Zurich Am. Ins. Co. v. Terrazas

• Decision Date: 21 July 2021
• Docket Number: Case No. 19-1275-JWL
• Parties: ZURICH AMERICAN INSURANCE COMPANY and AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, Plaintiffs, v. JUSTIN F. TERRAZAS and CLAUDALE M. ARTERBURN as Guardian and Conservator of Brian D. Arterburn, Defendants.
• Court: U.S. District Court — District of Kansas

ZURICH AMERICAN INSURANCE COMPANY and AMERICAN GUARANTEE ANDLIABILITY INSURANCE COMPANY, Plaintiffs, v. JUSTIN F. TERRAZAS and CLAUDALE M. ARTERBURN as Guardian

and Conservator of Brian D. Arterburn, Defendants.

Case No. 19-1275-JWL

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

July 21, 2021

MEMORANDUM AND ORDER

This matter comes before the Court on cross-motions for summary judgment filed by plaintiffs (Doc. # 64) and defendant Claudale Arterburn (Doc. # 72) on the issue of the alleged breach of the relevant insurance policies' cooperation clauses. For the reasons set forth below, the Court denies both motions.

I. Background

This insurance coverage dispute arises from an occurrence on February 7, 2017, in which a vehicle driven by Justin Terrazas struck Officer Brian Arterburn during a police pursuit. The vehicle had been reported stolen by its owner, Eddy's Toyota of Wichita, Inc. ("Eddy's Toyota"). Mr. Terrazas was convicted of various crimes, including a drug offense and offenses related to the pursuit, and he presently remains incarcerated.

Claudale Arterburn, spouse of Brian Arterburn, who was seriously injured by Mr. Terrazas, initiated a lawsuit on his behalf against Eddy's Toyota and Mr. Terrazas in the District Court of Sedgwick County, Kansas. Zurich American Insurance Company ("Zurich") and American Guarantee and Liability Insurance Company ("American") had issued insurance policies to Eddy's Toyota, and Zurich, under a reservation of rights, retained counsel to represent Mr. Terrazas in the Sedgwick County suit.

In October 2019, Zurich and American filed the present suit against Mr. Terrazas and Mrs. Arterburn, by which Zurich and American seek a declaration to the effect that they have no duty to defend or indemnify Mr. Terrazas under the policies issued to Eddy's Toyota. Default has been entered against Mr. Terrazas, who has not responded to the suit. On June 2, 2020, the Court stayed the case pending the resolution of the Sedgwick County case, in light of factual issues in that case that would be relevant to the present action, including whether Mr. Terrazas was a permissive user of the vehicle owned by Eddy's Toyota and whether Mr. Terrazas struck Mr. Arterburn intentionally.¹ On October 8, 2020, the Court modified the stay order and lifted the stay to allow discovery and motion practice with respect to the single issue of whether any duty of plaintiff insurers to defend and indemnify Mr. Terrazas was relieved by Mr. Terrazas's breach of the policies' cooperationclauses. The parties proceeded to conduct discovery, and insurers and Mrs. Arterburn have now filed cross-motions for summary judgment on the issue.²

II. Summary Judgment Standards

Summary judgment is appropriate if the moving party demonstrates that there is "no genuine dispute as to any material fact" and that it is "entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(a). In applying this standard, the Court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. See Burke v. Utah Transit Auth. & Local 382, 462 F.3d 1253, 1258 (10th Cir. 2006). An issue of fact is "genuine" if "the evidence allows a reasonable jury to resolve the issue either way." See Haynes v. Level 3 Communications, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006). A fact is "material" when "it is essential to the proper disposition of the claim." See id.

The moving party bears the initial burden of demonstrating an absence of a genuine issue of material fact and entitlement to judgment as a matter of law. See Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). In attempting to meet that standard, a movant that does not bear the ultimate burden of persuasion at trial need not negate the other party's claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party's claim. See id. (citing Celotex, 477 U.S. at 325).

If the movant carries this initial burden, the nonmovant may not simply rest upon the pleadings but must "bring forward specific facts showing a genuine issue for trial as to those dispositive matters for which he or she carries the burden of proof." See Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). To accomplish this, sufficient evidence pertinent to the material issue "must be identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated therein." See Diaz v. Paul J. Kennedy Law Firm, 289 F.3d 671, 675 (10th Cir. 2002).

Finally, the Court notes that summary judgment is not a "disfavored procedural shortcut;" rather, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action." See Celotex, 477 U.S. at 327 (quoting Fed. R. Civ. P. 1).

III. Analysis

Plaintiff insurers claim that Mr. Terrazas (assuming that he is deemed an insured under the policies) breached the policies' cooperation clauses and that such breach relieves them of any obligation to defend or indemnify him in the underlying suit. Zurich's policy required any insured to "[c]ooperate with [Zurich] in the investigation or settlement of the claim or defense against the suit [seeking damages for which the policy provides coverage]." Similarly, American's policy required any insured to "[c]ooperate with [American] in the investigation, settlement or defense of the claim or suit."

The purpose of a cooperation clause "is to protect the insurer's interest and prevent collusion between the insured and the injured person." See Geer v. Eby, 309 Kan. 182, 193(2019) (quoting Watson v. Jones, 227 Kan. 862, 866-67 (1980)).³ "Where an insurer seeks to avoid liability under its policy for failure of the assured to cooperate as required by a condition of the policy, the burden is on the insurer to establish the facts which bring the case within the specified condition in the policy." See Watson, 227 Kan. at 867.

"In order to prevail on defense of noncooperation, the insurer must show, by a preponderance of evidence, an unreasonable and willful pattern of refusing to answer material and relevant questions...." See Evergreen Recycle, L.L.C. v. Indiana Lumbermens Mutual Ins. Co., 51 Kan. App. 2d 459, 495-96 (2015) (quoting 14 Couch on Insurance 3d § 199:39 (2014)); see also Watson, 227 Kan. at 870 (insurer had to show that the insured willfully failed and refused to cooperate by appearing and testifying at trial). Moreover, the insurer must show that it exercised reasonable diligence and good faith in attempting to secure the insured's cooperation, and that requirement ordinarily presents a question of fact. See Watson, 227 Kan. at 870. "When an insurer determines that it needs specific information from the insured and that the information is not forthcoming, it should specify in writing the information needed and advise the insured of the consequences of its failure to provide it." See Evergreen, 51 Kan. App. 2d at 496 (quoting 14 Couch 3d § 199:39).

"Breach of a cooperation clause in a liability insurance policy does not by itself relieve an insurer of responsibility. The breach must cause substantial prejudice to theinsurer's ability to defend itself." See Boone v. Lowry, 8 Kan. App. 2d 293, 299 (1983) (citing, inter alia, Jameson v. Farmers Mutual Auto. Ins. Co., 181 Kan. 120, 127 (1957)).

An insurer's burden of showing prejudice from a breach of a cooperation clause by the insured is not sustained by a showing of possible prejudice. The insurer must establish at the very least that if the cooperation clause had not been breached there was a substantial likelihood that the trier of fact, in an action against the insured, would have found in the insured's favor.

See id. at 302.

In discovery in the underlying action, Mr. Terrazas has responded to questions about how he acquired the vehicle owned by Eddy's Toyota by invoking the Fifth Amendment's protection against self-incrimination. Insurers claim in this action that Mr. Terrazas breached the cooperation clauses by refusing to tell them such details. Insurers also appear to claim that Mr. Terrazas's invocation of the Fifth Amendment itself constitutes a breach. In opposing summary judgment, Mrs. Afterburn does not dispute that such an invocation may constitute a lack of cooperation. See, e.g., Aetna Cas. & Surety Co. v. State Farm Mutual Auto. Ins. Co., 771 F. Supp. 704, 707-08 (W.D. Penn. 1991) (rejecting argument that invocation of Fifth Amendment may not constitute breach of a cooperation clause as a matter of law), aff'd, 961 F.2d 207 (3d Cir. 1992). Insurers further argue that they have suffered substantial prejudice from the breach both in the underlying suit against Mr. Terrazas and with respect to the issue of coverage. Mrs. Arterburn has not argued or provided authority to suggest that the requisite prejudice may not relate to the coverage dispute instead of to the suit against the insured.⁴

Applying this law, the Court concludes that this claim of a breach of the cooperation clauses cannot be decided at this time as a matter of law in favor of either side. Both motions for summary judgment must therefore be denied.

First, the prejudice to plaintiff insurers from the alleged breaches depends on factual issues being litigated in the underlying suit in state court. Insurers argue that the defense of Mr. Terrazas in that suit could be prejudiced by his invocation of the Fifth Amendment at trial; insurers' theory is that the state court could permit the jury to draw an adverse inference against Mr. Terrazas from his invocation, and that the jury might then hold the inferred theft of the vehicle against Mr. Terrazas in deciding his liability for the injuries to Mr. Arterburn. Whether that occurs, however, can only be known after the trial in that case. The amount of any such prejudice necessarily depends on the totality of the...