Liberty Mut. Ins. Co. v. Tedford
| Decision Date | 09 February 2009 |
| Docket Number | Cause No. 3:07CV73-SA-SAA. |
| Citation | 644 F.Supp.2d 753 |
| Parties | LIBERTY MUTUAL INSURANCE COMPANY, et al., Plaintiffs v. Pauline TEDFORD, et al., Defendants. |
| Court | U.S. District Court — Northern District of Mississippi |
David M. Ott, Rick D. Norton, William Arthur Whitehead, Jr., Bryan Nelson PA, Hattiesburg, MS, for Plaintiffs.
Heber S. Simmons, III, Simmons Law Group, PA, Ridgeland, MS, L.F. Sams, Jr., John Samuel Hill, Otis R. Tims, William D. Prestage, Mitchell, McNutt & Sams, Tupelo, MS, for Defendants.
Comes now before this Court, Plaintiff's Motion for Summary Judgment as to Franklin's Counterclaim [80] and Plaintiff's Motion to Disqualify Defendant Franklin Corporation's Attorney [131]. Also before the Court are four appeals of magistrate judge decisions: Appeal [147] of Magistrate Judge Alexander's Order dated May 1, 2008 [133], 2008 WL 1930573; Appeal [172] of the Order granting in part and denying in part the Motion for Reconsideration [165] of the Order dated May 1, 2008; Appeal [157] of the magistrate judge's order compelling answers to deposition question [150]; and Appeal [179] of Order [171] denying the Motion for Reconsideration of a Motion to Compel. All of these motions and appeals can be disposed of with the same analysis as they center around one issue: privilege. After reviewing the appeals, motions, responses, rules, and authorities, the Court makes the following findings:
A. Factual and Procedural Background
This is a declaratory judgment action in which plaintiff Liberty Mutual Insurance Company ("Liberty Mutual") seeks reimbursement of defense fees, workers' compensation benefits and costs arising out of a state court case against Franklin Corporation ("Franklin") and other individual defendants. In the underlying state court case, the plaintiffs claimed that the defendants' intentional choice not to provide adequate ventilation and protection from an adhesive used in the furniture production process caused the employees' injury and damages. Liberty Mutual issued the Workers' Compensation and Employers Liability Policies to Franklin in effect during the time periods relevant to the state court case and claims. Liberty Mutual paid claims by each of the state court plaintiffs under the Workers' Compensation policies and defended the underlying state court case under a reservation of rights. The state court jury returned a verdict against Franklin and awarded the plaintiffs punitive damages in excess of a million dollars.
Liberty Mutual thereafter filed this action seeking a declaration that (1) it was not under a duty to defend Franklin in the state court case under the terms of its policies for Franklin; (2) it was not obligated to indemnify Franklin under the policies; and (3) it is owed by Franklin all workers' compensation benefits paid and all costs of litigation and trial and other defense costs which Liberty Mutual paid as a result of the state court action against Franklin and its employees.
Franklin answered the complaint in this case and filed a counterclaim alleging that Liberty Mutual failed to inform Franklin of a potential conflict of interest between Liberty Mutual and Franklin. Franklin claims that had Liberty Mutual advised it of its right pursuant to Mississippi law to have independent counsel, and of the potential conflict of interests between it and its insurer, it could have demanded its own independent counsel and controlled its own defense in the underlying case. According to Franklin, by this failure, Liberty Mutual breached its fiduciary duties to Franklin and is now estopped from seeking reimbursement and defense costs from Franklin. Franklin asks that the court exonerate Franklin from all claims brought by Liberty Mutual and now seeks damages from Liberty Mutual by way of its counterclaim.
Franklin's counterclaim is based on the principle outlined in Moeller v. American Guarantee & Liability Insurance Company, 707 So.2d 1062 (Miss.1996). In that case, American Guarantee issued a multi-peril insurance policy to the law firm of Fuselier, Ott, McKee & Moeller, P.A. While this policy was in effect, the law firm terminated Moeller. Moeller brought suit for, inter alia, wrongful termination and breach of employment contract. Fuselier, Ott & McKee counterclaimed for wrongful solicitation of the firm's clients and interference with business relations. In that action, the Chancellor awarded Moeller breach of contract damages and tort damages, including attorneys' fees.
On appeal, the Mississippi Supreme Court affirmed the contract damages and reversed Moeller's tort damages. According to the American Guarantee multi-peril policy, the insurance company obligated itself to defend the insured upon certain conditions being met. Specifically, the insurance policy exempted from coverage personal injury sustained as a result of an offense directly or indirectly related to the employment of such person by the named insured. Therefore, only certain parts of the complaint and counterclaim were explicitly covered by the American Guarantee policy. Thus, the Mississippi Supreme Court reasoned, the remaining claims were outside the policy.
To defend the underlying lawsuit, the law firm retained counsel and demanded that American Guarantee acknowledge coverage and pay for their defense. American Guarantee initially denied coverage. After further review, however, American Guarantee agreed to provide a defense under a reservation of rights but selected its own counsel to represent the law firm. Pursuant to the reservation of rights letter, the law firm was free to and did retain independent counsel at their own expense along with the American Guarantee-retained counsel. The American Guarantee policy also covered Moeller, but no notice was sent to him regarding that coverage, and Moeller did not demand to be defended.
Thereafter, American Guarantee filed a declaratory action that it had properly fulfilled its duty to defend the law firm against Moeller's claims, that it had properly reserved its rights under the policy, and that it was not responsible for any portion of the judgment obtained against the firm. Moreover, American Guarantee further contended that it was not under a duty to defend the parties on appeal. Moeller was named as a defendant, although no relief was requested of him.
Moeller answered and counterclaimed seeking actual and punitive damages and attorneys' fees incurred in the declaratory judgment. Moeller contended that he was not aware of or notified he was covered under the insurance policy until the filing of the declaratory action. Thereafter, he amended his counterclaim alleging that American Guarantee's failure to notify him of his insured status injured him.
to indemnify the firm for any acts not covered by the policy. Furthermore, the special chancellor ruled that the obligation to defend was fulfilled and no longer continued. As to the firm's counterclaims against Moeller, the special chancellor ruled that the insurance company had a duty to defend Moeller because the allegations were within the coverage of the policy. The Chancellor further held that the lack of notice did not prevent recovery as it was implausible to require the insured to notify the insurer of its own lawsuit.
Both parties appealed the Special Chancellor's findings to the Mississippi Supreme Court. That Court held "[b]ecause the insurer must eventually pay whatever sums the insured becomes legally obligated to pay, the insurance carrier has the right to select the attorney retained to defend the claim." Moeller, 707 So.2d at 1068 (citing Hartford Acc. & Indem. Co. v. Foster, 528 So.2d 255, 263 (Miss.1988)). The Court also recognized that "[u]nquestionably, the insurance carrier has a right to offer the insured a defense, while at the same time reserving the right to deny coverage in event a judgment is rendered against the insured." Id. at 1069 (citing State Farm Mut. Auto. Ins. Co. v. Acosta, 479 So.2d 1089, 1092 (Miss.1985)). However, the Court noted that defending under a reservation of rights creates a conflict of interest between the insured and insurer, and therefore, a "special obligation is placed upon the insurance carrier." Id. That obligation requires the insurer's attorney to "undertake to represent only the interest of the insurance carrier for the part covered, and the insurance carrier should afford the insured ample opportunity to select his own independent counsel to look after his interest." Id. at 1070 (citing Hartford Acc. & Indem. Co., 528 So.2d at 269; State Farm Mut. Auto. Ins. Co. v. Commercial U. Ins. Co., 394 So.2d 890, 894 (Miss.1981); Anthony v. Frith, 394 So.2d 867 (Miss.1981)).
The Mississippi Supreme Court held that American Guarantee had a duty to defend the law firm on Moeller's defamation claim, as it was the only of the Plaintiff's claims covered by the policy. In addition to defense of this singular claim, American Guarantee was also legally obligated to pay for that particular claim. The Court also noted that the law firm chosen by the insurance company was under a professional obligation to recognize the two conflicts of interest between Fuselier, Ott & McKee and American Guarantee, namely that they were (1) defending under a reservation of rights, and (2) attempting to represent both parties in defending all claims only one of which was covered by the policy. Moreover, "[b]ecause Fuselier, Ott and McKee was being defended under the defamation claim with a reservation of rights, American Guarantee was obligated to let them select their own attorney at American Guarantee's cost to represent them." Id. at 1071. In holding that American Guarantee was obligated to pay...
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