St. Paul Reinsurance Company, Ltd. v. Commercial Financial Corp., No. C00-4080 (N.D. Iowa 11/20/2000)
| Decision Date | 20 November 2000 |
| Docket Number | No. C00-4080.,C00-4080. |
| Parties | ST. PAUL REINSURANCE COMPANY, LTD., CNA REINSURANCE COMPANY, LTD., and ZURICH REINSURANCE (LONDON) LIMITED, Plaintiffs, v. COMMERCIAL FINANCIAL CORP., Defendant, COMMERCIAL FINANCIAL CORP. and SECURITY STATE BANK, Counterclaim Plaintiffs, v. ST. PAUL REINSURANCE COMPANY, LTD., CNA REINSURANCE COMPANY, LTD., ZURICH REINSURANCE (LONDON) LIMITED, PROFESSIONAL CLAIMS MANAGERS, INC., and U.S. RISK UNDERWRITERS, INC., Counterclaim Defendants. |
| Court | U.S. District Court — Northern District of Iowa |
This is an action for declaratory judgment pursuant to 28 U.S.C. § 2201 for the purposes of determining questions of actual controversy between the parties and construing the rights and legal relations of the parties arising from a contract of insurance entered into between St. Paul Reinsurance Company, Ltd., CNA Reinsurance Company, Ltd. and Zurich Reinsurance (London) Limited (hereinafter jointly referred to as the "London Insurers") and Commercial Financial Corp. ("CFC"). On July 24, 2000, London Insurers filed this declaratory judgment action for rescission of a contract between CFC and U.S. Risk Underwriters, Inc. ("U.S. Risk") based upon alleged material misrepresentations in the process of applying for insurance coverage.
The London Insurers are subscribing insurance companies that issue insurance policies through their managing general agent, U.S. Risk. Specifically, the London Insurers are engaged in the business of providing and underwriting insurance, including liability insurance. On October 6, 1999, CFC acquired controlling interest in First Security Banshares, Inc. Security State Bank is a wholly owned subsidiary of First Security Banshares and is comprised of twelve employees. In the sale transaction, CFC terminated three1 Security State employees and replaced them with its own management. Thereafter, on October 13, 1999, CFC applied for employment insurance with U.S. Risk for three of its corporate entities. The corporate entities seeking insurance were CFC, Commercial Trust & Savings Bank and Central Trust & Savings Bank. At this time, Security State did not seek insurance. In its application form, U.S. Risk sought certain information regarding the prospective insureds' employees. Among other things, U.S. Risk inquired whether CFC, Commercial Trust & Savings Bank and Central Trust and Savings Bank had fired any employees during the preceding twelve months. These prospective insureds accurately responded that they had not fired anyone during the preceding twelve months.
In February of 2000, CFC requested that the insurance policy be amended by adding Security State as a named insured on the policy. On February 9, 2000, CFC's soliciting agent, Iowa Bankers Insurance and Services, Inc. ("IBIS") contacted U.S. Risk and made this request on behalf of CFC. Specifically, Connie Hansen of IBIS provided U.S. Risk with the employee count and confirmation that the new subsidiaries, namely Security State, would follow the same procedures as CFC. Additionally, Ms. Hansen asked that U.S. Risk confirm receipt and advise as soon as possible if anything else would be required to issue the endorsement. Thereafter, in February of 2000, the London Insurers issued an endorsement adding Security State as a named insured on the policy.
In March of 2000, the three former employees of Security State filed wrongful discharge claims against Security State with the Equal Employment Opportunity Commission ("EEOC"). Based upon this information, the London Insurers seek rescission of the insurance contract because it argues that CFC's failure to disclose that it terminated these three employees when it sought to amend its policy by adding Security State as a named insured on the policy constitutes fraud.
On July 24, 2000, the London Insurers filed a declaratory judgment action against CFC seeking rescission of the insurance policy issued to CFC. The London Insurers' rescission claim is based on CFC's alleged misrepresentations and omissions of material information made in the application for the renewal of the insurance policy. Specifically, the London Insurers argue that CFC's failure to disclose the October terminations of three Security State employees in connection with the February 9, 2000, request that Security State be added to the already existing insurance policy, knowing that such information was material to the risk that the London Insurers assumed in issuing such an employment practices liability insurance policy, constitutes fraud.
On September 1, 2000, CFC moved for summary judgment on the London Insurers' declaratory judgment action for rescission of the insurance policy. In its motion for summary judgment, CFC argues that the London Insurers' claim is both factually frivolous and legally barred. With respect to the legal argument, CFC asserts the following: 1) Security State had no duty to answer questions that were not asked; 2) there is no duty to volunteer information that is not expressly and clearly requested; 3) there is no duty to supplement information after a policy is issued; and 4) the London Insurers' claims are statutorily barred. In short, CFC argues that it was under no duty to disclose any information that it was not asked by the London Insurers. In contrast, the London Insurers assert that CFC was under an affirmative duty to disclose all information relevant to the risk of being insured until the application process was completed and until the policy was actually issued and delivered by the insurer in its final form, which the London Insurers argue occurred in February of 2000 when Security State was added as a named insured on the already existing policy. The London Insurers assert that the law does not allow an insurance applicant to hide information it fully understands to be material during the application process—even if the questions concerning such material information are not specifically re-asked a second time. The London Insurers emphasize the timing of the events in this case, highlighting the following:
1. On October 6, 1999, CFC purchases Security State's parent company and immediately replaces numerous officers and employees of Security State with CFC's own management.
2. CFC was specifically asked on its initial application of October 13, 1999, whether the insured entity had been involved in any "involuntary terminations during the past twelve months."
3. CFC was specifically informed in the application that such information formed the "basis" of the insurance contract.
4. CFC, after receiving the subject insurance policy in November, 1999, re-opened the application process on February 9, 2000, by requesting that another, new entity be added to the existing policy—Security State Bank.
5. As of February 9, 2000, CFC and its insurance broker Iowa Bankers Insurance Services, Inc. knew:
i. That CFC and Security State had involuntarily terminated at least four Security employees;
ii. That the insurers regarded such information as material;
iii. That the final policy, including Security State as an insured, was not yet issued.
6. As of February 9, 2000, the banks and their insurance broker IBIS had not supplied any of the obviously material information to the insurers.
London Insurers' Resistance Brief at 8 and Surreply Brief at 4. Therefore, the London
Insurers argue that because the application process was not completed in November of 1999—it was continuing through February of 2000, because CFC and Security State themselves elected to re-open the process by adding the very bank whose employees have now brought actions against them—CFC and Security State were under a continuing duty to supplement any material inaccuracies in the application process though February, 2000. This is so, the London Insurers argue, because the application process was not concluded until the endorsement adding Security State was issued to defendants in February of 2000. In sum, the London Insurers argue that CFC and Security State, under the law, were required, as insurance applicants, to disclose any material change in the nature of the risk between the time that the application was submitted in October of 1999, and the time that the policy was issued and delivered in its final form in February of 2000.
On October 17, 2000, CFC filed its reply, and after obtaining leave from the court, the London Insurers filed a surreply on November 1, 2000. Thereafter, with permission from the court, CFC filed its response to the London Insurers' surreply on November 3, 2000. The court deems the matter fully submitted.
This court has considered in some detail the standards applicable to motions for summary judgment pursuant to FED. R. CIV. P. 56 in a number of prior decisions. See, e.g., Swanson v. Van Otterloo, 993 F. Supp. 1224, 1230-31 (N.D. Iowa 1998); Dirks v. J.C. Robinson Seed Co., 980 F. Supp. 1303, 1305-07 (N.D. Iowa 1997); Laird v. Stilwill, 969 F. Supp. 1167, 1172-74 (N.D. Iowa 1997); Rural Water Sys. #1 v. City of Sioux Ctr., 967 F. Supp. 1483, 1499-1501 (N.D. Iowa 1997) aff'd in pertinent part, 202 F.3d 1035 (8th Cir. 2000); Tralon Corp. v. Cedarapids, Inc., 966 F. Supp. 812, 817-18 (N.D. Iowa 1997), aff'd, 205 F.3d 1347 (8th Cir. 2000) (Table op.); Security State Bank v. Firstar Bank Milwaukee, N.A., 965 F. Supp. 1237, 1239-40 (N.D. Iowa 1997); Lockhart v. Cedar Rapids Community Sch. Dist., 963 F. Supp. 805 (N.D. Iowa 1997). Thus, the court will not consider those standards in detail here. Suffice it to say that Rule 56 itself provides, in pertinent part, as follows:
Rule 56. Summary Judgment
(a) For Claimant. A party seeking to recover upon a claim, counterclaim, or cross-claim or to obtain a declaratory judgment may, at any time...
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