RLI Ins. Co. v. Stan Koch & Sons Trucking, Inc.
| Decision Date | 15 September 2021 |
| Docket Number | 19-CV-1757 (PJS/HB) |
| Court | U.S. District Court — District of Minnesota |
| Parties | RLI INSURANCE COMPANY, Plaintiff/Counter-Defendant, v. STAN KOCH & SONS TRUCKING, INC., Defendant/Counter-Claimant. |
Erik T. Salveson, NILAN JOHNSON LEWIS PA, for plaintiff/counter- defendant.
R Henry Pfutzenreuter and Paul R. Smith, LARKIN HOFFMAN DALY & LINDGREN, LTD., and Lauris A. Heyerdahl, for defendant/counter- claimant.
This case involves a series of contract disputes between defendant Stan Koch & Sons Trucking, Inc., (“Koch”) and Koch's longtime insurer, plaintiff RLI Insurance Company (“RLI”). RLI filed suit in July 2019, alleging that Koch had breached its contractual obligations by failing to provide adequate security for a bond issued by RLI. Koch counterclaimed, alleging that RLI had failed to pay Koch amounts due under the parties' agreements. This matter is now before the Court on the parties' cross-motions for summary judgment. For the reasons that follow, both motions are granted in part and denied in part, and all claims and counterclaims are dismissed.
Koch is a trucking company. Koch purchased liability insurance from RLI in 2007 and renewed its policy every year until 2018, when Koch switched insurers.[1] ECF No. 33 ¶ 4; ECF No. 34 ¶ 5. During all coverage periods relevant to this litigation, Koch elected to maintain a large self-insured retention, meaning that Koch was responsible for investigating, adjusting, defending, and paying claims under a certain (high) threshold. ECF No. 33-1 at 2. In other words, Koch essentially functioned as its own primary insurer, and RLI essentially functioned as Koch's excess insurer. Because Koch was responsible for paying most claims, RLI bore less risk, and consequently Koch paid a lower premium. See id.
Under federal law, however, a commercial motor carrier such as Koch cannot function as its own primary insurer; instead, it must be insured for every dollar of potential liability. ECF No. 46 ¶ 2; ECF No. 47-1 at 14. To comply with this requirement, Koch obtained from RLI a bond under which RLI agreed to be liable for any claims that Koch failed to pay, including claims within the self-insured retention. See ECF No. 46 ¶ 2; ECF No. 47-3. In exchange for this bond, Koch agreed to provide security in the form of a letter of credit or cash. See ECF No. 33-1 at 5. As a result, if RLI did have to step in and pay a claim within Koch's self-insured retention, RLI could seek reimbursement of that payment from Koch-and, if Koch failed to reimburse RLI, RLI could recover against the security that Koch provided. In essence, then, RLI took on little or no additional risk when it issued the bond.
The Self-Insured Retention Agreement (“SIR Agreement”), which memorializes this arrangement, provides that the amount of the security provided by Koch must be the greater of $1.75 million or 125% of the reserves maintained by Koch to pay pending and anticipated claims. Id. A “reserve” is “the amount of money for which a claim . . . could be expected reasonably to be disposed of.” Id. at 3. The SIR Agreement grants RLI “the unrestricted right at any time to establish or revise Reserves.” Id. If the security on deposit dips below the required amount, Koch must deposit additional security within 15 days of receiving written notice of the deficiency. Id. at 5-6. If Koch fails to timely post additional security, the SIR Agreement gives RLI the right to “cancel the Policy, and all Endorsements, Filings and Certificates, including this Agreement.” Id. at 6.
Over the years, RLI has routinely audited Koch's reserves, and RLI has twice requested that Koch provide additional security-once in 2008 and again in 2013. ECF No. 46 ¶ 13; ECF No. 47-1 at 24-25. In both instances, Koch complied by providing an amended letter of credit. ECF No. 47-4; ECF No. 47-1 at 24-25. Koch currently has a $2 million letter of credit in place, and this amount has remained constant since the letter of credit was last increased at RLI's request on September 6, 2013. ECF No. 47-4 at 6.
On July 24, 2018, RLI conducted a routine audit of Koch's reserves. See ECF No. 47-6. Prior to the audit, Koch advised that its reserves were $3, 838, 576.01. ECF No. 47-1 at 37-38; ECF No. 47-6 at 3. Needless to say, Koch's $2 million letter of credit did not come close to satisfying Koch's contractual obligation to maintain security in the amount of 125% of its reserves. Accordingly, RLI demanded that Koch provide additional security. ECF No. 47-7.
In late August 2018, Koch notified RLI that it would not be renewing its insurance policy-i.e., that it would be moving its business to a different carrier. See ECF No. 47-8 at 3-4. But that did not end the relationship between the parties. Because the policies that Koch had purchased from RLI were occurrence-based (not claims- made), any claim asserted against Koch that arose out of events that had occurred while RLI insured Koch remained covered by RLI and remained subject to the SIR Agreement. See ECF No. 47-1 at 12. Therefore, Koch remained obligated to provide security in the amount required by the SIR Agreement.
After receiving notice that Koch would not be renewing its policy, RLI issued at least two more requests that Koch provide additional security. ECF No. 47-8 at 2-3; ECF No. 47-9 at 3-5. Koch responded by requesting that RLI perform a new audit of Koch's reserves, explaining that Koch had recently resolved several significant claims. ECF No. 47-12 at 3; ECF No. 47-15 at 3. RLI conducted another audit, and that audit determined that Koch still owed more than $2.2 million in additional security. ECF No. 47-21. Despite RLI's repeated demands, Koch failed to increase its letter of credit- something that Koch was indisputably obligated to do under the SIR Agreement.
Because Koch was clearly in breach of the SIR Agreement, RLI had the right to cancel that agreement and all underlying insurance policies. ECF No. 33-1 at 6. RLI chose not to exercise its contractual remedies, however. Instead, RLI decided to retaliate against Koch by breaching its own contractual obligations. Specifically, RLI withheld over $200, 000 in payments that were indisputably owed to Koch-telling Koch that, as soon as Koch fulfilled its obligation to post the additional security, RLI would fulfill its obligation to pay the withheld sums. See ECF No. 33 ¶ 15.
RLI then filed this lawsuit, seeking an injunction, declaratory relief, and damages in connection with Koch's refusal to provide the amount of security required by the SIR Agreement.[2] Koch answered and counterclaimed, alleging breach of contract and breach of the covenant of good faith and fair dealing in connection with RLI's refusal to pay over the amounts that it was withholding. ECF No. 34. Specifically, Koch alleged that RLI wrongfully withheld a $4, 662 premium refund, a $24, 672 owner/operator deposit, and $187, 254.78 in loss-adjustment expenses.[3]
While this lawsuit has been pending, Koch has continued to resolve claims, and its reserves have continued to shrink. As of December 10, 2020, Koch calculated its aggregate reserves to be just $673, 519. ECF No. 53 ¶ 11; ECF No. 53-1 at 80. The parties now agree that, because Koch's reserves have shrunk so dramatically, Koch's $2 million letter of credit (which remains in place) is more than sufficient to satisfy Koch's obligations under the SIR Agreement. The parties further agree that, during the period that Koch did not provide the amount of security required by the SIR Agreement, RLI was never called upon to pay any claim or expense on behalf of Koch. ECF No. 53-1 at 187. In other words, the amount of the security turned out not to matter, as RLI never had to make a payment on behalf of Koch, much less ask Koch to reimburse it for that payment, much less be refused reimbursement, much less turn to the security to be made whole.
After determining that Koch was no longer in breach of the SIR Agreement, RLI paid over to Koch all of the sums that it had been withholding. RLI represents-and Koch does not dispute-that Koch was paid in full as of April 13, 2021. ECF No. 64.
So that's the end of this lawsuit, right? After all, RLI filed this lawsuit because Koch was not providing the required amount of security. But Koch is now providing far more security that the SIR Agreement requires, and its past breach did not harm RLI. And Koch filed its counterclaims because RLI was refusing to make payments that were due under the contract. But RLI has now made those payments. So what is left to fight about? Most people would respond, “nothing.” But the relationship between these parties is so acrimonious that, instead of simply walking away from this litigation, they have continued to pay their lawyers to find creative ways to try to keep this lawsuit alive.
Each party now moves for summary judgment, seeking judgment in its favor on its claims and dismissal of its opponent's claims. Because the dispute between the parties is largely moot, the Court dismisses all of the remaining claims and counterclaims.
Summary judgment is warranted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A factual dispute is “material” only if its resolution might affect the outcome of the suit under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is “genuine” only if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. “The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in...
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