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Beacon Mutual Insurance Co. v. St. Paul Mercury Insurance Co.

United States District Court, District of Rhode Island

March 30, 2014

THE BEACON MUTUAL INSURANCE COMPANY, Plaintiff,
v.
THE ST. PAUL MERCURY INSURANCE COMPANY, Defendant.

MEMORANDUM AND ORDER

JOHN J. McCONNELL, JR., United States District Judge.

This case presents "what some might regard as an oxymoron: an interesting insurance coverage question." Vt. Mut. Ins. Co. v. Zamsky, 732 F.3d 37, 39 (1st Cir. 2013). This saga could be captioned "The Mystery Of The Missing Insuring Agreement."

This diversity declaratory judgment action involves the termination of two employees by plaintiff Beacon Mutual Insurance Company (Beacon), and a subsequent settlement with one of them. At issue is whether an insurance policy issued by defendant St. Paul Mercury Insurance Company (St. Paul) covers the cost of the settlement Beacon paid to that former employee and further whether it will cover a possible settlement with the other former employee.

The insurance policy at issue references an Employment Practices Liability Insuring Agreement (EPLIA), but no document bearing that title was attached to or provided with the policy originally issued to Beacon. Several years after Beacon obtained the policy, St. Paul supplied a document entitled "Employment Practices Liability Insuring Agreement" that contains a grant of coverage and several exclusions. For example, coverage for losses owed under written contracts and agreements are excluded.

Beacon argues that the insurance policy it originally received is whole without a separate document captioned EPLIA, and the policy provides broad coverage encompassing the settlement with one former employee and a future settlement with the other. St. Paul responds that without the EPLIA there is no valid coverage, so this Court must either reform the policy to include the forgotten EPLIA or utilize the policy's liberalization notice to evaluate coverage under Beacon's prior policy. Either way, St. Paul asserts that there is not coverage for the settlement and potential settlement because of exclusions contained in the EPLIA and the prior policy.

On cross-motions for summary judgment, this Court must decide whether either party is entitled to judgment on Beacon's claims for a declaratory judgment, breach of contract, anticipatory breach of contract, bad faith refusal to pay, or breach of the duty of good faith and fair dealing.

I. BACKGROUND[1]

Beacon is a workers' compensation insurance carrier organized under Rhode Island law. In 2003, Beacon obtained an "Employment Practices PLUS® Policy, " Policy No. 104181647, from Travelers Casualty and Surety Company of America (the Travelers Policy) providing "claims made" coverage effective from October 1, 2003 to October 1, 2004. The Travelers Policy excludes from coverage damages for several types of claims, such as claims seeking severance pay, damages under an employment agreement, and payments based on unpaid services. Beacon renewed the Travelers Policy for the period October 1, 2004 to October 1, 2005 with the same terms.

For the October 1, 2005 to October 1, 2006 period, Beacon obtained from St. Paul a "SelectOneSM for Insurance Companies" Policy, No. 569CM0889 (the St. Paul-Travelers Policy[2]). (ECF No. 24-2.) Its Policy Declarations indicate that 104181647 was the "Prior Policy Number, " and a Delivery Invoice included in the St. Paul-Travelers Policy states that it is a "Renewal of Policy #104181647." Id. at 2, 6. Beacon also renewed the St. Paul-Travelers Policy for the October 1, 2006 to October 1, 2007 period.

At the beginning of 2006, Employee A and Employee B were employed by Beacon.[3]Both entered into several written agreements with Beacon containing the terms of their employment. In April of 2006, Beacon terminated Employee A and Employee B "for cause." Employee A and Employee B subsequently were indicted on criminal charges, but neither was convicted of any crime.[4]

Both employees have demanded recovery from Beacon under various theories, including assertions that they are owed compensation under the terms of their employment agreements. Employee B also sought reimbursement for certain defense costs incurred in the criminal proceeding. Beacon settled with Employee B. This settlement included Beacon paying money to Employee B for contractual claims and money to reimburse Employee B's counsel for fees and costs associated with the criminal matter.

Employee A has made numerous allegations against Beacon and has demanded recovery under various theories, including pursuant to his employment contracts. At the time this lawsuit was filed, there was not a settlement between Beacon and Employee A.

Beacon provided written notice of the terminations of Employee A and Employee B to St. Paul, characterizing them as "Circumstances that May Give Rise to Claims." Beacon supplemented this notice several times. St. Paul responded, denying coverage because "the only coverage for this matter ... is for reasonable and necessary defense costs incurred in the defense of the Claim." St. Paul explained that several exclusions in the EPLIA appear to apply to the claims related to Employee A and Employee B. For example, the EPLIA states that the insurer is not liable for "amounts owed under a written contract or agreement" or for "compensation earned by the claimant in the course of employment but not paid by the Company, " but the insurer will pay defense costs associated with such claims.

Beacon replied to the denial, asserting that it did not receive a copy of the EPLIA prior to putting St. Paul on notice of the claims of Employee A and Employee B. Since the EPLIA was not issued with the original St. Paul-Travelers Policy, Beacon argued that St. Paul could not rely on its exclusions to deny coverage. Beacon also notified St. Paul that it had settled with Employee B and sought to be reimbursed for the total amount of that settlement. Regarding Employee A, Beacon notified St. Paul that it anticipated engaging in settlement discussions and expected to be indemnified for any such settlement amount.

In November of 2011, Beacon filed this lawsuit seeking, among other things, "a judgment . . . declaring the rights, duties, obligations and/or other legal relations of the parties. (ECF No. 1 at 7.)

A. The St. Paul-Travelers Policy

1. The "Missing" Insuring Agreement

Generally speaking, the St. Paul-Travelers Policy provides employment liability insurance coverage. Its Declarations state that it provides "claims made" coverage for the period October 1, 2005 through October 1, 2006. (ECF No. 24-2 at 2-3.) The Declarations also state that "Coverage is effective only for Insuring Agreements made part of this Policy and for which an Each Insuring Agreement Limit of Liability is set forth below." Id. at 2 (emphases added). The Table of Contents begins with the following statement: "This policy is not valid without a Policy Declarations and one or more insuring agreements. The only Insuring Agreements made a part of this policy are those set forth and selected in the Policy Declarations." Id. at 9 (emphasis added).

The parties agree that no insuring agreement captioned EPLIA was physically attached to or provided with the St. Paul-Travelers Policy when it was originally issued.

2. The Liberalization Notice

The St. Paul-Travelers Policy contains a Liberalization Notice[5] explaining that two insurance companies — St. Paul and Travelers — joined together to create The St. Paul-Travelers Companies, Inc. Id. at 27. It specifies that in order "[t]o simplify procedures and better serve [its] customers, many Specialty Commercial insurance policies that were previously issued by both companies will now be written only on St. Paul Travelers forms."[6] Id. The Liberalization Notice provides that the "new St. Paul Travelers Policy, which may be one package policy providing coverages that were previously provided through separate Travelers policies, will contain coverage terms and conditions substantially similar to those in your Travelers policy or policies." Id. (emphasis added). Further, it explains that "in order to make this transition as easy as possible for you, we will adjust any claims under your new St. Paul Travelers policy based upon the terms and conditions of either your expiring Travelers policy that would have applied to the claim or your first new St. Paul Travelers policy, whichever is broader...." Id. (emphasis added).

Beacon renewed the St. Paul-Travelers Policy for the 2006-2007 term, under Policy No. EC05700047. In October of 2007, St. Paul issued a Policy Change Endorsement adding Form IN006 to the 2006-2007 policy. This document is titled "EMPLOYMENT PRACTICES LIABILITY INSURING AGREEMENT" in the top left and has the identifier "IN006" as well as "Employment Practices Liability Insuring Agreement" at the bottom.[7] Form IN006 contains the following grant of coverage:

The Insurer shall pay on behalf of the Insured Loss for which the Insureds become legally obligated to pay on account of any Claim first made against them, individually or otherwise, during the Policy Period ... for an Employment Practices Act taking place before or during the Policy Period, provided that such Claim is brought by or on behalf of any . . . past, present or prospective Employee, officer of the Company, Independent Contractor or Leased Employee.

Form IN006 contains several exclusions. For example, it states that the Insurer is "not liable for that part of Loss that constitutes [] amounts owed under a written contract or agreement; . . .

compensation earned by the claimant in the course of employment but not paid by the Company including any unpaid salary, wages, or bonuses; . . . fringe ...


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