PowerSports, Inc. v. Royal & Sunalliance Insurance

Citations: 307 F. Supp. 2d 1355; 2004 U.S. Dist. LEXIS 3670; 2004 WL 415269Docket: 03-80238-CIV-RYSKAMP, 03-80238-CIV-VITUNAC

Court: District Court, S.D. Florida; February 25, 2004; Federal District Court

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Powersports, Inc. filed a lawsuit against Royal Sunalliance Insurance Co. seeking declaratory relief over coverage under a directors and officers (D&O) insurance policy for the period of August 29, 2001, to August 29, 2002. Powersports demanded defense and indemnity in relation to an ongoing lawsuit against it in the Circuit Court of Palm Beach County, Florida, which involved claims brought by the Heaton brothers and The Heaton Companies, Inc. The underlying litigation centers on a Purchase Agreement for PowerSports Preferred A Stock, alleging tortious interference by Powersports' Board members and other misconduct.

Royal Sunalliance denied coverage, citing an "Insured v. Insured" (I v. I) exclusion in the policy that disallows claims made by any insured person, which includes the Heaton brothers, former directors of Powersports. Although Powersports acknowledged that the claims from the Heaton brothers are uncovered, it contended that the claims from The Heaton Companies, Inc. should be covered. Additionally, Royal Sunalliance argued that claims against Powersports itself are excluded under a contract exclusion in the policy.

After hearing arguments on the cross-motions for summary judgment, the Court granted Royal Sunalliance's motion for summary judgment, effectively ruling that the exclusions applied and denying Powersports coverage for the claims in question.

Summary judgment is granted when the evidence—such as pleadings, depositions, and affidavits—demonstrates no genuine issue of material fact and the moving party is entitled to judgment as a matter of law, per Federal Rule of Civil Procedure 56(c). The moving party must initially inform the court of the basis for the motion and identify evidence showing the absence of a material fact dispute. They can do this by presenting evidence or demonstrating that the nonmoving party has not met its burden of proof on an essential element of the case. The moving party is not required to negate the opponent's claims with affidavits. Once the moving party meets this burden, the nonmoving party must provide specific facts, beyond mere pleadings, to show a genuine issue for trial, although they need not present admissible trial evidence.

Under Florida law, insurance policies should be interpreted comprehensively to reflect the parties' intent, with terms given their everyday meanings. Ambiguity arises only when policy language allows for reasonable interpretations that lead to both coverage and exclusion. If ambiguity exists, it is resolved in favor of the insured. In the absence of ambiguity, courts apply the policy's plain language. Exclusionary clauses are narrowly construed against insurers and must be read in conjunction with other policy provisions from the perspective of an ordinary person.

Royal denied coverage for the underlying lawsuit based on Policy Exclusion A.4, which excludes claims made against insured persons or the company by or on behalf of the company or any insured person. Under the policy, "Insured Persons" includes duly elected directors and appointed officers, which the Heaton brothers qualify as. Royal contends that coverage is barred because the Heaton brothers are plaintiffs in the underlying action. Conversely, PowerSports argues that The Heaton Companies, Inc., also a plaintiff, has distinct claims that should be covered. Previous cases, such as Level 3 Communications, Bernstein, and Sphinx International, address the implications of having an insured plaintiff in a lawsuit. In Level 3, the court ruled that while the claims of an insured plaintiff were not covered, claims from other plaintiffs were eligible for coverage, noting the presence of an allocation clause for settlements. Bernstein indicated that an "Insured vs. Insured" (I v. I) clause could bar coverage entirely if both insured and uninsured plaintiffs were involved, but did not apply it directly in that case. The decision in Bernstein reaffirmed the principle that claims instigated by insured parties could jeopardize coverage.

The Court determined that none of the plaintiffs were insured persons since "security holder" referred exclusively to current, not past, holders. If any class member qualified as a "security holder," the insured versus insured exclusion would apply, leaving the entire action uncovered if the class included both insured and uninsured individuals. The case referenced, Sphinx, involved claims from both insured and uninsured plaintiffs, where the insurer denied coverage based on similar exclusions. The relevant policy stated that coverage would not apply to claims initiated by the company, its affiliates, or security holders, unless entirely independent of company directors or officers. The Court concluded that the I v. I exclusion barred coverage for the entire action, unlike in Level III, where the claim was initially covered but later uncovered due to the addition of an insured plaintiff. In contrast, this case, like Sphinx, was uncovered from the outset. The Court noted that the Heaton brothers were "Insured Persons" and plaintiffs from the beginning, leading to a complete coverage denial. PowerSports argued that claims related to the Purchase Agreement were distinct and thus covered, but the Court refrained from ruling on that matter, as it was better addressed by a sister court. However, the Court highlighted that all allegations in the underlying complaints consistently referenced "Heaton," indicating that PowerSports could not assert that the Heaton brothers were not involved in all claims made.

The Heaton brothers are parties to all claims in the underlying action, which is rendered entirely uncovered by the "I v. I" clause. PowerSports argues that this clause should be interpreted alongside the Policy's allocation clause, which states that if both covered and non-covered losses are incurred due to a claim, the amounts must be allocated based on the parties' legal exposures. PowerSports contends that the presence of this allocation clause implies that Royal must cover claims by The Heaton Companies, Inc. due to the coexistence of covered and uncovered claims. However, the Court emphasizes that all claims are brought by insured parties, leading to a complete bar on coverage due to the "I v. I" clause. 

The allocation clause is deemed irrelevant since the action consists solely of uncovered claims from the outset. Previous cases cited indicate that allocation clauses apply only when both types of claims are present, and here, the absence of covered claims negates the relevance of allocation. PowerSports' assertion that the "I v. I" clause is ambiguous is rejected, as the clause clearly states that claims by insured persons are not covered, regardless of any uninsured parties involved. The Court concludes that the language of the "I v. I" clause is unambiguous and bars coverage for the entire action initiated by the Heaton brothers. Consequently, the Court grants Royal Sunalliance Insurance Co.'s motion for summary judgment, concluding that coverage is entirely barred by the "I v. I" clause. Final judgment will be issued separately.

Final judgment is entered in favor of Defendant Royal Sunalliance Insurance Co. against Plaintiff PowerSports, Inc., following the court's approval of the defendant's Motion for Summary Judgment filed on November 10, 2003. The Clerk of Court is instructed to close the case and to deny any pending motions as moot. The parties submitted both the original Complaint, which includes claims for breach of contract, tortious interference, rescission of ultra vires acts, and injunctive relief, and a Second Amended Complaint, which introduces a claim for indemnification, a civil conspiracy charge, and a request for a constructive trust. The ruling is based solely on the original Complaint, as the subsequent amendment does not affect the court's decision, with both complaints referencing the Heaton brothers and The Heaton Companies, Inc. as "the Heatons."