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Westport Insurance Corp. v. Black

May 30, 2007

WESTPORT INSURANCE CORPORATION, PLAINTIFF
v.
BLACK, DAVIS & SHUE AGENCY, INC., DEFENDANT



The opinion of the court was delivered by: Judge Conner

MEMORANDUM

This is an insurance declaratory judgment action filed by plaintiff Westport Insurance Corporation ("Westport"). Westport seeks a declaration that it owes no duty to defend or indemnify defendant Black, Davis & Shue Agency, Inc. ("BD&S") in a civil action pending in the United States District Court for the Southern District of New York.*fn1 (See Doc. 3 at 1.) Presently before the court are BD&S's motion for partial judgment on the pleadings (Doc. 23) and Westport's motion for summary judgment (Doc. 29). The motions have been fully briefed and are ripe for disposition. For the reasons that follow, BD&S's motion for partial judgment on the pleadings will be granted, and Westport's motion for summary judgment will be denied.

I. Statement of Facts

The dispute in this case centers around a professional liability policy that Westport issued to BD&S, an insurance brokerage company.*fn2 (Doc. 3 ¶¶ 1-2; Doc. 13 ¶¶ 1-2.) The policy obligated Westport to "pay on behalf of [BD&S] 'loss' for which [BD&S] is legally liable caused by a 'wrongful act' committed by [BD&S] arising out of 'professional services' rendered to others."*fn3 (Doc. 3, Ex. B at 61.) BD&S claims that the policy imposed upon Westport a duty to defend and indemnify BD&S in the Frontier action. Westport filed the instant complaint for declaratory relief, seeking a judicial declaration that it has no such duty to defend or indemnify BD&S. (Doc. 3 at 1.) The court will provide a brief background of the Frontier action before embarking on a discussion of Westport's claims in the above-captioned action.

A. The Frontier Action

Frontier is an insurance company that appointed BD&S to act as its agent "in the procuring and servicing of workers' compensation insurance" for members of a professional employer organization ("PEO").*fn4 (Doc. 3 ¶ 5; Doc. 3, Ex. A ¶¶ 59-66.) Pursuant to the agency arrangement, BD&S was to collect premiums, deduct a 10% commission, and remit the remainder to Frontier. (Doc. 3 ¶ 6; Doc. 3, Ex. A ¶¶ 68-71.) Frontier also entered into a reinsurance agreement with an offshore entity known as Congressional RE, which is owned in part by the principals of BD&S. (Doc. 3 ¶ 7; Doc. 3, Ex. A ¶¶ 78-79.) Pursuant to the reinsurance agreement, Frontier was to act as the "fronting" insurance company,*fn5 and Congressional RE was to act as the "captive" insurance company*fn6 for the workers' compensation insurance policies issued to members of the PEO. (Id.) More specifically, Frontier agreed to issue the policies in exchange for a fee to be deducted from the premiums collected by BD&S, and Congressional RE agreed to reimburse Frontier for any loss payments made under the policies in exchange for the balance of the premiums. (Doc. 3 ¶¶ 8-9; Doc. 3, Ex. A ¶ 83.)

On January 3, 2005, Frontier commenced a civil action against BD&S. (Doc. 3 ¶ 4; Doc. 13 ¶ 4.) In that action, Frontier seeks to recover millions of dollars in premiums that BD&S allegedly refused to remit to Frontier. (Doc. 3 ¶¶ 10-11, 18-19; Doc. 3, Ex. A ¶¶ 165-166.) Frontier alleges that BD&S improperly transferred some of the premiums directly to Congressional RE, an organization in which one or more of BD&S's principals "hold financial interests." (Doc. 3 ¶ 12; Doc. 3, Ex. B ¶ 169.) Frontier further alleges that BD&S engaged in a fraudulent scheme, whereby it falsely represented to PEOs that it had secured them insurance coverage and then collected premiums for the non-existent coverage. (Doc. 3 ¶ 11 n.2; Doc. 3, Ex. B ¶ 4 (stating that premiums were retained by BD&S employees "for their own personal benefit")).

B. The Above-Captioned Action

On June 21, 2005, Westport commenced the instant action. (See Doc. 1.) Westport argues that it has no duty to defend or indemnify BD&S in the Frontier action because of the following four policy provisions: (1) the funds exclusion, (2) the intentional acts exclusion, (3) the personal profit exclusion, and (4) the other insurance provision. (Doc. 3 ¶¶ 17-34.) On October 6, 2005, BD&S filed several counterclaims, alleging breach of contract, statutory bad faith, and common law bad faith. (Doc. 13.) By order of court dated December 2, 2005, BD&S's common law bad faith counterclaim was dismissed because Pennsylvania does not recognize such a cause of action. (Doc. 19.)

BD&S timely filed a motion for partial judgment on the pleadings on January 5, 2006. (Doc. 23 ¶ 4.) BD&S's motion seeks a declaration that none of the policy exclusions discussed above remove Westport's duty to defend. (Id.) On January 17, 2006, Westport filed a motion for summary judgment, seeking a declaration that it owes no duty to defend or indemnify BD&S.*fn7 (Doc. 29.) Both motions have been fully briefed and are ripe for disposition.

II. Standard of Review

A motion for judgment on the pleadings is a procedural hybrid of a motion to dismiss and a motion for summary judgment. Rule 12(c) of the Federal Rules of Civil Procedure provides: "After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." FED. R. CIV. P. 12(c). To succeed on a motion under Rule 12(c), "the movant [must] clearly establish [ ] that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law." Hayes v. Cmty. Gen. Osteopathic Hosp., 940 F.2d 54, 56 (3d Cir. 1991); see also 5A CHARLES A. WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 1368, at 519 (2d ed. 1990). When deciding a motion for judgment on the pleadings, the court is directed to view "the facts presented in the pleadings and the inferences to be drawn therefrom in the light most favorable to the nonmoving party." Hayes, 940 F.2d at 56.

Like a motion for judgment on the pleadings, a summary judgment motion allows the court to dispose of those claims that do not present a "genuine issue as to any material fact" and for which a jury trial would be an empty and unnecessary formality. See FED. R. CIV. P. 56(c). However, in contrast to a motion for judgment on the pleadings, a motion for summary judgment places the burden on the non-moving party to come forth with "affirmative evidence, beyond the allegations of the pleadings," in support of its right to relief. Pappas v. City of Lebanon, Civil Action No. 1:03-CV-1112, 331 F. Supp. 2d 311, 315 (M.D. Pa. Aug. 16, 2004); FED. R. CIV. P. 56(e); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). This evidence must be adequate, as a matter of law, to sustain a judgment in favor of the nonmoving party on the claims. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-57 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-89 (1986); see also FED. R. CIV. P. 56(c), (e).

While these standards of review have marked differences in most cases, they become synonymous in the context of declaratory judgment actions regarding an insurer's duty to defend. In Pennsylvania, an insurer's duty to defend its insured in a lawsuit brought by a third party is "determined solely from the language of the complaint against the insured." Kvaerner Metals Div. v. Commercial Union Ins. Co., 908 A.2d 888, 896 (Pa. 2006); see also Coregis Ins. Co. v. Harrisburg, No. 1:03-CV-920, 2006 WL 860710, *4 (M.D. Pa. Mar. 30, 2006) ("Under Pennsylvania law, the question of whether an insurance company has a duty to defend is determined by comparing the allegations contained within the four corners of the underlying complaint against the terms and conditions of the insurance policy at issue." (emphasis added)); Wilson v. Md. Cas. Co., 105 A.2d 304 (Pa. 1954) ("The obligation to defend is determined solely by the allegations of the complaint in the action." (emphasis added)); Scopel v. Donegal Mut. Ins. Co., 698 A.2d 602, 607 (Pa. Super. Ct. 1997) (rejecting the plaintiff's attempt to use "factual averments contained in discovery evidence but not reflected in the complaint itself" to establish a duty to defend). Because no extrinsic evidence is permitted, the nonmoving party's burden to produce affirmative evidence in support of its right to relief in the context of a summary judgment motion is removed. Therefore, the court may treat a motion for judgment on the pleadings and a motion for summary judgment together by focusing solely on the facts as alleged in the underlying complaint.

III. Discussion*fn8

The duty to defend attaches when the allegations of the complaint against the insured "may potentially come within the policy's coverage." Allstate Ins. Co. v. Drumheller, 185 F. App'x 152, 154 n.2 (3d Cir. 2006) (citing Gedeon v. State Farm Mut. Auto Ins. Co., 188 A.2d 320, 321-22 (Pa. 1963)). Even where only "a single claim in a multiclaim lawsuit is potentially covered, the insurer must defend all claims until there is no possibility that the underlying plaintiff could recover" on the covered claim. Penn Nat'l Ins. v. HNI Corp., No. 1:05-CV-2096, 2007 WL 1175636, *37 (M.D. Pa. Apr. 20, 2007) (quoting Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 746 (3d Cir. 1999)). Conversely, the insurer bears no duty to defend if the insurer can confine the complaint to "recovery that is not within the scope of the coverage." USX Corp. v. Liberty Mut. Ins. Co., 444 F.3d 192, 202 n.18 (3d Cir. 2006).

The duty to defend is broader than the duty to indemnify. Kvaerner, 908 A.2d at 896 n.7; see also Sikirica, 416 F.3d at ...


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