Beacon Mutual Insurance v. St. Paul Mercury Insurance
Docket: No. 11-cv-559-M
Court: District Court, D. Rhode Island; March 27, 2014; Federal District Court
This case involves a declaratory judgment action concerning insurance coverage following the termination of two employees by Beacon Mutual Insurance Company (Beacon) and a subsequent settlement with one of them. The primary issue is whether the insurance policy from St. Paul Mercury Insurance Company (St. Paul) covers the settlement costs Beacon incurred for the former employee and potentially for another employee. The policy references an Employment Practices Liability Insuring Agreement (EPLIA), but no such document was provided with the original policy. St. Paul later supplied an EPLIA document outlining coverage and exclusions, including exclusions for losses under written contracts.
Beacon contends that the original policy is comprehensive and covers the settlements without needing the EPLIA, while St. Paul argues that the EPLIA is necessary for valid coverage and suggests reformation of the policy or reliance on a liberalization notice to assess coverage under a prior policy. The court must resolve cross-motions for summary judgment regarding Beacon's claims, which include declaratory judgment, breach of contract, anticipatory breach of contract, bad faith refusal to pay, and breach of the duty of good faith and fair dealing.
Beacon, a workers' compensation insurance carrier under Rhode Island law, initially acquired a policy from Travelers Casualty and Surety Company (the Travelers Policy) that excluded certain claims from coverage. Beacon subsequently renewed this policy and acquired the St. Paul policy, which indicated the Travelers Policy as its prior policy. Following the termination of Employees A and B for cause, both employees sought compensation from Beacon based on their employment agreements. Beacon settled with Employee B, covering both contractual claims and legal defense costs related to criminal charges they faced but were not convicted of.
Employee A has alleged multiple claims against Beacon and seeks recovery based on various theories, including his employment contracts, with no settlement reached prior to the lawsuit's filing. Beacon notified St. Paul of the terminations of Employee A and Employee B, indicating potential claims. St. Paul denied coverage, stating that their Employment Practices Liability Insurance Agreement (EPLIA) contained exclusions relevant to the claims, such as no liability for amounts owed under contracts or unpaid employment compensation, while still covering defense costs. Beacon contested this denial, arguing it had not received the EPLIA before notifying St. Paul and asserted that St. Paul could not invoke exclusions absent the agreement’s prior issuance. Beacon also informed St. Paul of a settlement with Employee B and sought reimbursement, while indicating intentions to settle with Employee A and expecting indemnification for that settlement. In November 2011, Beacon filed a lawsuit seeking to clarify the rights and obligations of the parties involved.
The St. Paul-Travelers Policy provides employment liability insurance with claims-made coverage for the period from October 1, 2005, to October 1, 2006. The policy's declarations emphasize that coverage is valid only for insuring agreements included in the policy, and it is agreed that no EPLIA insuring agreement was attached or provided when the policy was originally issued. A Liberalization Notice explains the consolidation of St. Paul and Travelers into a single company and outlines that existing insurance policies would transition to St. Paul Travelers forms, maintaining coverage terms similar to previous policies. Beacon subsequently renewed the policy for the 2006-2007 term, and in October 2007, St. Paul issued a policy change endorsement introducing the Employment Practices Liability Insuring Agreement.
Form IN006 provides that the Insurer will cover losses for which the Insured becomes legally obligated due to claims made against them during the Policy Period related to the Employment Practices Act, specifically claims brought by or on behalf of employees or contractors. However, it excludes coverage for losses arising from amounts owed under written contracts, unpaid salaries, wages, bonuses, or other compensation. In March 2011, St. Paul added Form IN006 to the St. Paul-Travelers Policy applicable to this case.
Beacon has filed a six-count complaint against St. Paul, focusing on the insurer's coverage related to settlements with Employee B and claims by Employee A. The first three counts address coverage issues: Count one seeks a declaratory judgment to clarify the rights and obligations under the policy; Count two alleges breach of contract regarding Employee B's settlement; Count three asserts anticipatory breach concerning Employee A's claims.
The remaining three counts, referred to as the Bad Faith Claims, include two counts of bad faith refusal to pay (one statutory and one common law) and a count for breach of the implied covenant of good faith and fair dealing, all based on St. Paul's alleged wrongful refusal to indemnify Beacon.
Both parties filed for summary judgment in August 2013. Beacon seeks summary judgment on all counts, while St. Paul seeks partial summary judgment on five specific declarations related to Count One, including issues of policy reform, indemnity obligations, coverage exclusions for criminal defense fees, and the correctness of St. Paul’s coverage stance regarding Employee B and Employee A.
Rule 56(a) of the Federal Rules of Civil Procedure permits courts to grant summary judgment when the movant demonstrates no genuine dispute regarding any material fact and is entitled to judgment as a matter of law. Rule 56(c) requires summary judgment against a party failing to establish an essential element of their case, for which they bear the burden of proof at trial. In cases involving cross-motions for summary judgment, courts assess each motion independently, drawing reasonable inferences in favor of the non-moving party. This case is under diversity jurisdiction, applying Rhode Island substantive law, which interprets insurance policies based on the construction of written instruments. Courts determine contract interpretation as a legal question, and if an insurance policy's terms are clear and unambiguous, they must be applied as written without imposing liabilities not specified in the policy.
Counts One to Three primarily address whether the St. Paul-Travelers Policy covers Beacon's settlements with Employee B and the anticipated settlement with Employee A. In count one, Beacon requests a declaratory judgment to clarify the rights and duties under the St. Paul-Travelers Policy, asserting that the policy provides coverage for both settlements. Beacon argues the absence of a document titled EPLIA in the original policy materials and claims broad coverage, including indemnification for the settlement with Employee B and potential coverage for Employee A's settlement.
Conversely, St. Paul opposes Beacon's motion and seeks summary judgment, asserting that the St. Paul-Travelers Policy should be reformed to include Form IN006, or that coverage should be determined by the prior Travelers Policy per the policy’s Liberalization Notice. St. Paul contends that Form IN006 was a separate document mistakenly omitted from the original documents provided to Beacon, leading to a lack of valid coverage under the St. Paul-Travelers Policy. St. Paul argues that regardless of whether the court reforms the policy to include Form IN006 or evaluates coverage under the previous Travelers policy, it is justified in declining to indemnify Beacon for the settlement with Employee B and maintains its coverage position regarding any potential settlement with Employee A.
Beacon argues that the Employment Practices Liability Insurance Agreement (EPLIA) is incorporated within the St. Paul-Travelers Policy documents it received, despite no separate document with that name being attached. Beacon highlights multiple references to the EPLIA within the policy, including its mention in the Table of Contents, the Declarations section specifying a $100,000 retention for claims, and its inclusion under the 'Duty to Defend' heading. Beacon asserts that these references demonstrate the EPLIA is an integral part of the policy and claims it is "hiding in plain sight."
Additionally, Beacon notes that the EPLIA and Form IN006 are absent from the Policy Form List, arguing this indicates they were not separate documents but were part of the initial documents received. Beacon cites an attorney's letter discussing the EPLIA to support its claim that all necessary coverage terms are included in the documents received, emphasizing that the policy operates on a "claims made" basis.
Beacon further contends that if the phrase "Insuring Agreements made part of this Policy" is ambiguous, Rhode Island law requires that such ambiguity be construed in favor of coverage. Consequently, Beacon seeks to affirm that its policy covers claims related to Employees A and B. Meanwhile, St. Paul requests declarations to clarify that coverage should be assessed under either Form IN006 or a previous Travelers Policy. St. Paul also seeks to deny coverage for various claims, including indemnity for amounts owed to former employees under contracts or agreements, attorneys' fees related to criminal defense, and the settlement with Employee B. St. Paul maintains its position on the coverage for claims asserted by Employee A.
St. Paul argues that the St. Paul-Travelers Policy is incomplete without Form IN006, which contains the grant of coverage. They claim this form was inadvertently omitted, resulting in no valid coverage. Beacon disputes this, asserting that coverage is present within the originally issued documents. However, St. Paul contends that these documents explicitly require a separate 'Employment Practices Liability Insuring Agreement' for valid coverage, which was not included. St. Paul proposes two solutions for the court: either reform the policy to include Form IN006 as a scrivener's error or determine that no valid coverage exists, invoking the Liberalization Notice that allows claims to be adjusted under the broader terms of the previous Travelers policy.
The court's analysis focuses solely on the original policy issued to Beacon, emphasizing that it must be interpreted in its entirety without isolating specific terms. The court concludes that valid coverage is absent because the necessary insuring agreement was never incorporated into the St. Paul-Travelers Policy. Despite Beacon's efforts to identify coverage within the documents, the court maintains that it cannot create ambiguity where the policy language is clear. Since no insuring agreement was included, there is no valid coverage under the St. Paul-Travelers Policy. Consequently, the broader coverage of the prior Travelers Policy will apply to Beacon's claims regarding Employees A and B, as dictated by the Liberalization Notice.
Section III of the prior Travelers Policy outlines exclusions, specifically stating that Travelers is not obligated to pay Damages related to claims for severance pay or contractual compensation under employment agreements, while still covering Defense Expenses. Employees A and B have claimed compensation from Beacon under their employment agreements, and the settlement with Employee B included payments for both contractual claims and attorney fees. The court notes that the plain language of the policy likely excludes coverage for the contractual portion of Employee B’s settlement. However, the parties have not sufficiently addressed whether any part of this settlement is covered by the Travelers Policy. The court decides to allow the parties time to resolve their coverage dispute. Regarding Employee A, without evidence of a settlement, the court refrains from determining coverage for a potential future agreement, but any claims will still be subject to the policy's exclusions.
The court denies Beacon’s motion for summary judgment on count one but grants St. Paul’s motion in part, ruling that coverage is determined by the prior Travelers Policy and its exclusions, without issuing any further declarations at this time. The parties are instructed to resolve their disputes under the Travelers Policy. For counts two and three, which allege breaches of contract by St. Paul for failing to indemnify Beacon for settlements, Beacon did not initially address these counts in its motion but later indicated its desire to pursue them. St. Paul counters that Beacon failed to provide evidence of damages, which is necessary to support a breach of contract claim.
Beacon has failed to demonstrate entitlement to summary judgment on its breach of contract claims against St. Paul, as it has not provided sufficient evidence to prove that St. Paul breached the contract or that any breach caused damages. Under Rhode Island law, a plaintiff must establish the existence of an agreement, a breach, causation, and damages. Specifically, for anticipatory breach, St. Paul’s refusal to indemnify Beacon regarding a potential settlement for Employee A is not enough to constitute a breach. Consequently, Beacon's motion for summary judgment on counts two and three is denied, while St. Paul is granted summary judgment on those same counts due to Beacon's lack of evidence.
Additionally, counts four through six, which involve bad faith claims, are collectively addressed. Beacon did not present arguments or evidence to support these claims and indicated it is no longer pursuing summary judgment related to them. St. Paul continues to seek summary judgment, arguing that the coverage issues are debatable and that there is no evidence of bad faith or unreasonable conduct on its part. As a result, St. Paul is also entitled to summary judgment on counts four, five, and six.
At oral arguments, Beacon conceded the absence of evidence supporting its Bad Faith Claims. The court referenced the R.I. Supreme Court ruling in *Skaling v. Aetna Insurance Company*, which establishes that an insurance company may be liable for bad faith if it intentionally or recklessly fails to investigate a claim properly or behaves oppressively and unreasonably. The court emphasized the necessity for sufficient evidence to determine if the insurer acted unreasonably and was aware of this unreasonableness. Under Rule 56(c), summary judgment is warranted when a party fails to demonstrate the existence of an essential element of its case. Beacon, carrying the burden of proof for its Bad Faith Claims, did not provide adequate evidence. St. Paul argued for summary judgment, asserting the coverage issues were “fairly debatable,” which precludes bad faith claims, and indicated that Beacon failed to show any intentional failure to assess the legal basis for denying the claim. Therefore, St. Paul contended that all evidence points to a lack of basis for Beacon's claims, warranting summary judgment on counts four, five, and six.
Success on a common law bad-faith claim in Rhode Island necessitates that the plaintiff proves the absence of a reasonable basis for denying insurance policy benefits and that the defendant had knowledge or recklessly disregarded this lack of a reasonable basis. In the case cited (Labonte v. Nat’l Grange Mut. Ins. Co.), the plaintiff failed to meet the burden in opposing the defendant's summary judgment motion regarding bad faith. The Rhode Island Supreme Court has affirmed that the implied covenant of good faith and fair dealing is an essential element of bad faith, not a distinct claim, as codified in § 9-1-33. Beacon did not provide evidence to support its bad faith claims, merely showing that St. Paul denied coverage based on exclusions and proposed rates for defense costs. Consequently, both Beacon's and St. Paul’s motions for summary judgment regarding counts four, five, and six were ruled upon, with St. Paul granted summary judgment on those counts. Additionally, the court ruled that coverage under the St. Paul-Travelers Policy aligns with the terms of the previous Travelers Policy and directed the parties to resolve disputes accordingly. The court clarified references to involved parties and documents for clarity and noted that while not pertinent to the motions, depositions indicated that two employees faced insurance fraud charges, which were either dismissed or resulted in acquittals. The court also addressed procedural matters regarding the motions and evidence presented by both parties.
The Court denied St. Paul's motion to strike during the November 21, 2013 hearing. The Travelers Policy, similar to Form IN006, excludes coverage for claims related to severance pay, damages from written employment agreements, and unpaid services, which were central to St. Paul’s motion. Consequently, the Court is not required to assess arguments outside the document's text. Beacon noted a prior case, TranSched, where bad faith claims were stayed; however, that case involved a motion to dismiss and the potential for those claims to be moot if TranSched lost its declaratory judgment claim. In contrast, Beacon faces a motion for summary judgment and has not provided sufficient evidence or arguments to support the continuation of its Bad Faith Claims. The Court also does not need to determine if Rhode Island's statutory cause of action for insurer bad faith has replaced the common law action, referencing Borden v. Paul Revere Life Ins. Co.
