Union Ins. Co. v. Hull & Co.

• Decision Date: 19 December 2011
• Docket Number: No. 4:10–cv–00337–JEG.,4:10–cv–00337–JEG.
• Citation: 831 F.Supp.2d 1060
• Court: U.S. District Court — Southern District of Iowa
• Parties: UNION INSURANCE COMPANY, Plaintiff, v. HULL & COMPANY, INC., and Brown & Brown, Inc., Defendants.

831 F.Supp.2d 1060

UNION INSURANCE COMPANY, Plaintiff,

v.HULL & COMPANY, INC., and Brown & Brown, Inc., Defendants.

No. 4:10–cv–00337–JEG.

United States District Court,

S.D. Iowa,

Central Division.

Dec. 19, 2011.

Joseph A. Happe, Davis Brown Koehn Shors & Roberts PC, Jeffrey W. Lanz, Huber Book Cortese Happe & Lanz PLC, Des Moines, IA, Daniel G. Litchfield, Stephanie W. Tipton, Litchfield Cavo LLP, Chicago, IL, for Plaintiff.

John T. Clendenin, John F. Lorentzen, Nyemaster Goode West Hansell & O'Brien PC, Des Moines, IA, for Defendants.

ORDER

JAMES E. GRITZNER, Chief Judge.

This matter is before the Court on Motion to Dismiss by Defendant Brown & Brown, Inc. (Brown), pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Plaintiff Union Insurance Company (Union) resists. Also pending before the Court is Union's Motion to Compel Arbitration. Defendants Hull & Company, Inc. (Hull), and Brown (collectively, Defendants) resist. On November 9, 2011, the Court held a hearing on the motions. Attorneys Jeffrey Lanz and Stephanie Tipton represented Union, and attorney John Clendenin represented Brown and Hull. The matters are fully submitted and ready for disposition.

I. BACKGROUND

Hull is a wholly-owned subsidiary of Brown. On April 1, 2000, Hull entered into an Agency–Company Agreement (the Agreement) with five insurance companies (the companies), including Union, which is an Iowa insurance company, wherein the companies agreed to give Hull the authority to make binding proposals for insurance contracts for the companies under certain conditions. In the Agreement, Hull is referred to as “Agency,” and Union, along with the other companies, as “Company.” The relevant language of the Agreement provides,

Subject to requirements imposed by law, the terms of this Agreement, the underwriting rules and regulations as contained within the Agent's Manual, and where applicable Addendum I, Agency is authorized to receive, accept and strictly in accordance with Company binding guidelines, bind proposals for contracts of insurance for risks located in the Agency state of domicile and any other states where Agency holds a proper non-resident license and for which a commission is specified in the current Commission Schedule.... It is further understood and agreed that Agency shall under no circumstances have authority to bind any risk for: (1) Any coverage when such authority has been restricted by submission or prohibited list published in the Agents Manual or any other written notice given to Agency.

Agreement, Pl.'s Br. Supp. Mot. Compel Arbitration Ex. D ¶ 1(A), ECF No. 35–4.

Union issued a commercial umbrella insurance policy (the Umbrella Policy) to the Thirsty Parrot Bar and Grill (Thirsty Parrot), a Colorado restaurant and bar. Hull had placed the Umbrella Policy over a commercial general liability primary policy issued by Mt. Hawley (the Mt. Hawley Policy), which provided limits of $1,000,000 per occurrence and $2,000,000 in the aggregate. The declaration page of the Umbrella Policy stated limits of $1,000,000 per occurrence and $1,000,000 in the aggregate over the Mt. Hawley Policy. The Mt. Hawley Policy, however, had an assault and battery endorsement with a $500,000 “wasting” sub-limit.¹

An employee of the Thirsty Parrot seriously injured a patron, and the patron brought claims against the Thirsty Parrot and the employee for assault, battery, and negligent hiring. Union defended Thirsty Parrot, and the case eventually settled for $1,000,000; Union paid $800,000 toward the settlement. Union also incurred loss adjustment expenses of $19,492.91. The Mt. Hawley policy paid based on the assault and battery endorsement. However, with $300,000 incurred in defense fees, only $200,000 from that policy was paid toward the settlement amount.

Union then sought coverage for the balance of the settlement amount ($819,492.91) from its reinsurer pursuant to a facultative reinsurance agreement; the reinsurer refused, claiming that Union breached a warranty agreement, which provided that there would be $1,000,000 in underlying general liability coverage. Union and the reinsurer arbitrated that dispute. Union requested that Defendants join in that arbitration, but Defendants declined to do so. As a result of arbitration, Union only received a partial award of $273,978.78 from the reinsurer. Union then filed this lawsuit against Hull and Brown to recover the balance Union paid.

Union's Second Amended Complaint seeks an order from this Court compelling Defendants to arbitrate this matter under 9 U.S.C. § 4, or, in the alternative, Union seeks damages for breach of contract or indemnification as outlined in the Agreement. On May 17, 2011, Union filed a Motion to Compel Arbitration, and Brown filed its Motion to Dismiss under Rule 12(b)(6), arguing that Union had not adequately pled a claim against it. Both motions were timely resisted.

II. DISCUSSIONA. Brown's Motion to Dismiss

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.;see also Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir.2008) (noting that a complaint “must include sufficient factual information to provide the ‘grounds' on which the claim rests, and to raise a right to relief above a speculative level” (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 129 S.Ct. at 1949;see also Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (explaining that “a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do” (alterations in original)).

Brown argues in its Motion to Dismiss that Union's Second Amended Complaint cannot withstand a 12(b)(6) motion. Union counters that there are sufficient facts pled based on the alter ego doctrine, piercing the corporate veil, and the “identity rule.” ² It is undisputed that Hull is a wholly-owned subsidiary of Brown. Union alleges that an in-house attorney for Brown, Mr. King, made statements that implied that Hull employees were also Brown employees. Union argues—based solely on these facts—that it has pled facts sufficient to withstand a 12(b)(6) motion. Additionally, Union blames Hull for not “dispel[ling] its belief [that Hull and Brown are the same entity] so as to avoid needlessly naming Brown [ ] as a party. Brown [ ] steadfastly refused to work with Union on this issue. As such, Union felt compelled to add Brown [ ] as a party.” Pl.'s Resp. Def.'s Mot. Dismiss 3, ECF No. 43.

Under Iowa law,³ courts may disregard the corporate form under the alter ego doctrine “if the entity is ‘merely an instrumentality or device set up to ensure the avoidance of the legal obligations.’ ” HOK Sport, Inc. v. FC Des Moines, L.C., 495 F.3d 927, 935 (8th Cir.2007) (quoting Benson v. Richardson, 537 N.W.2d 748, 761 (Iowa 1995)).

A corporate entity is the alter ego of a person if (1) the person influences and governs the entity; (2) a unity of interest and ownership exists such that the corporate entity and the person cannot be separated; and (3) giving legal effect to the fictional separation between the corporate entity and the person would sanction a fraud or promote injustice.

Id. (quotation marks and citation omitted). “In addition to applying to persons using a corporate entity as a mere instrumentality, ... [c]ourts have disregarded the separate corporate personalities of parent and subsidiary corporations in certain circumstances to prevent the parent corporation from perpetuating a fraud, evading just responsibility, or defeating public convenience.” Id. at 935 n. 4 (quoting Schnoor v. Deitchler, 482 N.W.2d 913, 915–16 (Iowa 1992)).

The corporate veil doctrine applies only “under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.” Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 810 (Iowa 1978).

The burden is on the party seeking to pierce the corporate veil to show the exceptional circumstances required. Factors that would support such a finding include (1) the corporation is undercapitalized; (2) it lacks separate books; (3) its finances are not kept separate from individual finances, or individual obligations are paid by the corporation; (4) the corporation is used to promote fraud or illegality; (5) corporate formalities are not followed; and (6) the corporation is a mere sham.

Cemen Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1, 6 (Iowa 2008) (quoting In re Marriage of Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000)). “[M]ere identity of ... ownership and corporate management is not alone sufficient to permita piercing of the corporate veil.” HOK Sport, 495 F.3d at 936 (alterations in original) (internal quotation marks and citation omitted).

Union's Second Amended Complaint falls far short of adequately pleading a claim based on either an alter ego theory or piercing the corporate veil. Union names Brown as a party as a precaution yet fails to supply factual information to raise claims against Brown above the “speculative level.” See Schaaf, 517 F.3d at 549. A review of the law readily demonstrates that the theories under which Union is attempting to hold Brown liable require more...