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Metropolitan Prop. & Cas. Ins. Co. v. Westport Ins. Corp.

United States District Court, D. Nebraska

January 7, 2015

METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY, Assignee of the Claims of Agency One Insurance, Inc., and Pamela A. Siroky, Plaintiff,
v.
WESTPORT INSURANCE CORP., Defendant

Page 889

          For Metropolitan Property and Casualty Insurance Company, Assignee of the Claims of Agency One Insurance, Inc. and Pamela A. Siroky, Plaintiff: Christopher R. Miller, PRO HAC VICE, MILLER, GRELL LAW FIRM, Lincoln, NE; Colin A. Mues, David A. Dudley, BAYLOR, EVNEN LAW FIRM, Lincoln, NE.

         For Westport Insurance Corp., Metropolitan Property and Casualty Insurance Company, Assignee of the Claims of Agency One Insurance, Inc. and Pamela A. Siroky, Defendant: Joyce F. Noyes, Robert P. Conlon, PRO HAC VICE, WALKER, WILCOX LAW FIRM - CHICAGO, Chicago, IL; Michael K. Huffer, CASSEM, TIERNEY LAW FIRM, Omaha, NE.

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          MEMORANDUM AND ORDER

         Richard G. Kopf, Senior United States District Judge.

         The issue before the court in this insurance coverage dispute is whether Westport Insurance Corporation (" Westport" or " Defendant" ), should have defended and indemnified Agency One Insurance, Inc. (" Agency One" ), and its president, Pamela A. Siroky (" Siroky" ), on claims concerning a homeowner's policy that was improperly written by Agency One's employee, Doug Inlay (" Inlay" ). The claims against Agency One and Siroky were made by Metropolitan Property and Casualty Insurance Company (" Met P& C" or " Plaintiff" ), which issued the homeowner's policy and which has since taken an assignment of Agency One's and Siroky's claims against Westport.

         Westport has moved for summary judgment and argues there is no coverage under the errors and omissions policy it issued to Agency One because, shortly before it received notice of the Met P& C claim, Westport sent out a " Specified Individual Entity Exclusion" to exclude coverage for any claim arising out of the wrongful acts of Inlay. Westport requests that Plaintiff's action be dismissed and that a declaratory judgment be entered on count I of Westport's counterclaim, declaring that Westport does not owe any defense or indemnity obligation for claims asserted against Agency One and Siroky in an action brought by Met P& G in the United States District Court for the District of Northern Iowa. In response, Plaintiff argues (1) that Westport knew of an actual or potential claim regarding Inlay before it issued the exclusion, (2) that such a unilateral modification of an insurance contact is void under Nebraska law, and (3) that even if the exclusion is valid, Westport still had a duty to indemnify and defend Agency One and Siroky on claims that they negligently failed to train, monitor and supervise Inlay, and were otherwise negligent and breached their fiduciary duties to Met P& G. The motion for summary judgment will be denied.

         Plaintiff has moved to dismiss count II of Westport's counterclaim, which was not pleaded at the time the motion for summary judgment was filed, and which requests a declaratory judgment that a consent

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judgment entered in the Iowa lawsuit is unenforceable because of collusion. Plaintiff argues that Westport's allegations fail to satisfy the particularized pleading requirements of Federal Rule of Civil Procedure 9(b). Westport responds (1) that Rule 9(b) is inapplicable and (2), in any event, that Plaintiff did not object to Westport's motion to amend the counterclaim to add count II. The motion to dismiss will be denied.

         I. DISCUSSION

         A. Defendant's Motion for Summary Judgment

         " The court shall grant summary judgment if the movant shows 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). A material fact is one that " might affect the outcome of the suit under the governing law," and a genuine issue of material fact exists when " the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining whether a genuine issue of material fact exists, the evidence is to be taken in the light most favorable to the nonmoving party, Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970), and the court must not weigh evidence or make credibility determinations, Anderson, 477 U.S. at 249.

         1. Undisputed Facts

         As required by the court's local rules, Westport's supporting brief (filing 91) includes a 78-paragraph " statement of material facts about which the moving party contends there is no genuine issue to be tried and that entitles the moving party to judgment as a matter of law." NECivR 56.1(a)(1).[1] Plaintiff's opposing brief (filing 93) includes an appropriate response to each paragraph. See NECivR 56.1(b)(1).[2] In addition, Plaintiff has included a separate, 74-paragraph " statement of material facts about which there is no dispute," and Westport has responded to each paragraph of this statement in its reply brief (filing 100). The additional facts stated by Plaintiff,[3] and Westport's response, are considered by the court pursuant to Federal Rule of Civil Procedure 56(c)(1). Upon

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review of the briefs and referenced materials, the court finds there is no genuine dispute regarding the following facts stated by the parties.

         a. Defendant's Statement of Material Facts

         1. Agency One is an independent insurance agency located in David City, Nebraska. Agency One has been in business since 1996 and places personal, business and financial insurance for its clients through a select number of carriers. See Ex. A1 to the Declaration of Joyce F. Noyes (" Noyes Decl." ), attached as Ex. A to Index of Evidence in support of Westport's motion for summary judgment (filing 92), at 13:2-11, 18:11-15.

         2. Siroky is and has been the President, manager and part-owner of Agency One since 1996. Id. at 18:11-23, 68:12-17. Siroky works and has always worked out of the David City, Nebraska office of Agency One. Id. at 13:2-6, 58:3-6. Before 1996, Siroky worked in the insurance business for 11 years. Id. at 13:9-11.

         3. In early 2010, Siroky was introduced to Inlay. Id. at 55:13-22. Inlay had been working in Sioux City, Iowa as an agent for Liberty Mutual Insurance Company. Id. at 56:14-24, 58:15-17. Inlay advised Siroky that he was dissatisfied and was looking for an opportunity to work as an independent agent, placing policies with different insurance companies. Id. at 57:2058:2.

         4. Siroky met with Inlay on two additional occasions, the first at his office in Sioux City and the second in Omaha. Id. at 59:9-16.

         5. Siroky and Inlay discussed ways Inlay could expand Agency One's business, including Inlay writing Iowa business for carriers with whom Agency One was appointed, such as Metropolitan Property and Casualty Insurance Company (" Met P& C" ) Id. at 63:10-64:10, 67:19-68:3; Ex. A3 to the Noyes Decl. at 2. It was expected that Inlay could expand Agency One's business by placing policies in Iowa where Siroky was not licensed. Ex. A1 to Noyes Decl. at 67:19-68:3.

         6. Based at least in part upon the conclusion that Inlay could increase the revenues of Agency One, Siroky agreed that Inlay could join her agency and write insurance policies in Iowa and Nebraska under the Agency One name from his office in Iowa. Ex. A1 to Noyes Decl. at 67:19-68:11; Ex. A3 to Noyes Decl. at 2. To that end, Siroky and Inlay entered into an Agreement dated May 1, 2010. See Ex. A4 to Noyes Decl. The Agreement stated that Agency One would retain 3% of all commissions earned on policies written by Inlay. Id. at WIC00317.

         7. At the time, Inlay had insurance licenses in Nebraska, Iowa and South Dakota. Ex. A1 to Noyes Decl. at 62:23-63:2.

         8. After May 1, 2010, Inlay was appointed as an authorized agent with all of the carriers with whom Agency One had appointments to produce and write policies. Ex. A5 to Noyes Decl. at NDOI0000004932.

         9. In 2010, the Prudential Insurance Company of America filed suit in the United States District Court for the Northern District of Iowa in the matter styled The Prudential Insurance Company of America, et al v. Douglas E. Inlay, Case No. 10-4072. In that case, Prudential sought a restraining order against Inlay for alleged misappropriation of trade secrets in connection with Inlay's employment by Agency One (" the Prudential case" ). Ex. A6 to Noyes Decl. at NDOI000000271-NDOI000000274.[4]

         10. By letter dated July 29, 2010, Siroky received a copy of an Order entered

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by the Court in the Prudential case. Id. at NDOI000000270. Counsel for Prudential advised Siroky that Prudential had obtained a restraining order which they construed to bind Agency One. Id. Agency One did not notify its errors and omissions carrier, Westport, of the Prudential claim. Ex. A1 to Noyes Decl. at 133:5-9.[5]

         11. Prior to April 2010, the Iowa Department of Insurance (" IDOI" ) had been investigating Inlay's conduct as a licensed insurance producer. See Ex. A7 to Noyes Decl., AgOne000022-AgOne000027.

         12. The IDOI initially revoked Inlay's Iowa insurance producer's license on May 28, 2010. Ex. A37 to Noyes Decl. at NDOI0000002441.

         13. On July 16, 2010, the Iowa Department of Inspections and Appeals issued an Amended Proposed Decision that Inlay's Iowa insurance producer's license should be revoked. Ex. A7 to Noyes Decl. at AgOne000027. The Amended Proposed Decision stated that the issue before the Iowa Department of Insurance was, in part, whether Inlay had made misrepresentations on insurance applications. Id. at AgOne000022.

         14. By Final Decision dated November 2, 2010, the IDOI revoked Inlay's Iowa insurance producer's license and found that Inlay

committed numerous insurance transactions that not only violated Iowa insurance law but were to the detriment of his clients or insureds. ... The record indicates that on numerous occasions, [Inlay's] actions would have resulted in an insured not having the coverage that [Inlay] represented to them that they would have and that they thought they had purchased. Given this, it is necessary to protect the public that [Inlay's] Iowa insurance producer's license be revoked. [Inlay's] actions are some of the most egregious violations of Iowa insurance law and the public trust that can be committed.

Ex. A8 to Noyes Decl. at AgOne000020-AgOne000021.

         15. Inlay was placing insurance policies through Agency One during the time he was investigated by the IDOI and at the time his Iowa license was revoked. Ex. A38 to Noyes Decl. at IIAN 0103.

         16. The Nebraska Department of Insurance (" NDOI" ) commenced an investigation into Inlay's conduct as a licensed insurance producer in August 2010. Ex. A39 to Noyes Decl. at NDOI0000002390.

         17. The NDOI suspended Inlay's Nebraska insurance license on October 6, 2010. Id. at NDOI0000002392-NDOI0000002394.

         18. Siroky admits that she became aware in November 2010 that the IDOI had revoked Inlay's insurance license. Ex. A9 to Noyes Decl., Resp. 6.

         19. Siroky further admits that she was aware no later than December 31, 2010 that the NDOI had suspended Inlay's insurance license. Id., Resp. 7.

         20. In November 2010, Farmers Mutual of Nebraska, a carrier with whom Agency One was appointed and with whom Agency One placed insurance policies, advised Siroky that it was terminating Inlay's agency authorization because Inlay had lost his Iowa license. Ex. A1 to Noyes Decl. at 81:8-25.[6]

         21. Despite her awareness of his licensing and disciplinary issues with the Departments of Insurance in two states, the consumer complaints that had been lodged against him and the insurance company client concerns, Siroky did not terminate

Page 894

her business relationship with Inlay, and instead allowed him to continue to work for Agency One in the Sioux City, Iowa office throughout 2010 and well into 2011. Id. at 91:12-15.[7]

         22. Siroky, who worked in the David City, Nebraska office, did not undertake to supervise Inlay's activities in connection with his work for Agency One after she became aware that his Iowa license had been revoked. Id. at 92:1-18, 93:23-94:2.[8]

         23. After November 2010, Siroky was aware that new insurance policies were being issued out of the Agency One Sioux City office where Inlay worked. Id. At 88:17-21.[9] From December 2010 and thereafter, Agency One retained 100% of the commissions on those policies. Id. at 89:2-6.

         24. Inlay continued to write new policies of insurance out of the Sioux City office. Id. at 94:3-9, 95:2-5, 98:10-25.

         25. On or about December 7, 2010, while working for Agency One, Inlay submitted an application for a homeowner's property insurance policy to Met P& C on behalf of Patricia Potter and Sam Dedios (collectively " Potter" ). Id. at 95:2-5; Ex. A10 to Noyes Decl. at 2, 5. In the application, Inlay described the property to be insured as a one-story, 1500 square foot single family residential dwelling built in 1958. Ex. A10 to Noyes Decl. at 5.

         26. The property description Inlay submitted on the Potter application was consistent with Met P& C's underwriting guidelines. Id. at 2.

         27. However, the property that Potter sought to insure was actually a multi-dwelling, two story apartment building. Id. Met P& C's underwriting guidelines did not allow Agency One or Inlay to issue a property insurance policy on multidwelling, multi-unit properties. Id. at 2, 56.

         28. If the Potter application had accurately reflected the nature of the property to be insured, Met P& C would not have issued the policy. Id. at 6; Ex. A11 to Noyes Decl. at WIC00215.

         29. Based on Inlay's inaccurate description, Met P& C issued a property policy to Potter for the period December 10, 2010 to December 10, 2011. See Ex. A11 to Noyes Decl.; Ex. A10 to the Noyes Decl. at 5; Ex. A1 to the Noyes Decl. at 96:4-6.

         30. Siroky admitted that Inlay was the individual who submitted the application and produced the Potter policy. Ex. A1 to Noyes Decl. at 94:20-95:5.

         31. In early 2011, Inlay's work performance began to deteriorate and he was absent from the office on numerous occasions. Ex. A1 to Noyes Decl. at 100:19-101:8.[10]

Page 895

          32. Inlay began to fall behind on his financial obligations with respect to the operation of the Sioux City Agency One office and, in May 2011, Siroky began paying the employees in that office who were to be paid by Inlay. Ex. A10 to Noyes Decl. at 5.

         33. On April 20, 2011, the NDOI contacted Siroky by telephone followed by a letter dated April 21, 2011. Ex. A5 to Noyes Decl. at NDOI0000004932. The NDOI requested information regarding Siroky's business relationship with Inlay and policies he had written after March 15, 2011. Id. at NDOI0000004933.

         34. Siroky sent a letter dated May 6, 2011 to the NDOI. Id. In the letter, Siroky admitted that she was aware in November 2010 that Inlay's Iowa license had been revoked. Id. at NDOI0000004932.

         35. Notwithstanding all of these issues and developments, Siroky did not terminate Inlay's employment with Agency One until August 2011. Ex. A1 to the Noyes Decl. at 91:12-15.

         36. At that time, Siroky moved all of the Sioux City files to the David City office. Id. at 108:9-20, 109:8-13.

         37. Siroky and another Agency One employee reviewed the files and determined that Inlay had included inaccurate information in some policy applications. Id. at 109:8-13, 121:17122:22.

         38. The Potter policy was due to expire in December 2011, after Inlay had left the employ of Agency One. Id. at 96:4-20. Despite the incorrect description of the property in the original application, Agency One facilitated the renewal of the Potter policy in December 2011. Id. at 96:21-97:13. Because Met P& C was not advised of any inaccuracies in the original application that was filled out and submitted by Inlay, Met P& C renewed the Potter policy in December 2011 for an annual term. Ex. A10 to Noyes Decl. at 5.

         39. On January 12, 2012, during the 2011-2012 term of the Potter policy, the Potter property was destroyed by fire. Ex. A2 to the Noyes Decl. at ¶ 10.

         40. The Potters submitted the claim to Met P& C, which paid the loss. Id. at ¶ 11; Ex. A10 to Noyes Decl. at 5-6.

         41. From 1996 until 2012, Agency One's insurance industry errors and omissions coverage was provided by Westport. Ex. A1 to Noyes Decl. at 137:10-18.

         42. In regard to the 2011-2012 policy, Westport allowed Agency One to submit its application for errors and omissions coverage electronically. Id. at 148:6-25; Ex. A12 to Noyes Decl. at 44:9-24, 123:10-20. To facilitate Agency One's application, Westport provided Agency One an internet link to a web-based application. Ex. A12 to Noyes Decl. at 44:9-24, 123:10-20.

         43. The application included the following question:

24. Has any past or present agency personnel been the subject of complaints filed and/or disciplinary action by any insurance regulatory authority or convicted of criminal activity?

Ex. A13 to Noyes Decl. at WIC00016.

         44. Question 24 was answered in the negative. Id. ; Ex. A1 to Noyes Decl. at 50:151:4, 150:23-151:6.[11]

         45. Siroky understood it was her responsibility as the applicant to review the application, fill in any missing information and ensure that all information included in the application submitted to Westport was accurate. Ex. A1 to Noyes Decl. at 151:23-152:4.[12]

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          46. Siroky did undertake to review the application, including Question 24, fill in any missing information and ensure that all information included in the application was accurate. Id. at 141:11-147:19.[13]

         47. Siroky typed her initials in the signature line of the application, thereby representing that all information and responses were accurate. Id. at 153:15-155:10. Accordingly, the 2011 Agency One policy application was " signed" electronically by Agency One's principal, Pam Siroky, on February 1, 2011, when she typed her initials " PS" in the signature line of the application. Id. ; Ex. A13 to Noyes Decl. at WIC00027.

         48. Siroky then caused the application to be submitted to Westport as the application of Agency One for errors and omissions coverage for the policy period incepting February 16, 2011. Ex. A1 to Noyes Decl. at 155:11-19; Ex. A9 to Noyes Decl., Resp. 11.

         49. Siroky and Agency One admit that Question 24 on the application should have been answered " yes" based on the information known to Siroky at the time because Siroky and Agency One knew, months before Siroky signed and submitted the application for insurance to Westport, that Inlay's Iowa license had been suspended and/or revoked, and also knew that his Nebraska license had been suspended. Ex. A1 to Noyes Decl. at 50:1-51:4, 162:9-13; Ex. A9 to Noyes Decl., Resp. 6-10.

         50. Siroky admits that she should have made sure the answer to Question 24 was " Yes" based on Siroky's knowledge at the time that Inlay's Iowa license had been suspended and/or revoked in late November 2010. Id. at 50:1-51:4, 162:9-13.

         51. Siroky also personally completed and submitted a Mergers and Acquisition Supplement (dated February 10, 2011) regarding Inlay's business to Westport as part of its application for the 2011 Westport policy. Ex. A1 to Noyes Decl. at 155:20-162:8; Ex. A13 to Noyes Decl. at WIC00028-WIC00030.[14]

         52. In the Mergers and Acquisition Supplement dated February 10, 2011, Siroky stated that " Doug Inlay ... will ... write under our agency umbrella." (emphasis added.) Ex. A13 to Noyes Decl. at WIC00028.[15]

         53. Westport issued Policy No. WED4NE066184505, to the Named Insured Agency One Insurance, Inc. which was in effect for the policy period of February 16, 2011 to February 16, 2012 (the " Westport Policy" ). Ex. A14 to Noyes Decl. at WIC00055.

         54. The policy period was subsequently extended to May 27, 2012. Id. at WIC00204.

         55. Westport first learned that Inlay's license had been revoked in July 2011, when responding to inquiries from the Iowa and Nebraska DOIs. Ex. A15 to Noyes Decl. at WIC000521-WIC000522. The Iowa DOI noted in an email to the Westport underwriter that Inlay's Iowa license had been revoked in November 2010 and his Nebraska license was suspended. Id. at WIC000522.

         56. As a result of the information it learned from the Iowa and Nebraska DOIs, Westport endeavored to find out from Agency One what it knew about Inlay's licensure issues and when Agency

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One obtained that information. Ex. A16 to Noyes Decl. at WIC000613.

         57. Agency One responded to Westport's inquiries in a series of electronic mail messages to the broker, Brenda Kaiser. Ex. A17 to Noyes Decl. at IIAN 0215-IIAN 0216; Ex. A18 to Noyes Decl. at IIAN 0222.

         58. At no time did Agency One advise Westport that Siroky knew in November 2010 that Inlay's Iowa license had been revoked. Ex. A1 to Noyes Decl. at 51:11-52:2. Instead, Siroky implied that she had first found out in mid-2011. Indeed, in an August 2, 2011 email to Ms. Kaiser, Siroky stated " The only thing I was aware of was the Prudential Suit trying to enforce their non-compete." Ex. A18 to Noyes Decl., Ex. 9 at IIAN 0222 (emphasis added).[16]

         59. Moreover, Siroky told Westport in August 2011 that she had taken custody of all of the files in Inlay's office and was planning on " auditing all the files" to address any issues caused by Inlay's unlicensed activities. Ex. A41 to Noyes Decl. at AgOne000167.[17]

         60. In addition, Siroky also reported to Westport in February 2012 that " [w]e have worked diligently for the past 6 months trying to make sure we have closed the gap on any potential E& O claims that could have occurred as a result of Inlay's actions. As of this date I am happy to report that our efforts have been successful." Ex. A42 to Noyes Decl. at IIAN 0307. (emphasis added).[18]

         61. Westport received a January 27, 2012 letter from the Nebraska DOI inquiring about Westport's knowledge of Inlay's licensing problems and Westport's coverage for him and Agency One under the Westport Policy. Ex. A19 to Noyes Decl. at WIC00546-WIC00547. Westport responded on February 17, 2012. Ex. A20 to Noyes Decl. at WIC00458-WIC00460.[19]

         62. In an email exchange between Westport and the Nebraska DOI on February 22-23, 2012, the Nebraska DOI advised Westport for the first time that Siroky had been aware prior to the date she signed the Westport application for the 2011-2012 Westport policy that Inlay had lost his license. Ex. A21 to Noyes Decl. at WIC00524-WIC00525. In response, Westport asked the Nebraska DOI to provide any evidence the DOI had of Siroky's knowledge. Id. at WIC00524.[20]

         63. In February 2012, the Nebraska DOI forwarded to Westport a letter dated November 12, 2011 from Siroky in which Siroky admitted that she knew that the Iowa DOI revoked Inlay's license in November 2010. Ex. A22 to Noyes Decl. at WIC01151; Ex. A23 to Noyes Decl. at WIC00313. Westport responded to the Nebraska DOI in a letter dated March 22, 2012. Ex. A23 to Noyes Decl. at WIC00540-WIC00541.[21]

         64. The 2011-2012 Westport Policy was to expire on February 16, 2012. Ex. A14 to Noyes Decl. at WIC00055. Because the information Westport had received up to

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that time raised certain questions regarding the operations of Agency One and the licensure status of its agents and employees and was otherwise incomplete, to allow Agency One time to provide full information needed for Westport to underwrite the policy, Westport agreed to extend the policy period to April 16, 2012 in exchange for an additional premium, which was paid. Ex. A25 to Noyes Decl. at IIAN 0319; Ex. A14 to Noyes Decl. at WIC00121-WIC00122; Ex. A1 to Noyes Decl. at 229:18-230:1.

         65. In March 2012, Ms. Kaiser forwarded to the Westport underwriter an email from Siroky in which Siroky again admitted learning in November 2010 that Inlay had lost his Iowa license. Ex. A40 to Noyes Decl. at AgOne000016.[22]

         66. Westport added an endorsement to the policy effective March 26, 2012, which stated:

         SPECIFIED INDIVIDUAL ENTITY EXCLUSION

This INSURANCE INDUSTRY PROFESSIONALS " coverage unit(s)" does not apply to any " claim" or " loss" arising out of any " wrongful act" in the performance of business services by DOUG INLAY or any vicarious liability or apparent authority for liability for any " wrongful act" in the performance of business services by DOUG INLAY.[23]
All other conditions remain unchanged.
This endorsement forms a part of the policy to which attached, effective on the inception date of the policy unless otherwise stated herein.
(The information below is required when this endorsement is issued subsequent to the ...

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