Miller v. Westport Ins. Corp.

• Decision Date: 30 January 2009
• Docket Number: No. 95,768.,95,768.
• Citation: 200 P.3d 419
• Parties: Richard MILLER, Ed Zeller, and Jeremy Kohn, Appellants, v. WESTPORT INSURANCE CORPORATION and Employers Reinsurance Corporation, Appellees.
• Court: Kansas Supreme Court

200 P.3d 419

Richard MILLER, Ed Zeller, and Jeremy Kohn, Appellants, v. WESTPORT INSURANCE CORPORATION and Employers Reinsurance Corporation, Appellees.

No. 95,768.

Supreme Court of Kansas.

January 30, 2009.

James C. Heathman, of Heathman Law Office, of Topeka, argued the cause and was on the briefs for appellants.

William A. Larson, of Larson & Blumreich, Chartered, of Topeka, argued the cause and was on the briefs for appellees.

The opinion of the court was delivered by BEIER, J.:

This is a contract case involving an insurer's duty to defend on an errors and omissions policy.

Plaintiffs Richard Miller, Ed Zeller, and Jeremy Kohn are licensed life, accident, and health insurance agents who referred several of their clients to John F. Usher and Associated Financial Solutions, Inc. (Associated), a company offering debt adjustment services. Usher, the owner of Associated, absconded with the clients' funds while he was under investigation by the Kansas Attorney General's office. Miller, Zeller, and Kohn made claims under their professional errors and omissions insurance policies with defendants Westport Insurance Corporation (Westport) and Employers Reinsurance Corporation (Employers). Coverage was denied. The agents settled with their clients and again sought coverage. Again, they were unsuccessful; and they then filed this action. The district court granted the insurers' motion for summary judgment, and a panel of our Court of Appeals affirmed in Miller v. Westport Ins. Corp., No. 95,768, unpublished opinion filed February 16, 2007. We granted the agents' petition for review.

We address the one question dispositive of this appeal: Did the lower courts err in concluding that insurers Westport and Employers had no duty to defend agents Miller, Zeller, and Kohn?

Factual and Procedural Background

Miller has his own business, T & M Financial, Inc. (T & M), and Zeller and Kohn work with T & M as independent contractors. All three men are agents who sell insurance for Woodmen Accident and Life Insurance Company. Woodmen requires its agents to investigate clients' needs and financial ability, and it prohibits its agents from selling insurance that a client does not need or cannot afford.

In the course of their business, the agents referred certain clients to Associated, a nonprofit debt-adjustment organization, to enable the clients to pay insurance premiums and fund their purchase of other insurance products. The agents chose Associated because it was the only company that guaranteed its services would not have a negative impact on clients' credit ratings. The agents did not receive compensation for these referrals. They continued to refer clients to Associated for approximately 1 year before the agents' clients complained that their debts were not being discharged and that they could not get in touch with Associated.

Although the agents had "checked into the background" of Associated, they did not discover that it was not authorized under Kansas law to perform debt adjustment. In fact, Associated was under investigation by the Kansas Attorney General, and ultimately Usher entered into a consent judgment with the State under which he and Associated stipulated to multiple violations of the Kansas Consumer Protection Act, K.S.A. 50-623 et seq.; the Kansas Credit Services Organization Act, K.S.A. 50-1101 (Furse 1994) et seq.; and the Credit Repair Organizations Act, 15 U.S.C. § 1679 (2000) et seq. Usher also agreed to permanently cease improper activities. Unfortunately, none of this was enough to prevent Usher from absconding with approximately $55,000 belonging to the clients of Miller, Zeller, and Kohn.

The Attorney General also investigated T & M and Miller, Zeller, and Kohn. The agents denied any wrongdoing and refused to enter into a consent judgment, but they did execute an "Assurance of Voluntary Compliance" that agreed to reimburse their clients for monies paid to Associated.

Each of the agents was at all pertinent times covered by a professional errors and omissions policy with defendants Westport and Employers. The agents duly notified the insurers of their claim for coverage under the policy. The agents' claim included losses sustained by the 12 clients who had been referred to Associated.

The defendants denied coverage, asserting that the agents' claim did not arise out of services rendered as licensed insurance agents. The agents requested, twice, that the defendants reconsider the denial of coverage. Defendants again responded in the negative, this time also citing several policy exclusions. The agents responded, and the defendants again denied coverage.

Although the agents denied wrongdoing, faced with the cost of defending up to a dozen lawsuits, they settled their clients' claims for approximately $55,000. Apparently only two of their clients filed a lawsuit before the settlement was effected.

The agents then brought this action in the district court. Their petition alleged that "defendants' unjustifiable denial of coverage to Plaintiffs constitute[d] a breach of contract," and that, "due to defendants' breach, the [agents] incurred losses in the form of claims paid in the amount of $55,335.02, and incurred legal fees for the defense of such covered claims in the amount of $16,080.00."

The errors and omissions insurance policy on which agents relied provided coverage for loss "caused by any `wrongful acts' committed by the `insured agent,' arising out of the conduct of the business of the `insured agent' in rendering services for others as a licensed life, accident and health insurance agent." It also provided that Westport and Employers would "have the right and duty to investigate, defend, conduct settlement negotiations and enter into settlements for any `claim' or `suit' for which coverage is provided by the terms of this policy" and would pay "all expenses incurred in the defense of any `claim' or `suit' against the insured alleging any covered `wrongful act,' and seeking `loss' on account thereof, even if the `claim' or `suit' is groundless, false, [or] fraudulent." The policy defines "wrongful act" or "wrongful acts" to mean "any negligent act, error, [or] omission ... committed or alleged to have been committed by the insured agent."

The policy exclusions in Section VII state that it does not apply to:

"B. [A]ny intentional, dishonest, fraudulent, criminal or malicious act, or assault or battery committed by or contributed to by any insured; [or]

....

"T. [A]ny `claim' arising out of or in connection with a fraudulent or nonexistent entity."

A "Key Point Summary" prepared by a plan administrator for the professional liability program indicated that financial planning activities would be covered under the policy.

After discovery, the parties filed cross-motions for summary judgment. After setting out the standard governing such motions, the district court stated: "[W]hile both sides extensively debate whether the referrals occurred `out of the conduct' [of the agents' business], neither side fully addresses whether the agents committed a `wrongful act.'" The district judge reasoned that a "wrongful act" was defined under the policy as a negligent act; and, because there was no evidence that the agents could have foreseen Usher's theft of their clients' money, the agents were not negligent and thus did not engage in wrongful conduct. In addition, the district judge ruled, even if the agents did owe a duty to their clients, the clients' losses did not arise out of the agents' referrals to Associated. Rather, the proximate cause of the losses was Usher's theft of funds, which was not a natural and probable consequence of the agents' referral of clients to a company without the correct legal status. The judge granted the defendants' motion for summary judgment and suggested that the agents' only recourse would be to "chase the thief."

In its decision, the Court of Appeals panel came to the same conclusion as the district judge. It held that the agents' referrals to Associated were not negligent; thus no coverage was triggered. Miller, slip op. at 6-9. The panel also addressed the agents' argument that the question of proximate cause should have gone to a jury, concluding that the agents' conduct could not, as a matter of law, be the proximate cause of their clients' losses because the theft by Usher was not foreseeable. Slip op. at 10-12. The panel then addressed the agents' argument that the policy covered allegations of negligent acts as well as the acts themselves. Although the panel agreed, it held that the agents failed to establish there had been any such allegations. Slip op. at 12-14. Rather, the Attorney General had alleged only violations of the Kansas Consumer Protection Act, the Kansas Credit Services Organization Act, and the federal Credit Repair Organizations Act; and the record on appeal did not contain the two clients' petition.

Standard of Review

Our standard of review of a district court's grant or denial of a motion for summary judgment is well established:

"`"`Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute as to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case. On appeal, we apply the same rules and where we find reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.'"' [Citations omitted.]"...