United States Liability Insurance v. Kelley Ventures, LLC
Docket: CASE NO.14-62840-CIV-COHN/SELTZER
Court: District Court, S.D. Florida; September 30, 2015; Federal District Court
The Court partially granted and partially denied the Plaintiff's Motion for Summary Judgment. The Plaintiff, United States Liability Insurance Company (USLI), sought declaratory relief regarding its obligation to defend Defendants Kelley Ventures, LLC, and Kevin Kelley in a related state-court lawsuit filed by Kelley Automotive, Inc. (Kelley Auto). The Court ruled in favor of USLI's request for declaratory relief but denied its request to rescind the insurance policy in question.
The case centers on a dispute over insurance coverage stemming from Kelley Auto's claims against Kelley Ventures. Kelley Auto and Phoenix Motors, each owning a 50% share in Kelley Ventures, were entitled to equal profit distributions per their Operating Agreement. A conflict arose when Kevin Kelley informed Gail Kelley that Kelley Auto would not receive a cash distribution due to an accounts receivable claim, which Kelley Auto disputed as fictitious. Kelley Auto sent multiple letters demanding distributions, warning of potential litigation if their demands were not met.
Kevin Kelley applied for a Corporate Directors and Officers Liability Policy with USLI, asserting no awareness of any issues that might lead to a claim, despite the ongoing dispute with Kelley Auto. The policy was issued on January 15, 2014, while Phoenix was not covered. Kelley Auto's continued demands culminated in a formal lawsuit filed in Florida state court on October 9, 2014, with USLI being notified shortly thereafter and reserving its rights to deny coverage for the claims.
On December 12, 2014, USLI filed a complaint seeking (1) rescission of the Policy and (2) a declaratory judgment confirming no duty to defend or indemnify Defendants Kelley Ventures and Kevin Kelley. After unsuccessful mediation, USLI moved for summary judgment. The Defendants opposed this motion, requesting a trial instead, leading to a reply from USLI.
The legal standard for summary judgment states that a court must grant such a motion if there are no genuine disputes regarding material facts and the movant is entitled to judgment as a matter of law. The moving party must initially demonstrate the absence of evidence supporting the nonmoving party's case. Once this burden is met, the nonmoving party must present specific facts to show a genuine issue for trial, rather than relying on mere allegations or denials. In ruling on summary judgment, the court views facts in a manner favorable to the nonmoving party.
Regarding the duty to defend, an insurance carrier can initiate a declaratory action while defending under a reservation of rights if it perceives valid defenses against third-party claims. USLI has been defending Kelley Ventures and Kevin Kelley under such conditions while seeking to deny coverage. Under Florida law, the duty to defend is determined by the interpretation of the insurance policy and the underlying complaint. This duty exists when the allegations potentially fall within policy coverage; conversely, it does not arise if the allegations indicate no coverage or invoke a policy exclusion.
An insurer's duty to indemnify is contingent upon its duty to defend; if there is no duty to defend, there is likewise no duty to indemnify, as established in Nova Cas. Co. v. Waserstein. Any ambiguity regarding the duty to defend is resolved in favor of the insured, but clear policy exclusions must be enforced. In the context of a motion for summary judgment by USLI, it argues it owes no duty to defend the Defendants in the Underlying Action based on several points.
Firstly, USLI claims the insurance contract is void due to a material misrepresentation by Kevin Kelley in the Policy application. Secondly, USLI asserts that even if the contract remains valid, it is not obligated to defend under three specific policy provisions: the Full Prior Acts Coverage Provision, the Pending or Prior Litigation Exclusion, and the Percentage Shareholder Exclusion. The Court finds that rescission of the Policy is not warranted due to a dispute over whether Kelley accurately responded to questions on the application regarding potential claims against Kelley Ventures.
Under Florida law, a material misrepresentation can justify rescission if it affects the insurer's risk assessment. The Court recognizes that responses in the application were made "to the best of my knowledge and belief," thus giving credit to the applicant's belief unless clearly contradicted by facts. A genuine issue persists regarding whether Kelley made a material misrepresentation, particularly related to a question about awareness of facts that could lead to claims. While the Defendants acknowledge that a letter dated October 17 made demands against Kelley Ventures, they argue that subsequent events rendered the letter irrelevant. They assert that Kelley's interpretation of later letters suggested that the claims were directed at Phoenix instead. The Court acknowledges that the earlier letters appear to demand distributions from Kelley Ventures, but finds a material fact dispute over Kelley's belief regarding the nature of the claims. Consequently, USLI's motion for summary judgment is granted due to established policy provisions relieving it of the duty to defend.
Defendants referenced communication from October 24th and November 22nd that may be interpreted as threatening claims against Phoenix. The Court, favoring the non-moving party, declines to rescind the contract based on Plaintiffs' motion. USLI is not obligated to defend Defendants under the Pending or Prior Litigation Exclusion and the Percentage Shareholder Exclusion. The Pending or Prior Litigation Exclusion explicitly denies coverage for any claims that the Insured had written notice of before the policy’s inception. The October 17th letter contained a detailed demand from Kelley Auto, which Kevin Kelley acknowledged receiving prior to signing the policy application. Thus, this letter constitutes a valid exclusion under the policy.
Furthermore, the Percentage Shareholder Exclusion relieves USLI from liability for claims made by any person or entity owning more than 10% of the organization’s voting securities, designed to prevent conflicts of interest. Kelley Auto, owning 50% of Kelley Ventures, falls within this exclusion. Defendants argue that the complaint involves claims from Kelley Auto as a landlord against Kelley Ventures as a tenant, but the exclusion applies regardless of party identity, focusing instead on ownership stakes within the organization.
Defendants failed to provide controlling authority regarding an insurer’s duty to defend, leading the Court to rely on the plain meaning of the Policy language. The Percentage Shareholder Exclusion indicates that the Policy does not cover the Underlying Action, regardless of the capacity in which Kelley Auto sued Kelley Ventures. In contrast, the Full Prior Acts Coverage Provision does not definitively exempt USLI from its duty to defend, as it hinges on whether Kevin Kelley had a reasonable basis to foresee a claim arising from his actions prior to signing the Policy application. A material fact dispute exists regarding this foreseeability, preventing the Court from absolving USLI of its duty to defend based on this provision at the summary judgment stage. The Court concludes that USLI is entitled to a declaratory judgment based on the explicit exclusions, thus relieving it of the duty to defend Kelley Ventures and Kevin Kelley in the Underlying Action. However, due to the unresolved fact concerning a potential misrepresentation on the Policy application, the Court denies rescission of the contract. The Court's order includes granting the plaintiff's motion for summary judgment in part, confirming USLI's lack of duty to defend, and denying the request for rescission of the Policy. Phoenix Motors, initially named as a defendant, was subsequently dismissed from the case.
