National Union Fire Ins. Co. of Pittsburgh, Pa. v. RLC Corp.

• Decision Date: 22 June 1982
• Citation: 449 A.2d 257
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., a Stock Insurance Company, Plaintiff, v. RLC CORP., a Delaware corporation, Rollins Leasing Corp., a Delaware corporation, and RLC Corp. Voluntary Employees Beneficiary Association and Trust, Defendants.
• Court: Delaware Superior Court

Page 257

449 A.2d 257

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., a Stock Insurance Company, Plaintiff, v. RLC CORP., a Delaware corporation, Rollins Leasing Corp., a Delaware corporation, and RLC Corp. Voluntary Employees Beneficiary Association and Trust, Defendants.

Superior Court of Delaware New Castle County.

Submitted Sept. 24, 1981.

Decided June 22, 1982.

Upon Defendants' Motion to Continue the Stay of Proceedings. Denied.

Jack B. Jacobs and David C. McBride of Young, Conaway, Stargatt & Taylor, Wilmington, for plaintiff.

James T. McKinstry, E. N. Carpenter, II, Jesse A. Finkelstein of Richards, Layton & Finger, Wilmington, Thomas A. Masterson (argued) of Morgan, Lewis & Bockius, Philadelphia, Pa., and Kenneth B. Wright of Morgan, Lewis & Bockius, Los Angeles, Cal., for defendants.

LONGOBARDI, Vice Chancellor. ^*

After the filing of this action for declaratory judgment, the Defendants filed this motion to stay these proceedings in favor of an action they filed in the California Superior Court against the Plaintiff and two other insurers.

RLC Corp. ("RLC"), a Delaware corporation, Rollins Leasing Corp. ("Rollins Leasing"), a subsidiary of RLC and a Delaware corporation doing business in California, and the RLC Corp. Voluntary Employees Beneficiary Association and Trust ("VEBA"), an associated employee benefit plan which administers and pays health benefits to the employees of certain participating employers, including Rollins Leasing, are "named insured" under a policy of fiduciary insurance ("the Policy") issued by National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), a Pennsylvania corporation with its principal office in New York, New York, effective May 1, 1975. The Policy was obtained through Johnson & Higgins Insurance Brokers and Employee Benefit Plan Consultants in Wilmington, Delaware to meet the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Under the Policy, National Union was obligated to pay "... all sums which the insured shall become legally obligated to pay as loss because of any Breach of Fiduciary duty ... arising out of the Insured's activity as a fiduciary of [VEBA] ...." "Breach of fiduciary duty" is defined by the Policy to mean "... the violation of any of the responsibilities, obligations or duties imposed upon fiduciaries by the Employee Retirement Income Security Act of 1974 or amendments thereto with respect to [VEBA]." Additionally, National Union was obligated to "[d]efend any action or suit against the Insured alleging a Breach of Fiduciary Duty, even if such action or suit is groundless, false or fraudulent."

National Union filed its original complaint on September 8, 1980 seeking a declaratory judgment that the Policy did not cover claims arising out of, and that National Union had no obligation to defend against, a lawsuit pending in the Superior Court of California entitled Walter Wayte, Sr., et al. v. RLC Corp., C.A. No. C137010 ("Wayte I"). Wayte I was an action that had been filed in September, 1975, alleging the wrongful denial of Defendants RLC, Rollins Leasing and VEBA of medical benefits to Walter Wayte, Jr., the paraplegic adult son of Walter Wayte, Sr., and the wrongful termination of Wayte, Sr.'s employment with Rollins Leasing. In addition, the complaint alleged breach of contract, fraudulent misrepresentation, fraud in handling the Wayte claim, breach of good faith in handling the claim and intentional infliction of emotional distress. The Wayte complaint sought not only reasonable amounts for medical care covered by VEBA but general and punitive damages. The underlying administrative claim for these medical benefits was made in August, 1974. A final denial of the medical claim was made by the Administration Committee of VEBA on February 20, 1975. Ingall W. Bull, Jr., Esquire, Wayte's attorney, wrote to James Burns, RLC's Manager of Corporate Insurance in April and June, 1975, intimating imminent legal action. Wayte I was filed in September, 1975, after no response was made to these letters and after Wayte, Sr. was fired without explanation in August, 1975. RLC, Rollins Leasing and VEBA handled the case as a routine claim until March 12, 1979, when Wayte's attorney filed a Statement of Damages demanding compensatory and punitive damages in excess of $5,000,000.

RLC gave National Union notice of Wayte I in July, 1979. Within a month National Union "denied the request, demand or claim of RLC Corp. to extend coverage to and take over the defense of the Wayte claims because such claims were not first made during the policy period; such claims did not accuse RLC Corporation of a violation of the responsibilities, obligations or duties imposed upon fiduciaries by the Employee Retirement Income Security Act of 1974; RLC Corporation failed to comply with its contractual obligations to give to National Union notice of the Wayte claim as soon as practicable in writing; the Pension Trust Liability Policy No. 1177146 issued by National Union did/does not provide coverage to the extent that the Wayte claim seeks punitive damages or damages based upon fraud, breach of contract and infliction of emotional distress." Plaintiff's Answers to Defendant's Second Set of Interrogatories, Question # 18. Despite attempts by Defendants to sway National Union's position, it persistently refused to provide coverage in Wayte I. Finally, on September 8, 1980, National Union filed this action for Declaratory Judgment in the Superior Court of the State of Delaware.

On October 6, 1980, RLC (the only insured originally sued) filed its answer to National Union's complaint denying all material allegations and alleging the existence of policy coverage. During October and November, 1980, Interrogatories and Requests for Production of Documents were propounded by both sides. It was during this "first round" of discovery in the declaratory judgment action that Wayte I went to trial in California with the Defendants providing their own defense. The trial began on September 25, 1980, and ended on November 17, 1980. The jury awarded the Waytes $2,300,000 in compensatory and punitive damages ($1,500,000 of the verdict represented punitive damages) against RLC, Rollins Leasing and VEBA. (This verdict was subsequently reduced by way of post-trial remittitur to slightly over $1,000,000.). The verdict was apparently the result of the application of a unique California law creating a tort for a wrongful refusal to pay a claim.

On December 4, 1980, the Waytes (plaintiffs in the California Superior Court action) filed a second action in the United States District Court for the Central District of California entitled Walter F. Wayte, Jr., et al. v. Rollins Leasing Corporation, et al., No. 80-5401 Kn(Gx), ("Wayte II"). Wayte II is based on and grows out of the same alleged wrongful denial of benefits that formed the basis of the Wayte I complaint. The principal differences are that the federal court complaint alleges certain federal statutory causes of action ("ERISA"). ¹ In addition, certain of the common law causes of action from those in Wayte I are characterized somewhat differently. Once again, Defendants took the position that the Policy covered the claims alleged in Wayte II while National Union maintained that no coverage exists. National Union, however, agreed to defend its insureds in that action but under reservation of rights.

On or about December 19, 1980, Rollins Leasing and VEBA commenced an action in the California Superior Court against all three of their insurance companies to recover damages resulting from the insurers' alleged breach of contractual obligations, tortious breach of the implied covenant of good faith and fair dealing and violation of California's Unfair Practices Act as to both Wayte I and Wayte II. On January 29, 1981, Plaintiffs filed their First Amended Complaint in California seeking not only compensatory damages but also punitive damages. The parties stipulated that while the motion to stay the Delaware declaratory judgment claim was being briefed and decided, National Union was not required to respond to or answer this California suit.

On the previous day, January 28, 1981, National Union filed a motion to amend its Delaware declaratory judgment complaint primarily to set forth post-complaint occurrences, add VEBA and Rollins Leasing as Defendants and to obtain declaratory relief with respect to Wayte II based on the same grounds of noncoverage as Wayte I. RLC refused to consent to National Union's Motion to Amend. As a result, National Union's counsel renoticed its motion for February 5, 1981 which was later rescheduled to February 18, 1981.

On February 17, 1981 the day before the hearing on National Union's Motion to Amend, RLC filed a Notice of this motion to stay and scheduled its presentation the next day. The grounds for this motion were that the declaratory judgment action should be stayed in favor of the pending action that RLC, Rollins Leasing and VEBA filed in the California Superior Court against National Union and their other insurers, Protective Insurance Company ("Protective") and the Aetna Casualty and Surety Company ("Aetna"). In support of its motion, Defendant RLC contends that the stay of the Delaware proceedings would "avoid duplicative litigation, serve the interests of justice and promote efficient judicial administration." (Defendant's Motion to Stay All Further Proceedings, Paragraph 3). At the in-chambers conference/hearing on these two motions, this Court granted National Union's Motion to Amend its complaint and imposed an immediate temporary stay on the proceedings in this Court pending briefing and the Court's determination of Defendant's Motion to Stay. ² On March 4, 1981, Defendants filed a Motion to Continue the Stay of All Further Proceedings, i.e., making the February 20, 1981 Order permanent. This is the Court's decision on that Motion to Stay.

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