Security Insurance Co. of Hartford v. Kevin Tucker & Associates, Inc.
Docket: Nos. 93-6366, 93-6462
Court: Court of Appeals for the Sixth Circuit; September 7, 1995; Federal Appellate Court
The city of Bowling Green contracted Kevin Tucker Associates, Inc. (KT A, Inc.) for the development of Hartland Municipal Golf Course but later expressed dissatisfaction with the services, leading to a lawsuit against KT A, Inc. and related defendants. Security Insurance Company of Hartford (Security) initiated a declaratory judgment action, asserting that its professional liability policy for Kevin Tucker Associates and The Kevin Tucker Group, Inc. did not cover the other defendants or claims of errors and omissions preceding the policy's effective date. Both Security and Bowling Green appealed the district court’s ruling regarding the interpretation of the policy and its coverage limits. The court affirmed the interpretation but reversed the denial of Security’s request to amend its complaint to include claims for reformation and misrepresentation, remanding for further proceedings.
Kevin Tucker, an engineer and landscape architect, established KT A, Inc. in 1975, which began work on the golf course in 1988. Following a 50% stock purchase by Don Hinson, KT A, Inc. was renamed Tucker-Hinson Associates, Inc. (T-H), with Bowling Green informed of the change. Issues arose in 1989 regarding the accuracy of T-H's project plans, leading to Bowling Green's claims of errors. Tucker later formed The Kevin Tucker Group, Inc. (KT Group) in 1990, intending to continue work on the project, although no formal assignment was made, and the KT Group only performed final inspections. Bowling Green ultimately removed the KT Group from the project due to alleged ongoing errors and omissions, filing suit against the defendants in August 1990.
KT A, Inc./T-H was insured by CNA from 1985 to 1989. In November 1989, anticipating his resignation from T-H, Tucker applied for liability insurance with Security and identified his company as Kevin Tucker Associates, operating as a sole proprietorship. His application included a five-year business and financial history of KT A, Inc./T-H and stated that no key personnel were aware of any incidents potentially leading to claims against the firm. Security issued a professional liability policy effective December 8, 1989, to Kevin Tucker Associates as an individual, not a corporation. The policy obligated Security to cover damages exceeding a deductible for claims related to Tucker's professional practice. It defined "claims made" as those reported during the policy period, with conditions about the timing of errors or omissions. An endorsement removed a provision regarding retroactive claims, stipulating that any errors must occur after December 8, 1989, except for one unrelated project. The policy broadly defined "claim" to include lawsuits alleging professional practice errors and specified that it did not cover partnerships or corporations unless named in the declarations. Employees were insured only for acts within their employment scope. Tucker clarified that he sought prospective coverage only, excluding any work by KT A, Inc./T-H, and understood the policy did not allow for retroactive coverage. Security's agent confirmed discussions regarding retroactive coverage and that Tucker's premium was adjusted accordingly. Kevin Tucker Associates did not perform professional services. In February 1990, following the formation of the KT Group, the policy was amended to include the KT Group as a named insured and recognize its corporate status, retaining Kevin Tucker Associates as a named insured.
Security initiated a declaratory judgment action in June 1991 against Bowling Green and state court defendants previously associated with Kevin Tucker. The district court ruled that Bowling Green’s state court lawsuit, filed in August 1990, constituted a “claim” arising during the policy period, thus falling within the policy’s coverage despite being based primarily on pre-policy errors and omissions. However, the court dismissed Bowling Green's claim that KT A, Inc./T-H and Alan Wyatt were insured under the policy. It declared Kevin Tucker Associates and the KT Group as insureds, clarifying that Buckner was insured only for actions within the KT Group’s employment scope.
The court responded to Bowling Green’s motion to dismiss under Fed. R. Civ. P. 12(b)(6) by treating it as a motion for partial judgment on the pleadings under Rule 12(c), affirming coverage for the state court claims. The court considered matters beyond the pleadings to define insured parties, indicating that this determination qualifies as partial summary judgment under Fed. R. Civ. P. 56, which is subject to de novo review.
A key issue arose regarding the applicable state law due to the diversity action. While the district court referenced Kentucky law, it did not definitively choose a law. Bowling Green argued for Tennessee law, which was not contested by Security. The court noted that in a diversity action, it must apply the choice of law rules of the state in which it sits. Under Kentucky law, the applicable law is that of the state with the most significant relationship to the transaction and parties. The policy was issued to Tennessee citizens, negotiated by a Tennessee citizen, and issued by a Tennessee-authorized insurer. No arguments were made for applying Kentucky law, and Bowling Green explicitly relied on Tennessee law.
Additionally, Security contended that the district court erred by not addressing whether the KT Group and Kevin Tucker Associates were successors to KT A, Inc./T-H. However, this determination would hinge on potential successor liability for prior entities' acts, which was outside the scope of the declaratory judgment regarding the insurance coverage. Liability questions must instead be resolved in the state court action.
The proper construction of the insurance policy is examined, focusing on Security's claim that coverage does not extend to errors and omissions prior to the policy’s effective date, and Bowling Green's assertion that KT A, Inc./T-H qualifies as an insured. Tennessee law dictates that insurance contracts be interpreted based on their plain and ordinary meaning, as a layperson would understand them. A contract must be enforced as written unless there is evidence of fraud or mistake, even if the terms seem harsh. Ambiguities in the policy favor the insured; however, a court can only declare a policy ambiguous if two reasonable interpretations exist.
The policy, as amended, states it covers claims made during the policy period if they arise during that period or if the error or omission occurred after December 8, 1989. The district court concluded that a claim arises when a lawsuit is filed, which means any lawsuit filed and reported during the policy period is covered, irrespective of the timing of the error. Security argued that the use of "or" in the policy should be interpreted as "and" to avoid retroactive coverage, a claim rejected by precedent in Perkins v. Will, where a similar policy was interpreted to allow coverage as long as the lawsuit arose during the policy period, regardless of prior knowledge of the claim by the insured.
The terms “and” and “or” serve distinct grammatical purposes and are not interchangeable. Illinois courts maintain that these terms should be interpreted according to their literal meanings unless context clearly indicates otherwise. Security, the insurer, utilized both terms correctly within the policy, demonstrating an understanding of their meanings. In a referenced case, State Mutual Life Assurance Company v. Heine, the court upheld the interpretation of “or” in a disability insurance contract, rejecting the insurer’s argument for substituting it with “and.” Unlike statutes, where ambiguity is resolved to uphold legislative intent, ambiguities in insurance contracts are construed against the insurer in favor of the insured. The court determined that the policy language was not ambiguous; thus, the term “or” in section I(D)(3) was read disjunctively. As a result, the policy applied to a lawsuit against Bowling Green, which arose during the coverage period. Additionally, the policy was amended to include the KT Group as a named insured, reflecting its corporate status, while also retaining Kevin Tucker Associates as a named insured. The court agreed with the district court's findings regarding the intent to insure the earlier entity.
Plaintiff's assertion that "or" should be interpreted as "and" is rejected, just as the Defendants' argument for affixing "Inc." to "Kevin Tucker Associates" is denied, given the absence of such designation in the relevant documents. The Policy allows for liabilities incurred by the sole proprietorship before incorporation to be covered, regardless of the current corporate status. Bowling Green claims it was unaware of the dissolution of KT A, Inc./T-H and that the KT Group operated with the same staff, suggesting a continuity that may be relevant to state court successor liability discussions, but these claims do not impact the determination of insured entities under Security's policy. Bowling Green fails to provide compelling reasons to overturn the district court's interpretation.
Security's request to amend its complaint to include a reformation claim and allegations of misrepresentation by Tucker in the insurance application is also addressed. Amendments post-responsive pleading require either leave of court or consent from the opposing party, with a principle favoring such amendments for justice. The trial court's decision to deny the amendment based on concerns about Tucker's individual liability is contested by Security, which argues that it sought the amendment to address the city’s recovery claims related to KT A, Inc./T-H’s pre-policy errors and omissions. The district court's rationale for denying the motion as moot is deemed incorrect, as the amendment was relevant to determining coverage. Thus, the court's denial of Security's motion is concluded to be an error.
Security sought to amend its complaint to include a count for rescission of its insurance policy, alleging that Tucker’s denial of knowledge regarding potential claims by key employees constituted a material misrepresentation. This proposed amendment followed a district court order granting partial judgment in favor of Bowling Green. The court denied Security's motion to amend, citing a 16-month delay in filing and claiming that granting the amendment would unfairly prejudice the defendants. However, it failed to acknowledge that 13 months of this delay were due to Tucker's individual bankruptcy proceedings, during which the case was inactive. The court's focus on the delay overlooked that the case was still in the early pretrial phase, with no discovery cut-off or trial dates set, indicating no actual prejudice to Bowling Green’s ability to contest the claim. Bowling Green's speculation about potential impacts on other proceedings did not meet the standard for showing significant prejudice. Consequently, the denial of Security's motion to amend was deemed an abuse of discretion, leading to a reversal of this denial and a remand for the amendments to be allowed. The ruling affirmed all other aspects of the case. Additionally, the document referenced relevant case law regarding contractual obligations concerning disclosures of termite infestations and addressed Tucker's inclusion of prior work history in the insurance application, clarifying it did not imply an intent to obtain retroactive coverage.
