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Western Heritage Insurance v. Love
Citations: 24 F. Supp. 3d 866; 2014 U.S. Dist. LEXIS 75037; 2014 WL 2472267Docket: No. 4:13-CV-0034-DGK
Court: District Court, W.D. Missouri; June 3, 2014; Federal District Court
The court granted in part the summary judgment motions concerning insurance coverage related to a class action lawsuit where Fun Services of Kansas City, Inc. sued Parrish Love d/b/a Asphalt Wizards for allegedly sending unsolicited faxes, violating the Telephone Consumer Protection Act (TCPA) and Missouri law. Fun Services seeks to cover any judgment with proceeds from insurance policies issued to Asphalt Wizards by Western Heritage Insurance Company, which filed for a declaration of no duty to defend or indemnify Asphalt Wizards, naming both parties as defendants. Key findings include: 1. Fun Services lacks standing for its counterclaims against Western Heritage. 2. Western Heritage waived its coverage defenses by not issuing a timely reservation of rights letter to Asphalt Wizards. 3. A $1,000 deductible applies on a per-claim and per-person basis, exceeding potential damages for a single class member, meaning Western Heritage has no duty to indemnify. 4. Despite the deductible, Western Heritage is obligated to defend Asphalt Wizards in the underlying lawsuit. The motions were thus granted in part and denied in part. The court emphasized that summary judgment is appropriate only when there is no genuine dispute of material fact, placing the burden on the moving party to demonstrate this absence, while viewing disputes in favor of the nonmoving party. The non-moving party in a summary judgment cannot fabricate sham issues of fact to oppose the motion. If the totality of the record does not support a rational trier of fact in favoring the non-moving party, no genuine issue for trial exists. The relevant undisputed facts regarding the case involve Defendant Asphalt Wizards, which provides asphalt and paving services in the Kansas City area, and Plaintiff Western Heritage, an insurance company that issued three similar commercial general liability policies to Asphalt Wizards from May 18, 2004, to May 18, 2007. The policy effective from May 18, 2006, to May 18, 2007, includes an endorsement that excludes coverage for damages arising from violations of the Telephone Consumer Protection Act (TCPA). The policies cover legal obligations resulting from property damage defined as occurrences of continuous exposure to harmful conditions and include personal and advertising injury claims. They impose a $1 million per occurrence limit and a $2 million general aggregate limit, with a $1,000 deductible per claim for property damage and advertising injury. In a related lawsuit, Asphalt Wizards contracted Profax in 2005 to send a one-page advertisement via fax, resulting in 33,073 faxes sent, including one to Fun Services. On January 7, 2008, Fun Services initiated a class action lawsuit against Asphalt Wizards in Missouri, alleging TCPA violations for sending unsolicited faxes and claiming common-law conversion for using fax machines without consent. The class seeks statutory damages of $500 for each fax sent under the TCPA and actual damages for the conversion claims. On June 26, 2008, Western Heritage Asphalt Wizards acknowledged receipt of a lawsuit notification dated May 1, 2008, regarding a case filed in the Circuit Court of Jackson County, Missouri (Case No. 0186CV00064). The plaintiff alleges that Asphalt Wizards violated the Telephone Consumer Protection Act by sending unsolicited faxes to individuals in Kansas and seeks to establish a class action for others affected. The letter indicates that the compensatory damages sought are unspecified but may exceed the insurance policy limits, which provide $1,000,000 per occurrence and $2,000,000 aggregate, with a deductible of $1,000. Western Heritage appointed the law firm of Brown, James to defend Asphalt Wizards and advised against discussing the case with anyone except designated representatives. On October 29, 2012, Western Heritage's outside counsel, Selman and Breitman, sent a twelve-page letter to Asphalt Wizards, confirming continued defense of the Fun Services action while reserving rights. The letter requested cooperation with attorney Davis R. Buchanan from Brown, James, and included sections summarizing the lawsuit's allegations and procedural history, as well as details of the insurance policy limits, reaffirming the same per occurrence and aggregate limits and deductibles as previously noted. Western Heritage Insurance states its coverage position regarding Asphalt Wizards in the Fun Services action, agreeing to defend Asphalt Wizards while reserving rights. Coverage for the 2006/2007 policy is denied based on the CG 00 67 3-05 Exclusion, which pertains to violations of statutes governing electronic communications, including the TCPA. Western Heritage argues this exclusion negates coverage for all allegations against Asphalt Wizards. The insurer plans to seek a judicial declaration to clarify its rights and duties under the policies, including whether it must defend Asphalt Wizards. The reservation of rights includes: the ability to seek a declaration of its obligations; the right to withdraw defense and request reimbursement for defense costs related to non-covered claims; the right to recover any judgment or settlement not linked to covered claims; the right to rescind the policy if new facts warrant it; and the right to amend the reservation letter. Western Heritage emphasizes that it does not assert the merits of the allegations against Asphalt Wizards but highlights potential coverage issues. On January 14, 2013, Western Heritage filed a declaratory judgment action to establish it owes no duty to defend or indemnify Asphalt Wizards. The Jackson County Circuit Court stayed the underlying litigation on March 11, 2013, pending the outcome of this action. The case is governed by the federal Declaratory Judgment Act and is under the Court's diversity jurisdiction, allowing it to declare the parties' rights and obligations. The Act and Rule 57 are deemed procedural and not jurisdictional, allowing courts to apply a new remedy within their existing jurisdiction. Fun Services lacks standing to assert counterclaims against Western Heritage, as it is not a party to the insurance contracts or an intended beneficiary. Standing requires an actual or threatened injury, which Fun Services does not have under Missouri law, as it must first obtain a judgment against Asphalt Wizards before pursuing claims against Western Heritage. Consequently, all of Fun Services’ counterclaims are dismissed without prejudice. Western Heritage argues it has no duty to indemnify Asphalt Wizards in the underlying lawsuit, citing that no class member has damages exceeding $500, which is below the $1,000 deductible in the policies. Western Heritage seeks summary judgment on several grounds: it has no coverage obligation under the 2006-07 policy due to an exclusion for TCPA violations; a “prior publication” exclusion applies to “advertising injury”; and the faxed advertisements do not qualify as “products-completed operations” under the policy limits. Fun Services contends that Western Heritage waived its coverage defenses by defending Asphalt Wizards without a timely reservation of rights. Western Heritage counters that it referenced the deductible in a 2008 letter and later included additional exclusions, asserting that any waiver would not apply under Missouri law for risks excluded from policy coverage. Asphalt Wizards did not challenge the 2012 reservation of rights letter from Western Heritage, thereby continuing to accept its defense under such reservation. A reservation of rights letter allows an insurer to defend an insured while reserving certain policy defenses if liability is established later. The letter suspends waiver and estoppel, enabling the insured to make informed decisions regarding potential conflicts of interest. An effective reservation of rights letter must be timely and typically includes details about the policy, relevant provisions, specific allegations, claims that may not be covered, and informs the insured of any conflicts of interest. The Eighth Circuit has ruled that a reservation of rights letter sent six months after the insurer is aware of the basis for denying coverage is untimely. Under Missouri law, failure to provide timely notice of a reservation of rights precludes an insurer from denying coverage later. The Court determined that Western Heritage waived its coverage defenses by not issuing a timely reservation of rights letter to Asphalt Wizards. The 2008 letter was deemed ineffective as a reservation of rights letter because it lacked sufficient information for Asphalt Wizards to infer a reservation. Conversely, the 2012 letter met the criteria of a proper reservation of rights letter. Western Heritage's delayed notification to Asphalt Wizards regarding its reservation of rights rendered it ineffective, as it waited four years after receiving notice of the lawsuit in May 2008 to act. This delay constituted a waiver of several coverage defenses under its insurance policies, including exclusions for TCPA violations, prior publication exclusions for advertising injury, and defenses related to the definition of "products-completed operations" and "property damage." The court found no merit in Western Heritage's argument that waiver could not apply because it would create coverage outside the policy's terms, clarifying that the case involved an existing insured relationship with Asphalt Wizards and thus did not seek to create new coverage. The court held that Western Heritage indeed waived its coverage defenses by failing to send a timely reservation of rights letter. Additionally, Western Heritage's assertion that Asphalt Wizards acquiesced to a defense under a reservation of rights after receiving the 2012 letter was unsupported by evidence. The court distinguished this case from others cited by Western Heritage, noting that those involved timely notifications, unlike the current situation. However, Western Heritage did not waive the deductible endorsement, as it is a mechanism to shift risk rather than a coverage defense or exclusion. Even when assuming the insured's defense, the insurer retains the right to enforce the deductible endorsement. An insurer's defense of a claim without reserving rights may waive certain defenses but does not alter the policy's coverage limits. The policy includes a $1,000 deductible applicable to each class member's claim, which cannot be aggregated across claims. Each claim is treated separately, as established in Musmeci v. Schwegmann Giant Super Mkts. and Capitol Indem. Corp. v. Miles, where claims cannot be combined to meet the deductible. Western Heritage is not obligated to indemnify Asphalt Wizards until damages exceed the $1,000 deductible per individual claim. The policy stipulates that the insurer's duty to pay arises only for damages above the deductible amount. For instance, if a class member has a $1,300 claim, Western Heritage would pay $300, and would owe nothing if damages are $1,000 or less. Fun Services' argument that the insurer must cover judgments up to policy limits, regardless of the deductible, is rejected. The insurer’s obligation is conditioned on exceeding the deductible, and even if Asphalt Wizards cannot pay the deductible, Western Heritage's responsibility remains limited. The endorsement is deemed clear and not ambiguous, as a lack of definition for "claim" does not create confusion under Missouri law. The Court confirms that the endorsement is straightforward and applies as written. Western Heritage is not obligated to indemnify Asphalt Wizards in the underlying lawsuit because all claims are below the deductible threshold of $1,000. The court determined that the duty to indemnify is not premature and that damages can be established through summary judgment rather than requiring a trial. The analysis showed that no claim from class members would exceed $600, which includes potential statutory damages under the TCPA of $500 per unsolicited fax and minimal actual damages from receiving unsolicited faxes. Specifically, the cost of defense per claim was calculated to be approximately $3.02, indicating that individual claims cannot exceed $650. However, the endorsement requires Western Heritage to defend the underlying lawsuit regardless of whether the deductible is met. The court noted that an insurer's duty to defend is based on the potential for liability at the outset of the case, which is determined by the allegations in the petition. Prior to Fun Services limiting class members' recovery to $500 per violation, there was a possibility that the claims against Asphalt Wizards fell within the policy coverage, establishing Western Heritage's duty to defend. No class member's claim will exceed the deductible; however, the policy's deductible endorsement clarifies that the terms of the policy, including the Company's obligations regarding defense, apply regardless of the deductible's application. As such, Western Heritage is required to defend the underlying lawsuit even though it has no obligation to indemnify any claim due to the deductible exceeding potential damages. The court's conclusions include: 1) Fun Services lacks standing for counterclaims against Western Heritage; 2) Western Heritage waived coverage defenses by not issuing a timely reservation of rights letter to Asphalt Wizards; 3) The $1,000 deductible applies on both a per-claim and per-person basis; 4) The deductible surpasses any single class member's potential damages, negating any indemnity duty; and 5) Western Heritage must defend the underlying lawsuit. Additionally, the court dismissed Fun Services' counterclaim for 'Conflicted Defense' and acknowledged the presence of various policy exclusions that could impact coverage. Specific definitions within the policies include "advertisement," "products-completed operations hazard," "product," and "work," each outlining the scope of coverage and limitations. Fun Services confirmed seeking statutory damages of $500 per violation from Asphalt Wizards but denied seeking treble damages. Fun Services, in its February 23, 2009, motion for class certification, argued that a class action is preferable to individual lawsuits due to the limited recovery of $500 per class member under the TCPA, which does not permit fee shifting. The Jackson County Circuit Court, in granting the class certification, noted that the plaintiffs seek statutory damages under the TCPA and acknowledged that federal procedural rules govern the case, even if their application could affect the outcome, referencing Hanna v. Plumer. The Court corrected a prior order regarding Federal Rule of Civil Procedure 13(a), clarifying that while res judicata typically prevents claim splitting, an exception applies when the first lawsuit seeks a declaratory judgment, citing Allan Block Corp. v. Cnty. Materials Corp. The document emphasizes that an insurer's duty to defend is distinct from its duty to indemnify, with the former being broader. An insurer must defend any claim with potential coverage, even if those claims might not survive a motion to dismiss, as established in McCormack Baron Mgmt. Servs. Inc. v. Am. Guar. Liab. Ins. Co. and Fleishour v. Stewart Title Guar. Co. Western Heritage contends that Fun Services is improperly merging the duties of defense and indemnity. The Court intends to apply the appropriate standards for each duty. Furthermore, Western Heritage's assertion of a $1,000 deductible was not waived, as they informed Asphalt Wizards of this deductible in a letter dated June 26, 2008. The Court assumes class members’ claims are covered under the policies, acknowledging their alleged "property damage" or "advertising injury." It rejects Western Heritage's claim that it owes no duty to provide defense or indemnity until the deductible is paid, asserting that its obligation remains independent of Asphalt Wizards’ payment capabilities. Even a significant increase in defense costs would not alter this analysis. The TCPA allows for treble damages for willful or knowing violations, suggesting that potential liability per claim at the litigation's outset exceeded $2,000.