Pioneer Indus. Inc. v. Hartford Fire Ins. Co.

• Citation: 639 F.3d 461
• Decision Date: 08 April 2011
• Docket Number: Nos. 09–3002,09–3072.,s. 09–3002
• Parties: PIONEER INDUSTRIES, INC., Appellant/Cross–Appellee,v.HARTFORD FIRE INSURANCE COMPANY, Appellee/Cross–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

639 F.3d 461

PIONEER INDUSTRIES, INC., Appellant/Cross–Appellee,
v.
HARTFORD FIRE INSURANCE COMPANY, Appellee/Cross–Appellant.

Nos. 09–3002

09–3072.

United States Court of Appeals, Eighth Circuit.

Submitted: May 11, 2010.Filed: April 8, 2011.

[639 F.3d 463]

Joseph Francis Lulic, argued, Bjork Thorsten Hill, on the brief, Minneapolis, MN, for appellant/cross–appellee.Joel T. Wiegert, argued, John J. McDonald, Jr. and Katherine A. McBride, Minneapolis, MN, for appellee/cross–appellant.Before BYE, MELLOY, and SHEPHERD, Circuit Judges.BYE, Circuit Judge.

These appeals involve an insurance coverage dispute over commercial crime insurance Hartford Fire Insurance Company issued to Pioneer Industries. After Pioneer's chief financial officer (CFO) died, Pioneer discovered he had embezzled more than $500,000 from the company during the eleven years prior to his death. Pioneer sued Hartford after the latter refused to pay a claim for the loss. The district court ¹ concluded Hartford was entitled to rescind the policy covering the loss because the CFO made material misrepresentations in Pioneer's insurance applications, and the misrepresentations increased Hartford's risk of loss. Pioneer appeals that decision. Hartford cross-appeals the district court's determination

[639 F.3d 464]

that Pioneer was not obligated to reimburse Hartford for a separate claim Hartford paid in 2000. We affirm the district court in both appeals.

I

Pioneer Industries is a paper recycling company. Its owner, James Chafoulias, also owns four related companies, including the Batliner Paper Stock Company (Batliner). We refer collectively to these entities as Pioneer. Clinton Harlander served as Pioneer's CFO from 1985 until his death in 2006. Harlander's duties included completing insurance applications. Between 1987 and 2004, he completed six different applications for commercial crime insurance from Hartford, including both original policy applications and renewal applications. In the applications, Harlander made representations claiming Pioneer accounts at all locations were independently audited on an annual basis; he also made representations as to internal controls Pioneer had purportedly implemented, such as having bank accounts reconciled by someone not authorized to deposit to or withdraw from the accounts, and requiring countersignatures on checks. While Harlander's representations were true as to some Pioneer locations or accounts, they were not true as to all locations or accounts within Pioneer.

In truth, Harlander had sole signature authority over Pioneer's savings account and several of Pioneer's checking accounts. He also reconciled the accounts. Harlander abused his ability to control account processes from beginning to end (i.e., request a check, approve a voucher and sign a check) to write checks payable to himself, to withdraw cash for himself from the savings account, and to endorse checks written by one Pioneer entity to another entity for deposit into his personal account or for deposit into the savings account. Sometimes when checks were deposited to Pioneer's savings account, Harlander took the funds as cash. Harlander also used Pioneer's credit card for personal expenses, insured his personal automobile under Pioneer's automobile insurance policy, paid himself for unused vacation in contravention of the company's “use it or lose it” vacation policy, and gave himself unauthorized raises.

Shortly after Harlander died on May 28, 2006, Pioneer discovered he had misappropriated $549,859.26 from the company between 1995 and 2006. Pioneer submitted a claim to Hartford for the loss stemming from Harlander's misappropriation. Hartford refused to pay the claim. On November 30, 2006, Hartford told Pioneer it was rescinding its insurance coverage based upon the ground that Pioneer made material misrepresentations in the applications the company had submitted between 1987 and 2004. Hartford further demanded Pioneer reimburse Hartford for a $500,000 loss it paid in 2000 for inventory theft which occurred at a Batliner facility (the Batliner claim). Hartford included a check for $29,684, the full amount of all premiums Pioneer had paid under policy number 41BDDAH7179 (the 7179 Policy), which was initially issued by Hartford to Pioneer on April 1, 2000.

Pioneer refused the returned premiums and filed suit against Hartford in Minnesota state court alleging breach of contract based on Hartford's denial of coverage. Hartford removed the suit to federal district court and counterclaimed for a declaration as to it being entitled to rescind the commercial crime insurance policies it had issued to Pioneer between 1987 and 2000. Hartford's counterclaim also sought reimbursement of the $500,000 it had paid on the Batliner claim in 2000.

Hartford moved for summary judgment on the breach-of-contract claim brought

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against it, as well as its counterclaim seeking reimbursement of the Batliner claim. The district court granted Hartford's motion in part. The district court concluded Pioneer made material misrepresentations in its insurance applications which increased Hartford's risk of loss, and Hartford was entitled to rescind the policy which would have covered Harlander's misappropriation claim. The district court denied Hartford's motion as it related to the counterclaim for the $500,000 paid on the Batliner claim in 2000.

As relevant to the counterclaim, Hartford had issued Pioneer a “Notice of Nonrenewal” on January 24, 2003, indicating Hartford was exercising its right to terminate the 7179 Policy effective April 1, 2003. Thereafter Pioneer submitted a full application for insurance. After reviewing the full application, Hartford elected to continue providing insurance coverage to Pioneer. The district court concluded the nonrenewal notice resulted in a termination of the 7179 policy effective April 1, 2003, and the formation of a new contract of insurance effective as of that same date. The district court held that while Hartford had demonstrated its right to rescind its contract as to non-lapsed policies (back to April 1, 2003), it had not demonstrated as a matter of law it was further entitled to rescind policies which had already lapsed (any policies in effect prior to April 1, 2003).

The district court withheld entry of final judgment to give Hartford the opportunity to file a motion providing authority for its claim that it was not only entitled to rescind coverage back to April 2003, but further entitled to rescind policies which may have already lapsed, including the policy in effect in 2000 when the Batliner claim was paid. The time period set by the district court for bringing such a motion passed without Hartford filing a motion; as a consequence the district court dismissed Hartford's counterclaim. Thereafter both parties filed timely appeals.

On appeal, Pioneer challenges the district court's summary judgment in favor of Hartford on Pioneer's breach-of-contract claim. Pioneer contends Hartford failed to show material misrepresentations were made in the applications for insurance which increased the risk of loss. In its cross appeal, Hartford contends the district court erred when it determined the January 2003 “Notice of Nonrenewal” resulted in the formation of a new contract of insurance, and thus erred when it dismissed the counterclaim for reimbursement of the Batliner claim.

II

We review de novo both the district court's grant of summary judgment and its interpretation of state insurance law. Country Life Ins. Co. v. Marks, 592 F.3d 896, 899 (8th Cir.2010).

We first address Pioneer's contention the district court erred in granting Hartford's motion for summary judgment. The district court granted summary judgment on the ground Pioneer made material misrepresentations in its insurance applications which increased Hartford's risk of loss. Under Minnesota law, an insurer may rescind or avoid a policy if a misrepresentation on the application for insurance increases the risk of loss to the insurer or is made with intent to deceive or defraud. See Minn.Stat. § 60A.08(9) (providing in relevant part “[n]o oral or written misrepresentation made by the assured ... in the negotiation of insurance, shall be deemed material, or defeat or avoid the policy ... unless the matter misrepresented increases the risk of loss.”). The insurer has the burden of proving a misrepresentation increased the risk of loss.

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Quintana v. Allstate Ins. Co., 378 N.W.2d 40, 45 (Minn.Ct.App.1985).

Pioneer first argues Minn.Stat. § 60A.08(9) does not govern misrepresentations made in applications for insurance because the statute does not refer to an “application,” but only the “negotiation of insurance.” Pioneer points out another subdivision of the same statute, Minn.Stat. § 60A.08(11) (governing directors and officers liability coverage), refers to both “negotiation” and “application” to indicate when a misrepresentation or omission defeats insurance coverage. Pioneer argues the absence of the term “application” from Minn.Stat. § 60A.08(9), and its presence in Minn.Stat. § 60A.08(11), indicates the term must have a different meaning than “negotiation.” As a result, Pioneer contends misrepresentations made in applications for insurance do not trigger Minn.Stat. § 60A.08(9).

As the district court observed, however, the Minnesota courts have routinely and consistently applied Minn.Stat. § 60A.08(9), and its predecessor statute, Minn.Stat. § 60.85, to situations involving misrepresentations made in applications for insurance.² We are obligated to follow these decisions. See Minn. Supply Co. v. Raymond Corp., 472 F.3d 524, 534 (8th Cir.2006) (noting that when interpreting state law, the Eighth Circuit is bound by the decisions of the state's highest court). Furthermore, the Minnesota Legislature, despite recodifications to the statute after the Minnesota Supreme Court applied the statute to applications for insurance, has not...