Wilbanks Sec., Inc. v. Scottsdale Ins. Co.

• Decision Date: 19 October 2016
• Docket Number: Case No. CIV–16–294–R
• Citation: 215 F.Supp.3d 1196
• Parties: WILBANKS SECURITIES, INC., an Oklahoma Corporation, Aaron B. Wilbanks, an individual, Randall L. Wilbanks, an individual, Steven S. Sharpe, an individual, and William R. Freeman, an Individual, Plaintiffs, v. SCOTTSDALE INSURANCE COMPANY, Nationwide Insurance Company, and National Union Fire Insurance Company of Pittsburg, PA., Defendants.
• Court: U.S. District Court — Western District of Oklahoma

215 F.Supp.3d 1196

WILBANKS SECURITIES, INC., an Oklahoma Corporation, Aaron B. Wilbanks, an individual, Randall L. Wilbanks, an individual, Steven S. Sharpe, an individual, and William R. Freeman, an Individual, Plaintiffs,

v.SCOTTSDALE INSURANCE COMPANY, Nationwide Insurance Company, and National Union Fire Insurance Company of Pittsburg, PA., Defendants.

Case No. CIV–16–294–R

United States District Court, W.D. Oklahoma.

Signed October 19, 2016

John M. Gibson, John M. Gibson Attorney at Law, Oklahoma City, OK, for Plaintiffs.

Tom Cooper, Pignato & Cooper, Oklahoma City, OK, Valerie D. Rojas, Sedgwick LLP, Los Angeles, CA, Duncan L. Clore, John Randall Riddle, Strasburger & Price, Dallas, TX, Gary C. Crapster, Steidley & Neal, Tulsa, OK, for Defendants.

ORDER

DAVID L. RUSSELL, UNITED STATES DISTRICT JUDGE

This matter comes before the Court on the Motion to Dismiss (Doc. No. 27) filed by Defendants Nationwide Insurance Company and Scottsdale Insurance Company. Plaintiffs responded by conceding that dismissal of Nationwide Insurance Company is appropriate, without prejudice, but arguing that their claims against Defendant Scottsdale should be permitted to proceed. The parties filed replies and sur-replies in support of their respective positions. Having considered the parties' briefs, the Court finds as follows.

Plaintiffs filed this action seeking a declaratory judgment with regard to the issue of Defendant's duty to defend Plaintiffs in an underlying FINRA arbitration. They further allege breach of contract and bad faith with regard to the errors and omissions policy issued by Defendant Scottsdale. Plaintiffs contends Defendant owes a duty to defend and indemnify Plaintiffs under a Financial Services Professional Liability Insurance Policy, No. BFS0002154–OK–03–00 issued by Scottsdale with regard to an ongoing arbitration pursued against Plaintiffs by Kent and Shawna Powell. Defendant contends Plaintiffs are not entitled to declaratory relief and further that their claim for breach of contract fails at this juncture because Plaintiffs cannot satisfy a condition precedent of the Policy. In support of its Motion to Dismiss Defendant relies upon Condition C of the Policy, which states:

Suits Against Us. No suit or other action may be brought against us unless, as a condition precedent thereto, there has been full compliance with all the terms and conditions of this policy and the obligation of the insured to pay "damages" has been finally determined either by judgment against the insured after actual trial or arbitration or by written agreement signed by the insured, the claimant and us. Anyone who has obtained such a judgment or written agreement will be entitled to recover under this policy to the extent of the insurance then available to the insured under this policy. No one has the right to make us a party to a suit to determine the liability of an insured; nor shall we be impleaded by an insured or his/her/its legal representative(s).

Defendant contends that because the underlying arbitration is ongoing, that the above-quoted "no action" clause precludes this litigation from proceedings. In support of its position Defendant relies on Seaborn v. Preferred Acc. Ins. Co. of N.Y. , 206 Okla. 626, 246 P.2d 365 (1952). Therein the court evaluated identical policy language and concluded the policy did not violate Oklahoma statute or sections 8 and 9 of Article 23 of the Oklahoma Constitution.

In Seaborn , the insured owned and operated a produce and feed store as well as an appliance store in Chandler, Oklahoma. During the relevant policy period his wife fell while visiting the store. He sent her to the hospital, ensured she received treatment, and paid for the same. As a result, plaintiff, the insured, sought reimbursement from the insurer under the policy. The court framed the relevant issues as including "first, does the policy indemnify against liability or loss; second, can the name assured sue and recover against the insurance company prior to a determination of the liability by judgment or by written agreement by the third party." Id. at 626. The Oklahoma Supreme Court concluded in Seaborn , that because the liability of the insurer was dependent on the liability of the insured, and the liability of the insured had to be determined in accordance with the "no action" clause, that the insured could not recover under the policy. The court further held that the "no action" clause did not violate certain provisions of the Oklahoma Constitution or Oklahoma statutes because "the No-action provision in the insurance policy does not restrict the method or time limit in determining the liability of the named insured. It merely provided certain conditions precedent to enforcing the liability." Id.

Unlike the instant case, Seaborn , did not involve the issue of the duty to defend. That is, the insurance company in Seaborn was never asked to tender a defense to the underlying claim and thus was not placed in the position of having to evaluate the same. The same holds true in another case upon which Defendant relies, Zahn v. General Ins. Co., 611 P.2d 645 (Okla. 1980). Therein the insurance company originally provided a defense when a property buyer sued the developer, the insured, following flood damage to the home purchased from the developer. After two years of litigation the counsel provided by the insurance company withdrew and General tendered the defense to Hartford, the other insurer, which assigned counsel to defend the case. A trial was initiated, but when the insureds' counsel became ill, a mistrial was declared. Thereafter Hartford informed the insured it was denying coverage, although it would continue with its defense. General refused defense or coverage. The insured arranged for counsel, believing the insurers had created a conflict of interest and thereafter settled the action with the homebuyers for $50,000, which was set forth in an agreed judgment. The insured and the homeowners then filed suit against the insurers, asserting breach of contract and the developer argued that having tendered defenses at various times both insurers were estopped from arguing that insurance coverage did not exist. The insured also sought punitive damages for bad faith. Id. at 647. The court concluded the no-action provision had been waived by the insurance companies when they disclaimed all liability days before trial. Accordingly, because Zahn is premised on both a direct action by a third party and because the insurance companies originally tendered a defense, like Seaborn , it is not directly applicable to the case at hand, where Defendant Scottsdale has refused to defend since the outset.

Rather, this case most closely resembles the Tenth Circuit decision in Paul Holt Drilling, Inc. v. Liberty Mutual Ins. Co. , 664 F.2d 252 (10th Cir. 1981), applying Oklahoma law, wherein the court concluded that a claim for breach of contract premised on breach of the duty to defend accrues at the time the defense is denied by the insurer and continues until the underlying litigation is resolved. The insured alleged the breach of the duty to defend by Liberty Mutual. "The single issue on appeal is when the statute of limitations begins to run on such a breach." Id. at 253. The underlying litigation was instituted in 1971 by a third party. In March 1972, Liberty Mutual denied coverage for any liability Paul Holt Drilling might incur and refused to tender a defense to the insureds. In 1977, while the underlying litigation was winding down, the insureds filed suit against Liberty Mutual alleging breach of contract for failure to defend. The question was whether the cause of action accrued when Liberty Mutual notified the insured that coverage was denied or when the underlying litigation was terminated.

The insureds argued their claim was timely based on the no action clause in the Liberty Mutual policy, which is similar to the provision at issue herein. Liberty Mutual argued that the clause applied only to third parties attempting to make claims. The court concluded:

A few courts have relied upon a no action clause in a policy to hold that the statute of limitations does not begin to run until the underlying litigation has concluded. However, most courts have held that the no action clause does not apply to a suit the insured brings for breach of the insurer's obligation to defend. The Oklahoma courts have not treated the issue, so we must determine how the Oklahoma Supreme Court could decide the issue.

We see an important difference between the claims by a third party alleging the insured is responsible for the third party's injuries and claims by the insured asserting the insurer is withholding benefits dues under the policy. The purposes of the no action clause are to prevent an injured party or an insured from bringing the insurance company into the underlying litigation with possible resultant

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