United States District Court, D. Montana, Butte Division
L. CHRISTENSEN, CHIEF JUDGE UNITED STATES DISTRICT COURT
the Court is Defendant Federated Rural Electric Insurance
Exchange's ("Federated") motion for partial
summary judgment. For the reasons explained below, the Court
grants the motion in part as it relates to the claim of
conversion for $14, 264.17.
Scott Johnson ("Johnson") was a director of Global
Net, Inc. ("GNI") and his removal as an officer is
central to litigation involving both GNI and Glacier Electric
Cooperative, Inc. ("GEC") filed in the Eighteenth
Judicial District, Gallatin County, Montana. This litigation
is referred to by the parties as the "underlying
litigation, " the "underlying action, " the
"business litigation, " and the "corporate
litigation." It will be referred to as the
"underlying litigation" in this Order. The
underlying litigation is a separate case from what is
referred to by the parties as the "lease
litigation." The lease litigation involves a dispute
regarding Johnson's property company and the leasing of
office space. The lease litigation is irrelevant to the
instant motion before this Court.
action seeks a declaratory judgment regarding Federated's
defense and indemnity obligations. Federated provided a
Directors, Officers, and Managers Liability and Corporate
Indemnification Policy ("D&O Policy") to
Johnson's employer. When Johnson was sued in the
underlying litigation, Federated issued an initial
reservation of rights letter, on May 4, 2012, in which it
agreed to provide "a defense" subject to the terms
of the letter and the D&O Policy. To date, Federated has
paid approximately $2 million in attorneys' fees on
behalf of Johnson.
September 2012, Johnson filed a declaratory judgment action
against Federated in the Montana Eighteenth Judicial District
Court alleging Federated had failed to pay the full amount of
fees and costs incurred by Johnson in the underlying
litigation. The suit was removed to this Court on March 18,
2013. Various motions were filed in this action which were
subsequently resolved by the parties' stipulation and
adopted by the Court on December 17, 2013. (Doc. 43.) The
stipulation and Order provided that Federated would pay on a
monthly basis all reasonable and necessary attorneys'
fees and costs incurred in the defense of Johnson for the
underlying litigation with GEC/GNI. Subsequently, on February
3, 2014, Johnson moved to compel Federated to pay additional
attorneys' fees above and beyond the amount stipulated
to. The Court denied Johnson's motion. (Doc. 50.)
case at hand was then stayed due to the potential for
settlement of the underlying litigation. Settlement did not
occur and Judge Salvagni of the Eighteenth Judicial District
Court referred certain motions in the case to Special Master
Tracy Axelberg ("Axelberg"). On December 31, 2015,
Axelberg issued his Special Master's Report to the
Eighteenth Judicial District Court regarding the pending
motions. That Report granted GEC/GNI's motion for partial
summary judgment as to Johnson's conversion of the sum of
$14, 264.17, plus interest. Judge Salvagni adopted
Axelberg's Report in full.
the issuance of the Eighteenth Judicial District Court's
order regarding Johnson's conversion, Federated issued to
Johnson an amended reservation of rights letter, dated March
31, 2016. This letter cites to the following exclusion found
in the D&O Policy, referred to as the "personal profit
Company shall not be liable to make any payment of Loss in
connection with any claims or claims made against the
A. Which results in a finding of personal profit, gain or
advantage; B. For the return by the Insureds of any
remuneration paid to Insureds without the previous approval
of the stockholders of the Entity, when payment without such
previous approval shall be held by the courts to have been
(D&O Policy, at 2.) Federated's final determination
in its amended reservation of rights letter was that due to
Johnson's conversion of GNI funds, the exclusion applies
and coverage is precluded under the D&O Policy.
now moves for partial summary judgment seeking a declaratory
ruling that the D&O Policy issued by Federated does not
provide a duty to defend Johnson in the underlying action,
pay interim billing of his attorney's fees and defense
costs, or indemnify Johnson against the allegations in the
underlying litigation. Johnson opposes the motion and argues
that Federated has failed to establish that the Eighteenth
Judicial District Court's order, which held Johnson
liable for conversion of $14, 264.17, unequivocally
establishes that no coverage exists under the D&O Policy.
is entitled to summary judgment if it can demonstrate that
"there is no genuine dispute as to any material fact and
the movant is entitled to judgment as a matter of law."
Fed.R.Civ.P. 56(a). Summary judgment is warranted where the
documentary evidence produced by the parties permits only one
conclusion. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 251 (1986). Only disputes over facts that might
affect the outcome of the lawsuit will preclude entry of
summary judgment; factual disputes that are irrelevant or
unnecessary to the outcome are not considered. Id.
at 248. In ruling on a motion for summary judgment, a court
must view the evidence "in the light most favorable to
the opposing party." Tolan v. Cotton, 134 S.Ct.
1861, 1866 (2014) (quoting Adickes v. S.H. Kress &
Co., 398 U.S. 144, 157 (1970)). "[T]he evidence of
the nonmovant is to be believed, and all justifiable
inferences are to be drawn in his favor." Id.
at 1863 (quoting Anderson, 477 U.S. at 255).
federal court sitting in diversity jurisdiction applies the
substantive law of the forum state to state law claims.
Mason & Dixon lntermodal, Inc. v. Lapmaster Intern.
LLC, 632 F.3d 1056, 1060 (9th Cir. 2011). Thus, the
Court analyzes Federated's motion for partial summary
judgment pursuant to Montana law.
interpretation of an insurance policy presents a question of
law" to be decided by the Court. Allstate Ins. Co.
v. Wagner-Ellsworth, 188P.3d 1042, 1044 (Mont. 2008).
The Court must "examine insurance contracts as a whole,
with no special deference to specific clauses, ... accord the
usual meaning to the terms and the words in an insurance
contract, and ... construe them using common sense."
Modroo v. Nationwide Mut. Fire Ins. Co., 191 P.3d
389, 395 (Mont 2008) (citations omitted). "[W]hen the
language of a policy is clear and explicit, the policy should
be enforced as written." Steadele v. Colony Ins.
Co., 260 P.3d 145, 149 (Mont. 2011) (citations omitted).
"Courts should not... seize upon certain and definite
covenants expressed in plain English with violent hands, and
distort them so as to include a risk clearly excluded by the
insurance contract." Travelers Cas. & Sur. Co.
v. Ribi Immunochem Research, Inc., 108 P.3d 469, 474
(Mont. 2005) (citations and internal quotation marks
contends that there is no duty to defend under the D&O
Policy because the policy does not contain a defense benefit
provision. Federated cites to Farmers Union Mutual
Insurance Company v. Staples, for the proposition that a
duty to defend is determined by the language of the policy
and the allegations contained within the four-corners of the
complaint. (Doc. 65 at 2; 90 P.3d at 385.) Federated then
points to section four of the policy which states:
Section 4. Defense Costs, Charges and Expenses
A. The Company does not under the terms of this policy,
assume any duty to defend. Any and all costs, charges and
expenses of defense payable by the Company are a part of, and
not in addition to, the Limit of Liability. Loss includes
costs, charges and expenses of defense and as such is subject
to the provisions of Section 3.
contends that this provision relieves the company of any duty
to defend, and cites to a New York case ruling that an
insurer does not have a duty to defend under a D&O policy
when the policy does not contain a duty to defend provision.
Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v.
Ambassador Grp., Inc., 556 N.Y.S.2d 549, 553 (1990).
Therefore, Federated argues that to the extent coverage
exists under the policy, it is limited only to
indemnification of defense costs, which Federated contends
would not be owing until the end of the
counters that under Montana law an insurer has a duty to
defend and that duty is independent of and broader than the
duty to indemnify. United Nat. Ins. Co. v. St. Paul Fire
& Marine Ins. Co., 214 P.3d 1260, 1269 (Mont. 2009);
Insured Titles, Inc. v. McDonald, 911 P.2d 209, 212
(Mont. 1996). Johnson argues that the language of the D&O
Policy is ambiguous as to the duty to defend because the term
"Loss" is defined under the policy to include
"defense costs" and "charges and expenses ...
incurred in the defense of actions." (Doc. 62-1 at 5.)
argument relies upon National Union Fire Insurance
Company of Pittsburg v. Ambassador Group, Incorporated,
which explains that "most directors and officers
liability policies, [do] not impose an obligation to provide
a defense, but only to reimburse expenses incurred in the
defense." 556 N.Y.S.2d at 553. The court found that
under certain directors and officers liability policies
"insurers are required to make contemporaneous interim
advances of defense expenses where coverage is disputed,
subject to recoupment in the event it is ultimately
determined no coverage was afforded." Id.
National Union Fire is an out-of-jurisdiction case,
it is not entirely persuasive. However, the Montana Supreme
Court has not addressed whether a D&O policy can restrict
the duty to defend, and whether there is a difference between
the duty to defend and duty to indemnify defense costs under
a D&O policy. At the hearing on this motion,
Federated's counsel represented to the Court that the
case law in Montana relates to "duty to defend"
cases interpreting property and casualty policies, which do
not apply here because this case involves a D&O policy
which expressly excludes a duty to defend and, therefore, the
Court should interpret the policy under general contract
principles and enforce ...