World Water Works Holdings, Inc. v. Cont'l Cas. Co.

• Decision Date: 24 June 2019
• Docket Number: No. 17 CV 5237,17 CV 5237
• Citation: 392 F.Supp.3d 923
• Parties: WORLD WATER WORKS HOLDINGS, INC., Plaintiff, v. CONTINENTAL CASUALTY CO. and Anthony W. Besthoff, Jr., Defendants. Continental Casualty Co., Counter-Claimant, v. World Water Works Holdings, Inc., Counter-Defendant.
• Court: U.S. District Court — Northern District of Illinois

392 F.Supp.3d 923

WORLD WATER WORKS HOLDINGS, INC., Plaintiff,

v.CONTINENTAL CASUALTY CO. and Anthony W. Besthoff, Jr., Defendants.

Continental Casualty Co., Counter-Claimant,

v.World Water Works Holdings, Inc., Counter-Defendant.

No. 17 CV 5237

United States District Court, N.D. Illinois, Eastern Division.

Signed June 24, 2019

Paul L. Langer, John Anthony Aramanda, Quarles & Brady LLP, Chicago, IL, for Plaintiff/Counter-Defendant.

Dawn M. Gonzalez, Greta Ayn Matzen, Lisa Ann Wilson, CNA Coverage Litigation Group, Chicago, IL, Ashley E. Gilbert, CNA Coverage Litigation Group, Metairie, LA, for Defendants/Counter-Claimant.

MEMORANDUM OPINION AND ORDER

John J. Tharp, Jr., United States District Judge

In March 2017, a shareholder derivative lawsuit was filed in federal court in New Jersey against World Water Works Holdings, Inc. ("World Water") and three individual members of its board of directors. At the time, World Water was covered by a liability insurance policy issued by Continental Casualty Co. ("Continental"). World Water asserts that, under the policy, Continental has a duty to defend that lawsuit, while Continental denies that it has any such duty. Accordingly, World Water brought this action against Continental, seeking, among other things, a declaratory judgment that Continental has a duty to defend the shareholder suit. Both World Water and Continental have moved for summary judgment. Continental has also filed a motion for judicial notice, asking this Court to take judicial notice of various documents relevant to the New Jersey lawsuit. For the reasons that follow, both of Continental's motions are granted, and World Water's motion is denied.

BACKGROUND

In 1998, World Water Works, Inc. ("WWW, Inc.") was founded by Mark Fosshage. See Continental Casualty Company's Local Rule 56.1 Statement of Undisputed Material Fact ("DSOF") ¶ 19, ECF No. 49. The company is in the business of wastewater treatment. Fosshage's father, James Fosshage, was a founding investor in WWW, Inc. and so was given a seat on its board of directors. See id. ¶¶ 20-21.¹ Mark Fosshage served as the initial president and CEO of the company. In 2011, World Water was formed as a separate legal entity and became the holding company for WWW, Inc. See id. ¶ 22. Around the same time, three other individuals—Prashant Mitta, Ravi Reddy, and Ravishankar Tumuluri—became involved with World Water, and ultimately became directors on World Water's board. A dispute later arose between these three individuals and the elder Fosshage over the direction and management of the company. Id. ¶ 29. In 2016, these individuals removed Mark Fosshage from his role as president and CEO of World Water. Id. ¶ 24. The elder Fosshage, however, remains a member of the World Water board.

From July 21, 2016, to July 21, 2017, World Water was covered by a liability insurance policy issued by Continental. That policy had a provision that is known as the insured versus insured exclusion ("IVI Exclusion"). The language in the policy setting out the IVI Exclusion contained a general exclusion from coverage and then provided that "this exclusion shall not apply" to a series of seven circumstances. The general exclusion and the first of those limitations read as follows:

The Insurer shall not be liable to pay any Loss under this Coverage Part in connection with any Claim made against any Insured:

...

2. Claims by Insureds

by or on behalf of any Insured in any capacity provided, however that this exclusion shall not apply to:

a. any Claim brought derivatively on behalf of the Insured Entity provided that such Claim is brought and maintained solely by persons acting independent of and without the solicitation, assistance, active participation or intervention of the Insured Entity or any Executive (unless such solicitation, assistance, participation or intervention is Whistleblower Activity)[.]

Ex. A, Directors & Officers Liability Coverage Part 1-2, ECF No. 64-1. The other six limitations on the applicability of the exclusion—which are not relevant to this case—were separately listed in subparagraphs marked with the letters (b) through (g). See id. at 2.

On March 2, 2017 (i.e. , during the policy period), Anthony Besthoff, a shareholder of World Water, filed a lawsuit in the U.S. District Court for the District of New Jersey. The full title of that lawsuit is Anthony W. Besthoff, Jr., derivatively and on behalf of World Water Works Holdings, Inc. v. Prashant Mitta, Ravi Reddy, Ravishankar Tumuluri, and World Water Works Holdings, Inc. , No. 2:17-cv-01449-JMV-MF (D.N.J. Mar. 2, 2017). The Besthoff lawsuit is a stockholder derivative action against Mitta, Reddy, and Tumuluri as individual directors, along with World Water as a nominal defendant. See Verified Shareholder Compl. and Jury Demand ¶ 1, ECF No. 35-1. The core allegation in the lawsuit is that the defendants created various corporate entities in India (the "India Operations"), which were later spun off as independent companies. According to the Besthoff complaint, Mitta, Reddy, and Tumuluri simultaneously held dual roles as members of World Water's board and owners of the India Operations. See id. The complaint further alleges that these defendants took various actions in their capacity as World Water directors that were to the detriment of World Water and for the sole benefit of the India Operations. Besthoff thus brought claims against all three individual defendants for breach of fiduciary duty and waste of corporate assets, and against Mitta for unjust enrichment and tortious interference with contract. Id. ¶¶ 112-30.

After Besthoff filed this complaint, World Water tendered the Besthoff action to Continental, seeking defense coverage under the terms of its insurance policy. On May 3, 2017, Continental denied this request for coverage and refused to defend World Water in the Besthoff action, on the basis that it fell within the IVI Exclusion. Ex. C, ECF No. 64-3. A representative of World Water subsequently spoke with Continental and conveyed that World Water disagreed with this assessment, leading Continental to review its coverage obligations. In a letter dated August 25, 2017, Continental concluded, again, that it had no duty to defend the lawsuit. It nevertheless agreed to defend the Besthoff suit, but did so subject to a full reservation of rights, including the right to seek recoupment of "Defense Costs" as defined by the policy. Ex. D, ECF No. 64-4. Finally, on October 6, 2017, Continental revised its position one more time. It withdrew its claim that it had the right to seek recoupment—but continued to represent that it reserved all other rights under the policy and at law. Ex. E, ECF No. 64-5.

World Water filed this complaint against Continental in July 2017, with Besthoff also included as a nominal defendant.² World Water seeks a declaratory judgment that Continental has a duty to defend the individual defendants in the Besthoff action and to reimburse World Water for all amounts it has incurred in defending that action. In addition, World Water asserts that Continental is liable for breach of contract and for bad faith. Continental responded by bringing a counterclaim against World Water, seeking a declaratory judgment that it has no duty to defend or indemnify World Water. Both Continental and World Water have moved for summary judgment. Continental has also filed a motion for judicial notice, asking the Court to take judicial notice of a number of the filings in the Besthoff case and other documents relevant to that lawsuit.

DISCUSSION

A court shall grant summary judgment "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 genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In reviewing a motion for summary judgment, the Court "construe[s] all facts and inferences in favor of the nonmoving party." Love v. JP Cullen & Sons, Inc. , 779 F.3d 697, 701 (7th Cir. 2015).

I. Duty to Defend

Both parties agree that the insurance policy in this matter is governed by Oklahoma law. See Mem. of Law in Supp. of Continental Casualty Company's Mot. for Summ. J. 6, ECF No. 50; Pl.'s Opp'n to Def. Continental Casualty Company's Mot. for Summ. J. ("Plaintiff's Opposition") 2, ECF No. 64.³ Under Oklahoma law, a liability insurance policy such as the one at issue in this case contains two basic duties: the duty to defend and the duty to indemnify. First Bank of Turley v. Fid. & Deposit Ins. Co. of Md. , 928 P.2d 298, 302-03 (Okla. 1996). The duty to defend "is separate from, and broader than, the duty to indemnify.... An insurer has a duty to defend an insured whenever it ascertains the presence of facts that give rise to the potential of liability under the policy." Id. at 303 (emphasis in original). The duty to defend is "measured and limited by the nature and kinds of risks covered by the policy," meaning that "an insurer does not have a duty to defend if the claims in the underlying action fall within an exclusion from coverage." Scottsdale Ins. Co. v. Owl Nite Sec., Inc. , No. 06-CV-0097-CVE-SAJ, 2006 WL 3742102, at *4 (N.D. Okla. Dec. 15, 2006).

The parties have focused much of their attention in their briefing on the question of what sources an insurer may or should consult in determining whether it has a duty to defend in a particular case. World Water insists that, under Oklahoma law, "the general rule is that the existence of a duty to defend is determined by an analysis of the complaint without regard to extrinsic evidence." Plaintiff's Opposition 2. It contends that there is a single, narrow exception to this rule, which is that when the allegations in a complaint do not trigger the duty to defend, the insurer has an obligation to look beyond the complaint...