National Union Fire Ins. Co. of Pitts. v. Willis

• Decision Date: 24 April 2001
• Docket Number: No. CIV. A. H-00-4205.,CIV. A. H-00-4205.
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff, v. Mark A. WILLIS, Defendant. Equalnet Communications Corporation F/K/A Equalnet Holding Corporation, Plaintiff in Intervention, v. National Union Fire Insurance Company Of Pittsburgh, Pa., Defendant in Intervention.
• Court: U.S. District Court — Southern District of Texas

Page 827

139 F.Supp.2d 827

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff, v. Mark A. WILLIS, Defendant.

Equalnet Communications Corporation F/K/A Equalnet Holding Corporation, Plaintiff in Intervention, v. National Union Fire Insurance Company Of Pittsburgh, Pa., Defendant in Intervention.

No. CIV. A. H-00-4205.

United States District Court, S.D. Texas.

April 24, 2001.

Jeffrey Roger Parsons, Beirne Maynard & Parsons, Houston, David A Clark, Beirne Maynard & Parsons, Houston, TX, for National Union Fire Insurance Company of Pittsburgh PA, plaintiffs.

James Harrison Miller, Attorney at Law, Houston, TX, for Equalnet Communications Corp, intervenor-plaintiffs.

John Zavitsanos, Ahmad & Zavitsanos, Houston, TX, for Mark A Willis, defendants.

Jeffrey Roger Parsons, Beirne Maynard & Parsons, David A Clark, Beirne Maynard & Parsons, Houston, for National Union Fire Insurance Company of Pittsburgh PA, intervenor-defendants.

MEMORANDUM AND ORDER

CRONE, United States Magistrate Judge.

Pending before the court are National Union Fire Insurance Company of Pittsburgh, Pennsylvania's ("National Union") Motion to Dismiss Counterclaim under Rule 12(b)(6)(# 9), National Union's Motion for Judgment on the Pleadings (# 10), and Mark A. Willis's ("Willis") Cross-Motion for Partial Summary Judgment (# 26). Having reviewed the pending motions, the submissions of the parties, the pleadings, the petitions in the underlying lawsuit, and the applicable law, the court is of the opinion that National Union's Motion to Dismiss Counterclaim and Motion for Judgment on the Pleadings should be granted and that Willis's Cross-Motion for Partial Summary Judgment should be denied.

I. Background

In this declaratory judgment action, Plaintiff National Union seeks a declaration that Defendant Willis, an officer of Defendant EqualNet Communications Corporation ("EqualNet"), is not entitled to coverage under any of three directors, officers, and corporate liability insurance policies issued to EqualNet. These policies encompass the time periods March 8, 1998 — March 9, 1999 ("1998 policy"); March 8, 1999 — March 8, 2000 ("1999 policy"); and March 8, 2000 — March 8, 2001 ("2000 policy"). In his counterclaim, Willis alleges that National Union has breached the terms of the insurance policy as well as its duty of good faith and fair dealing by failing to defend and indemnify him. National Union asserts that no coverage exists because Willis failed to give timely notification of a lawsuit brought against him in 1998. Willis contends, however, that he had no duty to notify National Union until the petition was amended in 2000 to add an additional claim and that he is entitled to coverage under the 2000 policy.

On September 21, 1998, CyberServe, Inc. ("CyberServe"), WSHS Enterprises, Inc., and William Stuart (collectively "the CyberServe plaintiffs") filed Cause No. 98-45115, styled CyberServe, Inc., WSHS Enterprises, Inc. and William Stuart v. EqualNet Communications Corp. (f/k/a EqualNet Holding Corp.), Willis Group L.L.C., Mark A. Willis and Netco Acquisition L.L.C., in the 215th District Court of Harris County, Texas. The CyberServe plaintiffs' allegations relate to business transactions and contractual agreements between the parties and initially asserted claims against Willis for fraud, fraud in the inducement, statutory fraud in a stock transaction, tortious interference with contract, and conspiracy. In addition to the causes of action listed above, the petition alleged claims against EqualNet and the Willis Group for breach of contract and quantum meruit. In March 2000, after amending their petition several times, the CyberServe plaintiffs filed their fourth amended petition adding a claim against Willis, the Willis Group, and EqualNet for negligent misrepresentation, which appears to be based on the same alleged misrepresentations underlying their fraud, fraudulent inducement, and statutory fraud claims.

It is undisputed that neither Willis nor EqualNet notified National Union of the CyberServe lawsuit during the 1998 policy period. In fact, EqualNet first notified National Union of the lawsuit by form dated February 29, 2000, and Willis first provided notice of the lawsuit by letter dated May 11, 2000. In a letter dated June 9, 2000, National Union denied coverage and declined to advance defense costs to Willis "[b]ecause the claims asserted against Mr. Willis were not timely reported to National Union in accordance with paragraph 7 of the policies."

Willis maintains that he was not required to give notice of the lawsuit until a claim that was covered by the terms of the policy was asserted against him, which he contends did not occur until the fourth amended petition, alleging a claim for negligent misrepresentation, was filed in March 2000. According to Willis, prior to the fourth amended petition, the only claims asserted against him were intentional torts, which he argues fall within the policy exclusion for claims "arising out of, based upon, or attributable to the committing in fact of any criminal or deliberate fraudulent act." Thus, Willis posits that his May 11, 2000, notification of National Union was timely to trigger coverage under the 2000 policy.

II. Relevant Policy Provisions

Although they relate to different policy periods, the operative language of the three policies is virtually identical. The policies provide insurance coverage for corporate directors and officers of EqualNet, including Willis, as described below:

1. INSURING AGREEMENTS

COVERAGE A: DIRECTORS AND OFFICERS INSURANCE

This policy shall pay the Loss of each and every Director or Officer of the Company arising from a Claim first made against the Directors or Officers during the Policy Period or the Discovery Period (if applicable) and reported to the Insurer pursuant to the terms of this policy for any actual or alleged Wrongful Act in their respective capacities as Directors or Officers of the Company, except when and to the extent that the Company has indemnified the Directors or Officers. The Insurer shall, in accordance with and subject to Clause 8, advance Defense Costs of such Claim prior to its final disposition.

With respect to individual directors and officers, "Wrongful Act" is defined as:

any breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Directors or Officers of the Company in their respective capacities as such, or any matter claimed against them solely by reason of their status as Directors or Officers of the Company, or any matter claimed against them arising out of their serving as a director, officer, trustee, or governor of an Outside Entity in such capacities, but only if such service is at the specific written request or direction of the Company.

"Claim" is defined as:

(1) a written demand for monetary or non-monetary relief; or

(2) a civil, criminal, or administrative proceeding for monetary or nonmonetary relief which is commenced by:

(i) service of a complaint or similar pleading; or

(ii) return of an indictment (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges.

Under the policies, the insurer does not assume a duty to defend and is only obligated to advance defense costs:

Under both Coverage A and Coverage B of this policy, except as hereinafter stated, the Insurer shall advance, at the written request of the Insured, Defense Costs prior to the final disposition of a Claim. Such advanced payments by the Insurer shall be repaid to the Insurer by the Insureds or the Company severally according to their respective interests, in the event and to the extent that the Insureds or the Company shall not be entitled under the terms and conditions of this policy to payment of such Loss. The Insurer does not, however, under this policy, assume any duty to defend. The Insureds shall defend and contest any Claim made against them. The insureds shall not admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any Defense Costs without the prior written consent of the Insurer. Only those settlements, stipulated judgments and Defense Costs which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy. The Insurer's consent shall not be unreasonably withheld, provided that the Insurer shall be entitled to effectively associate in the defense and the negotiation of any settlement of any Claim.

The cover sheet of the policy also cautions:

NOTICE: THE INSURER DOES NOT ASSUME ANY DUTY TO DEFEND; HOWEVER, THE INSURER MUST ADVANCE DEFENSE COSTS PAYMENTS PURSUANT TO THE TERMS HEREIN PRIOR TO THE FINAL DISPOSITION OF A CLAIM.

The notice provisions of the policies state the following:

7. NOTICE/CLAIM REPORTING PROVISIONS

Notice hereunder shall be given in writing to the Insurer named in Item 8 of the Declarations at the address indicated in Item 8 of the Declarations. If mailed, the date of mailing shall constitute the date that such notice was given and proof of mailing shall be sufficient proof of notice.

(a) The Company or the Insureds shall, as a condition precedent to the obligations of the Insurer under this policy, give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either:

(1) any time during the Policy Period or during the Discovery Period (if applicable); or

(2) within 30 days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than 30 days after the date such Claim was first made against an Insured.

(b) If written notice of a Claim has been given to the Insurer pursuant to Clause 7(a) above, then any Claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based upon or attributable to the facts alleged in the Claim for which such notice has been given, or...