Continental Cas. Co. v. Allen

• Decision Date: 03 April 1989
• Docket Number: CA-5-87-156-C.,Civ. A. No. CA-5-86-252-C
• Citation: 710 F. Supp. 1088
• Parties: CONTINENTAL CASUALTY CO., Plaintiff, v. Doreen ALLEN, et al., Defendants. CONTINENTAL CASUALTY CO., Plaintiff, v. MOORE-HARALSON AGENCY, P.C., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

710 F. Supp. 1088

CONTINENTAL CASUALTY CO., Plaintiff, v. Doreen ALLEN, et al., Defendants.

CONTINENTAL CASUALTY CO., Plaintiff, v. MOORE-HARALSON AGENCY, P.C., et al., Defendants.

Civ. A. Nos. CA-5-86-252-C, CA-5-87-156-C.

United States District Court, N.D. Texas, Lubbock Division.

April 3, 1989.

COPYRIGHT MATERIAL OMITTED

Dennis R. Yeager and Richard Imbrogno of Yeager & Lang, New York City, and Alton Griffin, Lubbock, Tex., for plaintiff.

Pete Baker of Glandon, Erwin, Scarborough, Baker & Choate, Abilene, Tex., Tom M. Richards of Smith, Merrifield & Richards, Dallas, Tex., Frank E. Murchison and H. Alan Carmichael of McCleskey, Harriger, Brazill & Graf, Robert L. Craig, Jr. of Carr, Evans, Fouts & Hunt, Tom S. Milam of Crenshaw, Dupree & Milam, John C. Sims and Richard Hubbert of Sims, Kidd, Hubbert & Wilson, Lubbock, Tex., T. Ray Guy and John C. Eichman of Jenkens, Hutcheson & Gilchrist, Dallas, Tex., Michael H. Carper, J.R. Blumrosen and Myrtle McDonald of Blumrosen & McDonald, Lubbock, Tex., and Floyd D. Holder, Jr., Lubbock, Tex., for defendants.

George Shivers, Irving, Tex., pro se.

MEMORANDUM OPINION IN SUPPORT OF PARTIAL JUDGMENT

CUMMINGS, District Judge.

The first stage of a bifurcated jury trial was held in this matter regarding declaratory judgment issues of the plaintiff's liability to the defendants on certain directors' and officers' liability insurance policies. The Court also entertained evidence in the non-jury trial, consolidated with the jury trial, regarding indemnification rights of the plaintiff against the defendants' insurance agent. The trial spanned approximately two weeks and culminated in a jury verdict on some 28 special issues. The Court, after considering the arguments of counsel, hearing the testimony, and reviewing the exhibits admitted in evidence and jury verdict, files this memorandum opinion in support of the partial judgment entered this same date.

Factual Background and Findings

Most of the defendants in this action were officers or directors of the failed Seminole State National Bank ("the Bank"). The plaintiff became involved with the Bank in 1983 through the assumption of certain obligations and rights of an insurance company entitled MGIC Indemnity Corporation ("MGIC"). MGIC aggressively solicited and created a large portfolio of directors' and officers' liability insurance ("D & O insurance") including that for the Bank. The defendants began placing their D & O insurance with MGIC in 1977. The policy issued by MGIC in 1977 was renewed upon the same terms and conditions in 1980, Policy No. DO5618-6, for another three years ("the 1980 Policy").

In early August, 1983, the defendants submitted an application requesting renewal of the 1980 Policy. Shortly after submitting their application for insurance, the defendants were notified that the Office of the Comptroller of the Currency was issuing a temporary cease and desist order against the Bank. The directors did not tell MGIC about the issuance of the cease and desist order. However, the defendants subsequently received from MGIC an insurance binder which greatly varied from the terms of the two prior policies.

In this same time period, the plaintiff became involved in buying the book of business of MGIC's portfolio of directors' and officers' liability policies. The plaintiff entered into several agreements with MGIC, including an Assumption Reinsurance Agreement dated November 18, 1983 ("Assumption Agreement"); Claim Service Agreement dated November 18, 1983; an Agreement Not to Compete dated November 1, 1983; a Sales Service Agreement dated November 18, 1983; and an Underwriting and Administration Agreement dated November 18, 1983. Although dated and apparently executed in November, some of these agreements were effective as early as October 1, 1983.

A new, one-year policy for D & O insurance, Policy No. 04175-DA01, was issued by MGIC to the Bank in December, 1983 with an effective date of October 27, 1983 (the "1983 Policy"). The 1983 Policy contained an assumption endorsement executed by the plaintiff whereby it assumed all of MGIC's obligations under the 1983 Policy. In March, 1984, the Federal Deposit Insurance Corporation ("FDIC") closed the Bank and subsequently filed suit against many of the directors.¹ This FDIC suit, among others, triggered the plaintiff to file a declaratory judgment action regarding its liability on the 1983 Policy.

The parties do not dispute that the defendants are among the defined "insureds" under both the 1980 Policy and the 1983 Policy. The Court's attention in this portion of the case is narrowly drawn to the liability provisions of the policies and the parties' actions preceding the issuance of the 1983 Policy to determine the parties' rights.² Many legal issues complicate this case due to the plaintiff's agreements with MGIC and the fact that the crucial time frame for renewing the 1980 Policy was coincidentally the same time frame as all the agreements between the plaintiff and MGIC.

The plaintiff admits in its brief and through testimony of witnesses that the 1983 Policy contains significantly different terms.³ On or about October 17, 1983, Mr. Richard Carpenter, an MGIC employee, held a telephone conference with the defendants' insurance agent, Carroll Haralson of the Moore-Haralson Agency, P.C., regarding the different terms, conditions, and endorsements in the 1983 Policy. Mr. Carpenter subsequently followed up such conversation with a written letter. Additionally, various memoranda were introduced by the parties regarding MGIC's plans to reduce its potential liability in D & O insurance by inserting significantly different terms and conditions in policies when renewal was sought.

The Bank was a bank doing business in Texas when it contracted with MGIC for insurance. Therefore, the Court applies Texas law throughout this opinion even though certain agreements between the plaintiff and MGIC may be more properly construed using Illinois law the plaintiff's principal place of business or Wisconsin law situs of MGIC's receivership and prior principal place of business of MGIC. None of the parties have raised any conflict of laws questions, but in fact advised the Court on certain points in post-trial briefs that same results occur under Illinois and Wisconsin law as under Texas law. Therefore, the Court proceeds under Texas law, without any conflict of laws questions and with the assumption that the other two states involved would reach similar results.

Partial Jury Verdict

The jury, after deliberating several days, failed to answer Questions 4A, 4B, and 4C. Further, Questions 10, 16 and 17 were withdrawn from the jury after several notes from the jury indicated a lack of understanding of the legal terms therein.⁴ The plaintiff contends that it is entitled to a mistrial since the answers to Questions 4A, 4B and 4C are ultimate issues. The Court, however, disagrees.

Questions 4A, 4B, and 4C ask whether any events occurred prior to October 27, 1983 (the expiration date of the 1980 Policy and effective date of the 1983 Policy) which are material enough to render the insurance proposal form inaccurate and if notice of such an event was given to the plaintiff or if the defendants knew such an event was not communicated to the plaintiff. The primary basis for these questions is the plaintiff's contention that the issuance of the temporary cease and desist order in September, 1983, was a material omission which affected its risk of insurance and the defendants should have amended their application for insurance once the cease and desist order was issued.

The Court finds that the answers to Questions 4A, 4B, and 4C are not ultimate issues. Additional elements of (i) the defendants' intent to deceive and (ii) the plaintiff's reliance are necessary in order to void the 1983 Policy for fraud or material misrepresentation. Mayes v. Massachusetts Mut. Life Ins. Co., 608 S.W.2d 612, 616 (Tex.1980); Republic-Vanguard Life Ins. Co. v. Walters, 728 S.W.2d 415, 418 (Tex. App. — Houston 1st Dist. 1987, no writ).

The jury answered Question No. 1 in the negative regarding whether the defendants made a material, false representation or omission. This answer precluded the jury from answering subsequent Questions 2 and 3 which asked about the defendants' intent to deceive or the plaintiff's reliance. Additionally, although the jury did not follow the limiting instructions, the jury answered Questions 4D and 4E, which specifically asked about the plaintiff's reliance and the defendants' intent to deceive. The jury answered both Questions 4D and 4E in the negative.

The Court finds the answers to Questions 1, 4D and 4E supported by the evidence, thereby precluding the plaintiff from succeeding on theories of fraud or material misrepresentation. Bridges v. Chemrex Specialty Coatings, Inc., 704 F.2d 175, 180 (5th Cir.1983) (adopting the 8th Circuit's decision in Skyway Aviation Corp. v. Minneapolis, N & S Ry. Co., 326 F.2d 701 (1964) in determining whether unanswered jury questions leave a "gaping hole" in a verdict). Even if the jury had answered Questions 4A, 4B, and 4C favorable to the plaintiff, the ultimate issue and ability to succeed on the plaintiff's theory requires favorable answers to at least Questions 4D and 4E, which is lacking in the verdict. The Court does not dispute that Questions 4A, 4B and 4C are factual findings, but the lack of a jury answer is not fatal to a judgment since the other elements of the plaintiff's cause of action were answered negatively.

Therefore the jury verdict can be fashioned into a declaratory judgment that the defendants made no misrepresentations which would void the 1983 Policy. The 1983 Policy is in effect as providing D & O insurance coverage of the defendants per its terms and conditions as interpreted herein. The plaintiff's assumption endorsement attached to the 1983 Policy makes the plaintiff liable on the 1983 Policy, subject...