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Johnson v. Federated Rural Electric Insurance Exchange

United States District Court, D. Montana, Butte Division

December 14, 2016

SCOTT JOHNSON, Plaintiff,
v.
FEDERATED RURAL ELECTRIC INSURANCE EXCHANGE, Defendant.

          ORDER

          DANA L. CHRISTENSEN, CHIEF JUDGE UNITED STATES DISTRICT COURT

         Before 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.

         Background

         Plaintiff 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.

         This 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.

         In 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.)

         The 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.

         With 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[1], referred to as the "personal profit exclusion":

         The Company shall not be liable to make any payment of Loss in connection with any claims or claims made against the Insureds:

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 illegal....

(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.

         Federated 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.

         Legal Standard

         A party 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).

         Analysis

         A 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.

         "The 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 omitted).

         I. Duty to Defend

         Federated 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.

         Federated 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 litigation.[2]

         Johnson 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.)

         Federated's 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.

         Because 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 ...


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