acts, failures to act, representations, statements or conduct." (Id. at 18.)
The Jesta petition alleged that Papalia, as the Jesta Rx Group's trusted financial advisor, represented that the Section 419 Plan complied with the IRC and IRS, that contributions to the plan were tax deductible, and that the Jesta Rx Group could take out their money tax free after a number of years. (Id. at 28-29.) The Jesta Rx Group allegedly invested in the Section 419 Plan as a result of Papalia's representations. (Id. at 29.) After the IRS issued notices which made the Section 419 Plan a "listed transaction," Papalia allegedly transferred the Jesta Rx Group's Section 419 Plan to a Section 79/Section 83 Plan, without their informed consent. (Id. at 29-30.) Papalia allegedly continued to represent, among other things, that the contributions to these plans were tax-deductible. (Id. at 30.) According to the Jesta petition, the IRS informed the Jesta Rx Group that their plans were non-compliant, and assessed back taxes, penalties and interest. (Id. at 30-31.)
The Jesta petition asserts claims of fraud, negligent misrepresentation, negligence, unjust enrichment, "money had and received," and violations of the Texas Insurance Code against all defendants, including Columbus and Papalia. The fraud claim alleges that the "[d]efendants, individually and/or through their agents, knowingly made . . . false representations . . . ." (Id. at 60.) The negligent misrepresentation claim alleges that the "[d]efendants, individually and through their agents, and inconspiracy with one another, and in aiding and abetting one another, negligently made false representations to Plaintiffs . . . ." (Id. at 63.) The Jesta petition incorporates these allegations into the other claims against all defendants. (Id. at 63, 67, 68.) It seeks damages in the form of back taxes, penalties, interest owed to the IRS, loss of investment, contribution to...
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