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The Cincinnati Insurance Company v. Stonebridge Financial Corporation

June 23, 2011

THE CINCINNATI INSURANCE COMPANY
v.
STONEBRIDGE FINANCIAL CORPORATION, ET AL.



The opinion of the court was delivered by: Legrome D. Davis, J.

MEMORANDUM AND ORDER

Plaintiff Cincinnati Insurance Company seeks a declaration that no coverage exists for an underlying suit against its former insureds, Defendants Stonebridge Bank, Joseph Spada, and David Keller. Presently before the Court are the parties' cross-motions for summary judgment (Docs. No. 23 & 24), and responses in opposition (Docs. No. 33 & 34). Upon careful consideration of the parties' briefs and applicable case law, the Court DENIES Plaintiff's Motion and GRANTS Defendants'.

I. INTRODUCTION

We are asked to determine whether an errors-and-omissions insurance policy provides

coverage for a lawsuit brought against a bank for its alleged wrongful failure to extend credit. Stonebridge Bank ("Stonebridge") entered into an agreement to extend credit to Engel Group, LLC ("Engel") but failed to honor that agreement, asserting that it believed the agreement had expired. Engel brought action against Stonebridge, claiming it suffered damages and lost profits due to Stonebridge's breach of contract. Stonebridge, in turn, sought coverage for the lawsuit from Cincinnati Insurance Company ("Cincinnati"), its errors-and omissions ("E&O") insurer. Cincinnati initially recognized a defense obligation, but reserved its right to disclaim coverage at a later date. On August 16, 2010, Cincinnati filed this action, seeking a declaration that the insurance policy it issued to Stonebridge does not provide coverage for Engel's claims against Stonebridge. Stonebridge filed a counterclaim, seeking a declaration that coverage exists. Both parties now seek summary judgment.

II. BACKGROUND

A. The Policy

In 2007, Cincinnati issued an errors-and-omissions insurance policy-the Financial Institutions Blue Chip Policy (the "Policy")-to Stonebridge, covering the period March 25, 2007 to March 25, 2010. Cincinnati undertook to pay all monetary damages that Stonebridge "become[s] legally obligated to pay on account of any 'claim' for a 'wrongful act.'"*fn1 (Doc. No. 3, Ex. A-1, p. 13-15.) The policy defines "wrongful act" as "any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty committed . . . by . . . [Stonebridge] in the performance of 'professional services.'" (Doc. No. 3, Ex. A-1, p. 15.) "Professional services" refers to "activities allowed under the law and regulations governing financial institutions which are performed for or on behalf of any client or customer of [Stonebridge]." (Id.)

The policy also features a contractual liability exclusion and an endorsement-two provisions that are at the heart of the parties' disagreement. Part V, Section I.I of the Policy (the "Exclusion") provides that Cincinnati is not liable to pay, indemnify, or defend any claim:

[b]ased upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving legal liability assumed by any of the "policy insureds" under the terms, conditions, or warranties of any oral or written agreement, or by virtue of any waiver or release from liability of any third party . . . . (Doc. No. 3, Ex. A-2, p. 9.) And, the Financial Institution Coverage Amendatory Endorsement (the "Endorsement") adds the following language to the Policy:

It is further understood and agreed that this policy shall be amended to include coverage for any claim or claims arising out of any "wrongful lending act" related to an extension of credit or refused extension of credit to a "borrower."*fn2 (Doc. No. 3, Ex. A-3, p. 11.)

B. The Underlying Litigation

On May 7, 2007, Stonebridge issued two loan commitment agreements (the "Commitments") to Engel, a small home builder. The Commitments, originally set to expire on September 30, 2008, expressed Stonebridge's promise to extend credit to Engel in the total amount of $5,145,000, in exchange for Engel's compliance with certain conditions. On September 24, 2008, Stonebridge and Engel agreed, in writing, to extend the end date to October 31, 2008. (Engel Group, LLC v. Stonebridge Bank, et al., No. 08-cv-6020, Compl. ¶ 13.) According to Engel, Stonebridge later orally modified the Commitments to further extend them to November 20, 2008, but then failed to appear at closing on that day. (Id. at ¶¶ 14-21.) Engel then filed suit in this Court (the "Lawsuit"), (see Engel Group, LLC v. Stonebridge Bank, et al., No. 08-cv-6020), alleging that the Commitments induced it to: (1) enter into a contract to purchase some property from Lehman Brothers; (2) pay a $550,000 deposit; and (3) bear other costs in preparation for construction on the property. (Id. ¶¶ 11-70.) The Lawsuit advances alternative theories of liability: breach of contract and promissory estoppel. In response, Stonebridge and its officers insist that there was ...


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