EXECUTIVE RISK INDEMNITY, INC. v. Charleston Area Medical Center, Inc.

Citation681 F. Supp.2d 694
Decision Date30 July 2009
Docket NumberCivil Action No. 2:08-cv-00810.
PartiesEXECUTIVE RISK INDEMNITY, INC., Plaintiff, v. CHARLESTON AREA MEDICAL CENTER, INC., et al., Defendants.
CourtUnited States District Courts. 4th Circuit. Southern District of West Virginia

Daniel L. Rivetti, Dennis St. J. Mulvihill, Jill D. Sinatra, Robb Leonard & Mulvihill, Pittsburgh, PA, for Plaintiff.

A.L. Emch, Ben M. McFarland, J. Rudy Martin, Jackson Kelly, Pamela C. Deem, Robert B. Allen, Allen Guthrie & Thomas, Charleston, WV, W. Neil Rambin, Sedgwick Detert Moran & Arnold, Dallas, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

JOSEPH R. GOODWIN, Chief Judge.

This multi-party insurance case involves a dispute over which insurance company, if any, must provide coverage to Charleston Area Medical Center, Inc. ("CAMC") for a multi-million dollar verdict against CAMC and a resulting settlement. As is the case with most hospitals, which incur significant risks in their day-to-day operations, CAMC holds several insurance policies with varying levels of coverage for different risks, and is insured by multiple insurance companies, some of whom are then reinsured by other insurance companies. Three such companies are involved in this suit: Executive Risk Indemnity, Inc. ("ERI"), Employers Reinsurance Corporation, n/k/a Westport Insurance Corporation ("ERC"), and Vandalia Insurance Company ("Vandalia"). The convoluted relationship among the parties, who have asserted various claims against each other and are also all involved in a related case pending before this court,1 adds an additional layer of complexity to this matter, which already poses complex issues of reinsurance law, contract interpretation, and equitable principles.

To summarize the basic allegations in this case, the plaintiff, ERI, claims that its policy does not provide coverage for punitive damages,2 and also argues that Vandalia (allegedly a captive insurance company) and ERC (allegedly an assumption reinsurer) are liable to CAMC. Vandalia, who also alleges that it was just a conduit between CAMC and ERC, argues that ERC has assumed all of its liability to CAMC and therefore owes coverage to CAMC. CAMC contends that ERI and ERC are obligated to provide coverage to CAMC, but that Vandalia does not. ERC denies that it owes coverage to CAMC or that it is obligated to provide contribution to ERI or Vandalia.

This Order addresses the several pending motions by Defendant/Cross-Defendant ERC, namely, its Motion to Dismiss the Second Amended Complaint Docket 39, Motion to Dismiss the Cross-Claim of Vandalia Insurance Company Docket 59, and Motion to Dismiss the Cross-Claim of Charleston Area Medical Center, Inc. Docket 61.

In the Second Amended Complaint, ERI asserts two claims: (1) a declaratory judgment action and (2) a claim for equitable contribution against ERC and Vandalia. ERC moves to dismiss ERI's Complaint against it insofar as ERI asserts a claim for equitable contribution against ERC. Although ERC has not explicitly sought to dismiss ERI's declaratory judgment action, insofar as ERC may be seeking its dismissal, the Motion is DENIED because there is a substantial live controversy between the parties, who have adverse interests, and this issue is of sufficient immediacy and reality to warrant the issuance of a declaration of rights or other legal relations. See 28 U.S.C. § 2201(a); Energy Corp. of Am. v. Bituminous Cas. Corp., 543 F.Supp.2d 536, 541 (S.D.W.Va.2008); Majeed v. North Carolina, 520 F.Supp.2d 720, 724-25 (E.D.N.C.2007). However, ERC's Motion to Dismiss the Second Amended Complaint is GRANTED as to ERI's claim for equitable contribution against ERC because ERI and ERC do not insure the same risk. See Union Indem. Ins. Co. of N.Y. v. Certain Underwriters at Lloyd's, 614 F.Supp. 1015, 1016 (S.D.Tex.1985).

ERC also seeks to dismiss CAMC's cross-claim. CAMC asserts the following claims against ERC: a declaratory judgment cause of action, a breach of contract claim, claims for statutory and common law bad faith, and a claim for unjust enrichment. Insofar as ERC is seeking to dismiss CAMC's declaratory judgment action, the Motion is DENIED because, as I have stated, there is a substantial live controversy between the parties and this issue is of sufficient immediacy and reality to warrant the issuance of a declaration of rights. ERC's Motion to Dismiss CAMC's Cross-Claim is also DENIED as to CAMC's claims for breach of contract, statutory and common law bad faith, and unjust enrichment because CAMC has alleged sufficient facts to state those claims against ERC under Federal Rule of Civil Procedure 8 and to avoid dismissal under Rule 12(b)(6).

Finally, ERC has moved to dismiss Vandalia's cross-claim. Vandalia has asserted a declaratory judgment action as well as breach of contract and unjust enrichment claims against ERC. ERC's Motion to Dismiss Vandalia's Cross-Claim is DENIED as to Vandalia's declaratory judgment action for the same reasons I have discussed as to the other declaratory judgment actions—there is a substantial live controversy between the parties and this issue is of sufficient immediacy and reality to warrant the issuance of a declaration of rights. The Motion is also DENIED as to Vandalia's breach of contract claim because Vandalia has alleged sufficient facts to state such a claim and avoid dismissal under Rule 12(b)(6). However, ERC's Motion to Dismiss Vandalia's Cross-Claim is GRANTED as to Vandalia's claim for unjust enrichment against ERC because Vandalia has not alleged that Vandalia (rather than CAMC) has paid any money to ERC and that ERC has been unjustly enriched as a result.3

I. Background

The alleged facts giving rise to this matter are as follows. On February 7, 2008, a jury in the Circuit Court of Kanawha County, West Virginia returned a verdict against CAMC for $5,000,000 in compensatory damages and $20,000,000 in punitive damages in the case of Hamrick v. CAMC et al. ("Underlying Litigation").4 The award was reduced by the trial judge to $2,000,000 in compensatory damages and $8,000,000 in punitive damages. The Underlying Litigation subsequently settled for $11,500,000, including interest, attorneys' fees, and all contingencies. The settlement was funded in part by CAMC, which contributed a portion of its self-insured retention, and the balance was to be funded by CAMC's three insurers: ERI, ERC, and Vandalia. CAMC has alleged, however,5 that Vandalia contributed no monies to fund the settlement, while the other parties contributed as follows: ERI $8,050,000; CAMC $1,995,000; and ERC $1,495,000.6 Vandalia agrees that it has not contributed any funds to the settlement.

As part of the settlement, the parties agreed to reserve all rights pertaining to the respective insurance policies. Thereafter, this dispute arose over which of CAMC's three insurers, if any, must provide coverage to CAMC for the verdict in the Underlying Litigation and the subsequent settlement. I will now briefly describe the insurance policies at issue.

ERI provided Directors, Officers and Trustees Liability Insurance to CAMC effective from May 1, 2004 to May 1, 2005.7 (2d Am. Compl. ¶ 12 & Ex. A Docket 37.) The ERI policy provides $10,000,000 of coverage, and ERI undertook the defense of CAMC in the Underlying Litigation. (CAMC Crossclaim ¶ 10 Docket 49.) On March 12, 2008, ERI issued a reservation of rights letter notifying CAMC that its policy did not provide coverage for punitive damages. (Id. ¶ 12.)

Vandalia issued the Hercules policy to CAMC, which provided the following coverage to CAMC effective from May 1, 2004 to May 1, 2005: Health Care Professional Liability, Directors and Officers Liability, and General Liability.8 (Id. ¶¶ 14-15; 2d Am. Compl., Ex. B.) Under the Hercules policy, CAMC agreed to pay $2,573,988 in premiums, including captive fees, to Vandalia and Vandalia agreed to indemnify CAMC under certain circumstances. (2d Am. Compl., Ex. B.) Groups II and III of the Hercules policy are relevant to this case. Group II provides Directors and Officer's Liability coverage for all amounts in excess of ERI's coverage up to $25,000,000 per loss event and in the aggregate. (Id. at 22; Vandalia's Cross-Claim ¶ 18 Docket 48.) Under Group III of the Hercules policy, which insures General Liability, CAMC has a self-insured retention amount of $2,000,000,9 and the policy provides coverage to CAMC for all amounts above the $2,000,000 self-insured retention up to $25,000,000 per loss event and in the aggregate. (Id. ¶ 19.) Vandalia has maintained that it does not have any rights or obligations to CAMC under the Hercules policy because Vandalia was set up by ERC and CAMC to serve as a "straw man" and ERC therefore assumed all of Vandalia's rights and obligations to CAMC under a reinsurance agreement.

ERC issued a Facultative Reinsurance Certificate and Reinsurance Schedule ("Reinsurance Certificate") to Vandalia for 100% of the liability of the Hercules policy effective from May 1, 2004 to May 1, 2005.10 (Id. ¶ 16.) Vandalia was not obligated to pay a retention amount. (2d Am. Compl., Ex. C.) The annual premium amount due to ERC from Vandalia was $2,573,899. (Id.) The parties disagree about the terms of the Reinsurance Certificate, and whether ERC assumed all of Vandalia's rights and obligations to CAMC under that agreement.

It is evident that the dispute about which party must provide coverage for the verdict/settlement is complicated by the parties' representations about their relationship to Vandalia. ERI, Vandalia, and CAMC allege that ERC worked with CAMC and West Virginia United Health Systems, Inc. to establish Vandalia as a pass-through company between ERC and CAMC for insurance coverage. They claim that Vandalia was established to allow CAMC to access the reinsurance market and ERC's services without the involvement of an independent primary insurer and to provide a legal conduit for ERC to provide primary coverage under the guise of 100%...

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