Date: 07-07-2014

Case Style: Automatic Protection Systems Corp., Tom Palmer and Chad Mariska v. Federal Insurance Company

Case Number: CV-2014-548

Judge: Dana Kuehn

Court: District Court, Tulsa County, Oklahoma

Plaintiff's Attorney: Kevin R. Kelley and William R. McMahon

Defendant's Attorney: Nichole Thompson, Chubb Group, Dallas, Texas

Description: Automatic Protection Systems Corp., Tom Palmer and Chad Mariska v. Federal Insurance Company

1. Automatic Protection Systems, Corp. is an Oklahoma corporation, organized a&i existing under the laws of the State of Oklahoma with its principal offices iii Broken Arrow, Tulsa County, Oklahoma. Tom Palmer is an individual aàil former President of Automatic Protection Systems, Corp., residing in Tulsa County, Oklahoma; and Chad Mariska is the current President of Automatic Protection Systems, Corp., residing in Tulsa County, Oklahoma.
2. Federal Insurance Company is a corporation authorized to do business in Oklahoma and is doing business in Oklahoma.
JURISDICTION AND VENUE
3. The contract in dispute was entered into in Tulsa County, Oklahoma and the insurance policy at issue does not state the place of performance. Further, said policy contains Endorsement number 14-02-4 195 (08/200 1 ed.) Oklahoma Amendatory Endorsement To General Terms & Conditions Section and the Endorsement 14-02-t 7970, Oklahoma Addendum to the Declarations.
4. The controversy in this action sounds in contract and pursuant to pleading under
12 0.5. Section 2008A(2) and under 120.S. Section 2009, no monetary damages are being requested. Rather, the Plaintiffs demand relief regarding the Court’s
interpretation of the contract at issue, and attorney fees and costs.
FACTS OF CLAIM
5. Automatic Protection Systems Corporation (hereinafter referred to as “APS”) began its operations 198t selling fire suppression systems. Marvin Morris was hired by APS in 1996 for the purpose of opening a Houston office for APS’ wholly owned subsidiary.
6. On or about May 31, 2012, Mr. Morris was fired for cause. Suit was filed by Mr. Morris on November 7, 2012, naming APS, Tom Palmer and Chad Mariska, as defendants alleging quantum meruit damages arising from the allegation that those named defendants each owed him unpaid earned commissions for sales which were not completed at the time of his termination.
7. On December 12, 2012, the insurer, Federal Insurance Company, issued a letter advising the Plaintiffs, APS, Tom Palmer and Chad Mariska, that although the three Plaintiffs were insureds under the policy, no coverage existed for the loss, due to the fact that the loss is not a “Wrongful Act” as defined by the policy, as it stemmed from the ordinary obligation of paying an employee. Federal Insurance Company (hereinafter referenced as “Federal”) provided a defense for the claim, but denied coverage for liability and indemnification for the loss.
DIRECTORS & OFFICERS and ENTITY LIABILITY COVERAGE
(Request for Declaratory Judgment)
8. There is coverage for indemnification of the liability for Mr. Morris’ claim under the Federal insurance policy.
9. Federal Insurance Company issued policy number 8209-2582, a renewed claims made policy, with effective dates of renewed November 1, 2012 to November 1, 2013 to Automatic Protective Systems Corporation; said policy contained Directors and Officers and Entity Liability; Fiduciary Liability and Employment Practices Liability Coverage.
10. Mr. Morris’ claim is that the Plaintiffs, APS, Tom Palmer and Chad Mariska, allegedly failed to pay him commissions allegedly due to him for sales not closed at the time of his termination by APS. Federal provided a defense of the litigation, but denied indemnification for liability, yet said policy contained the Renewal Policy Endorsement, No 14-02-1844901/20/il), to-wit:
“In consideration of the premium charged, it is agreed that:
(1) This Policy (together with all endorsement attached hereto, the Renewal Policy”) has been issued as a renewal of 8209-2582
issued to AUTOMATIC PROTECTION SYSTEMS CORPORATION
by Federal Insurance Company (such policy together
with all endorsements attached thereto, the “Expiring Policy”). The terms and conditions of either the Renewal Policy or the Expiring
Policy, whichever in their entirely is more favorable to the Insured, shall govern with respect to any Claim first made during the Policy Period under any Liability Coverage Part, or any Coverage
Event under any Non-Liability Coverage Part; provided however, that in all events, any applicable Retention and Limit of Liability of the Renewal Policy shall apply to all such Claims or Coverage
Events.”
(see Plaintiffs’ Exhibit No, 1, Endorsement/Rider No. 14-02-18449 (11/2011) to General Terms and Conditions, p. 1)
11. Therefore, any denial of coverage must review both policies for the more favorable coverage to the Insureds. Defendant Federal has never provided a coverage determination of the previous policy from November 1, 2011 through November 1, 2012, as required by the renewed policy.
12. The first coverage section of the policy is the Directors & Officers and Entity Liability Coverage. The insuring agreement coverage part is divided into three (3) insuring agreements providing separate coverage parts. The Directors & Officers and Entity Liability Coverage Part insuring clause for all three (3) insuring agreements reads as follows:
“I. INSURING CLAUSES
Insuring Clause (A): Individual Non-Indemnified Liability Coverage
(A) The Company shall pay, on behalf of an Insured Person, Loss on account of a Claim first made against the Insured Person during the Policy Period, or the Extended Reporting Period if applicable, to the extent that such Loss is not indemnified by an
Organization.
Insuring Clause (B): Individual Indemnified Liability Coverage
(B) The Company shall pay, on behalf of an OrganizatioR, Loss on account of a Claim first made against an Insured Person during
the Policy Period, or the Extended Reporting Period if applicable, to the extent the Organization indemnifies the Insured Person for such Loss as permitted or required by law.
Insuring Clause (C): Entity Liability Coverage
(C) The Company shall pay, on behalf of an Organization, Loss on
account of a Claim first made against the Organization during the Policy Period, or the Extended Reporting Period if applicable.”
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, I. INSURING CLAUSES, p. 1 of 11)
13. Clearly, the insuring agreement of the policy intends to pay a claim for liability of an Insured Person under Part (A) when a ross is reported during the policy period; and requires a separate deductible for this risk as shown on the declaration page of the policy. The Part (B) insuring agreement provides coverage for APS if it indemnities the insured person for liability, which also includes a separate deductible for this risk. Lastly, Part (C) insuring agreement is solely for APS and also contains a separate deductible for said coverage. Therefore, there are three (3) insuring agreements under the D&O Coverage Part. For coverage to be extended the loss only needs to meet the requirements of one of these insuring agreements.
The D&O coverage part of the policy defines “claim” as follows:
“IV. DEF1NITIONS
Claim means:
(A) when used in reference to the coverage provided by Insuring
Clauses (A), Individual Non-Indemnified Liability Coverage, or (B), Individual Indemnified Liability Coverage, any:
(1) written demand first received by an InsHred for monetary or non-monetary relief, including injunctive relief;
(2) civil proceeding commenced by the service of a complaint or similar pleading; ... or...
against an Insured Person for a Wrongful Act, including any appeal therefrom;
(7) civil, criminal, administrative or regulatory investigation or interview of an insured Person for a Wrongful Act once
such Insured Person is identified in writing by an investigating authority as a target of such investigation or interview, including when such Insured Person is served with a target letter or similar document; or”
(C) when used in reference to the coverage provided by Insuring Clause (C), Entity Liability Coverage, any:
(I) written demand first received by an Insured for monetary or non-monetary relief, including injunctive relief;
(2) civil proceeding commenced by the service of a complaint or similar pleading; ... or...
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, IV. DEFINITIONS, p. 2 of 11)
14. The allegation of Mr. Morris’ lawsuit is defined by the D& 0 Coverage Part of the policy’s language as a claim against the lnsureds, APS, Tom Palmer and Chad Mariska under all three (3) insuring parts of the D&O Coverage Part, which the insuring agreement declares it will cover.
The D&O Coverage Part of the policy defines Insured as, to wit:
“IV. DEFINITIONS
Insured means any Organization and any Insured Person.
Insured Person means any Executive or Employee of an Organization acting either in his or her capacity as such or in an Outside Capacity.
(see Plaintiffs’ Exhibit No. 1, IV. DEFINITIONS, p. 3 of 11)
Loss means the amount which an Insured becomes legally obligated to
pay as a result of any claim, including:
(A) compensatory damages;
(B) punitive, exemplary or multiplied damages, if an to the extent such damages are insurable under the law of the jurisdiction most favorable to the insurability of damages, provided such jurisdiction
has a substantial relations to the Insured, the Company, or the Claim giving rise to such damages;
(C) civil fines or civil penalties assessed against an Insured Person, including civil penalties assessed against an Insured Person pursuant to 15 U.S.C. Section 78dd-2(g)(2)(B) (the Foreign Corrupt Practices Act), if and to the extent such fines or penalties are insurable under the law of the jurisdiction in which such fines or penalties are assessed;
(D) judgments, including pre-judgment and post-judgment interest;
(F) settlements; and
(F) Defense Costs.
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, IV. DEFINITIONS, p.4 of 11)
Further, the policy continues to define, to-wit:
“IV. DEFINITIONS
Wrongful Act means any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by:
(A) for purposes of coverage under Insuring Clauses (A), Individual
Non-Indemnified Liability Coverage, and (B) Individual
Indemnified Liability Coverage, any Insured Person while acting
in his or her capacity as such or any matter claimed against any
Insured Person solely by reason of his or her status as such; or
(B) for purpose of coverage under Insuring Clause (C), Entity Liability Coverage, any Organization.”
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, IV. DEFINITIONS, p. 5 of 11)
15. Mr. Morris’ allegation meet the definitions under the policy language of the all three (3) insuring agreements of the D&O Coverage Part as a Loss caused by a Wrongful Act. Further the three Plaintiffs in the ease at bar also meet the definition of
Insured and Insured Person under all three (3) insuring agreement clauses contained in the D&O Coverage Part of the policy.
16, Unless Mr. Morris’ allegation is excluded under all three (3) insuring agreement clauses of the D&O Coverage Part of the policy, there is coverage for APS, Tom Palmer and Chad Mariska in this situation. Therefore, the D&O Coverage Part of the policy’s exclusions must be examined, to-wit:
“V. EXCLUSIONS
(A) EXCLUSIONS APPLICABLE TO ALL INSURING CLAUSES
The Company shall not be liable for Loss on account of any Claim:
(6) Insured versus Insured
(c) brought by an Insured Person in any capacity against an Insured, except with respect to a Claim:
(i) for employment-rclated Wrongful Acts against an Insured Person; ... or”
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, V. EXCLUS1ONS, p. 6 of 11)
This exclusion refers to a lawsuit filed by one “Insured” against another;
therefore, is not applicable to the loss at bar, as Mr. Morris is not an insured under the policy. Mr. Morris had not worked for APS for seven (7) months prior to the loss, nor was he acting on behalf of APS at the time of the loss. Therefore, said exclusion does not apply to Morris’ claim. In the alternative, if Mr. Morris is determined an “Insured” as to the policy’s definition, then the exception would apply and there would be coverage for the loss.
“(B) EXCLUSIONS APPICABLE TO INSURING CLAUSE (C), ENTITY LIABILITY COVERAGE, ONLY
The Company shall not be liable for Loss on account of any Claim against an Organization:
(2) Employment Practices
based upon, arising from or in consequence of any employment- related Wrongful Act.”
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, V. EXCLUSIONS, p. 7 of 11)
17. Therefore, insuring agreement Clause (C) does not provide coverage for Morris’ loss and no deductible is applicable under Clause (C) of the DECO Coverage Part of the policy. Mr. Morris’ claim is not excluded under Insuring Clauses (A) and (B). To put it simply the liability for Tom Palmer and Chad Mariska and any indemnification given by ALPS for that exposure are covered under the two (2) above insuring clauses. Further, the language in Exclusion (B) clearly shows that Federal took into account the type of risk Mr. Morris is claiming in the policy and chose to exclude solely the company, but provide coverage under Insuring Clauses (A) and (B) for Tom Palmer, Chad Mariska and any indemnification provided to them by APS. Therefore, the only deductible applicable to this loss would be those declared on the Declaration Page of the policy for Clauses (A) and (B).
18. The only other exclusion applicable to Mr. Morris’ allegations against APS, Tom Palmer and Mariska is as follows, to-wit:
“V. EXCLUSIONS
(9) Conduct
based upon, arising from or in consequence of:
(a) any deliberately fraudulent act or omission, or any willful violation of any statute or regulations, by an Insured, if a final, non- appealable adjudication in any underlying proceeding or action (other than a declaratory proceeding or action brought by or
against the Company) establishes such an act or omission or violations; or
(b) an Insured having gained any profit, remuneration or other
advantage to which such Insured was not legally entitled, if a final, non-appealable adjudication in any underlying proceeding or
action (other than a declaratory proceeding or action brought by or against the Company) establishes the gaining of such profit, remuneration or advantage,
provided that:
(i) no conduct pertaining to any Insured Person shall be imputed by any other Insured Person; and
(ii) any conduct pertaining to any past, present, or future chief
financial office, chief executive officer or chief operating office (or any equivalent position to any of the foregoing) of an
Organization shall be imputed to such Organization and its Subsidiaries.”
(see Plaintiffs’ Exhibit No. 1, Directors & Officers and Entity Liability Coverage Part, V. EXCLUSIONS, p. 7 of 11)
19. The above exclusion excludes fraudulent acts and any act in which the insured would gain any profit to which it was not legally entitled, yet said exclusion provides an exception, to-wit: unless, the insureds are alleging that one insured made the other do the dirty deed, which is not the case at bar. Nor has fraud been alleged or inferred in Mr. Morris’ claim. This exclusion does not exclude the loss at bar.
20. Therefore, in summ4ry, the policy issued by Federal Insurance Company, number
8209-2582 with effective dates of November 1, 2012 to November 1, 2013, provides indemnification as well as the defense of the suit which has already been provided only for the individuals and not APS, for Mr. Morris’ suit filed on November 7, 2012. Under the Directors & Officers and Entity Liability Coverage Part insuring clauses (A) and (B)
of the Federal policy No. 8209-2682 coverage for indemnification and defense of this loss exists for all three (3) Insureds.
EMPLOYMENT PRACTICES LIABILITY COVERAGE
(Request for Declaratory Judgment)
21. Further review of the policy issued by Federal Insurance Company, policy
number 8209-2582 with effective dates of November 1, 2012 to November 1, 2013, to
determine if coverage and a defense cost are available for the suit filed on November 7,
2012 by Mr, Marvin W. Morris, Jr., under said policy’s Employment Practices Liability
Coverage Part, to-wit:
“I. INSURING CLAUSES
Insuring Clause (A): Employment Practices Liability Coverage
(A) The Company shall pay, on behalf of an Insured, Loss on account of an
Employment Claim first made against the Insured during the Policy
Period, or the Extended Reporting Period if applicable, provided the
Company’s maximum liability for this insuring Clause (A) shall be the
Limit of Liability set forth in Item 3(A) of the EPL Declarations or the
unpaid portion of the Maximum Aggregate Limit of Liability set forth in
Item 2 of the EPL Declaration for each Policy Year, whichever is less...
(see Plaintiffs’ Exhibit No. 1, Employment Practices Liability Coverage Part,
I. INSURING CLAUSES, p. 1 of 12)
The definitions that are applicable to the Employment Practices Liability Coverage Part, are as follows, to-wit:
“II. Definitions
For purposes of this Coverage Part:
Employment Claim means:
(A) (]) any:
(a) written demand first received by an Insured for monetary or non-monetary relief, including a written demand for reinstatement, reemployment, re-engagement or injunctive relief .,, or
(b) civil proceeding commenced by the service of a complaint or similar pleading;’
Breach of Employment Contact means any breach of any oral, written or implied contract or contractual obligation including any contract arising out of any personnel manual, employee handbook, policy statement or other representation.”
(see Plaintiffs’ Exhibit No. 1, Employment Practices Liability Coverage Part, 11. DEFINITIONS, p. 2 of 12)
Ako, see the definition under the Employment Practices Liability Coverage Part of the following:
“Employment Practices Wrongful Act means any actual or alleged:
(A) Breach of Employment Contract; or
committed, attempted, or allegedly committed or attempted by an Organization or by an Insured Person while acting in his or her capacity as such.
(see Plaintiffs’ Exhibit No. 1, Employment Practices Liability Coverage Part, II. DEFINITIONS, p. 3 of 12)
Further, the Employment Practices Liability Coverage Part defines a Loss as:
“Loss means the amount which an Insured becomes legally obligated to pay as a result of any Claim, including:
(A) compensatory damages;
(C) back pay, front pay, claimant’s attorney’s fees awarded by a court against an Insured or agreed to by the Company in connection with a settlement (but only if such claimant’s attorney’s fees are agreed to in writing by the Company at the time of or after a final settlement;
(D) judgments, including pre-judgment and post-judgment interest;
(F) settlements; and
(F) Defense Costs,”
22. The only exclusion under the EPL Coverage Part of the policy that would apply to the loss at bar is as follows, to-wit:
“111. EXCLUSIONS
The Company shall not be liable for Loss on account of any Claim:
(L) Breach of Written Employment Contract
based upon, arising from or in consequence of any breach of any written employment contract, provided that this Exclusion (L) shall not apply to:
(1) Loss to the extent an Insured would have been liable for such Loss in the absence of such written employment contract; or
(2) Defense Costs.”
(see Plaintiffs’ Exhibit No. 1, Employment Practices Liability Coverage Part, III. EXCLUSIONS, p. 9 of 12)
23. Said exclusion does not apply to the loss at issue as the suit filed is not for breach of a ‘Written Employment Contract’ Further, said exclusion declares that coverage would exist if the Insureds would be liable for this loss whether or not a written employment contract existed; thereby meeting the requirement of the exception to the exclusion.
24. The Employment Practices Liability Coverage Part provides coverage for back pay and compensatory damages. Said Part of the policy provides coverage for both insured persons and any indemnification APS is required to provide the individuals. This loss is covered in its entirety under the D&O Coverage Part Insuring Agreement Clauses (A) and (B) of the policy, as well as, the EPL Coverage Part of the policy.
APPLICABLE RETENTION
(Request for Declaratory Judgment)
25. The last contractual issue before this Court is the applicable retention or deductible for the loss at bar. The Directors & Officers and Entity Liability Coverage Part under policy No. 8209-2582 with effective dates of November 1, 2012 to November 1, 2013 has no retention for Insuring Clause (A) and (B)z only Insuring Clause (C) has a retention of $10,000.00. (see Plaintiffs Exhibit No. 1, D&O DECLARATIONS, p. 1 of
1) Since there is no coverage for this loss under Insuring Clause (C) the $10,000.00 retention would not apply; also, there is no retention applicable for a covered loss under Insuring Clauses (A) & (B). Therefore, no retention is applicable under the D&O and Entity Liability Coverage Part.
26. As to the Employment Practices liability Coverage Part there is a retention of
$5,000.00. (see Plaintiffs’ Exhibit No. 1. EPL DECLARATIONS, p. 1 of 1). The policy includes how the retention may apply, to-wit:
“V. RETENTION
(A) The Company’s liability under this Coverage Part shall apply only to that part of each Loss which is excess of the applicable Retention set forth in Item 4 of the EPL Declarations and such Retention shall be borne by the Insureds uninsured and at their own risk.
(C) If different parts of a single Claim are subject to different Retentions in different Coverage Parts, the applicable Retentions shall be applied
separately to each part of such Claim, but the sum of such Retentions shall not exceed the largest applicable Retention.
27, Tn the case at bar there are no separate parts of the loss to apply separately to the different coverage parts. Said policy language clearly states that EPL retention would only apply if the claim contained several parts, some of which are covered under one section of the policy and others that would be covered under another section of the policy, which is not the case at bar. The singular claim is fully covered under the D&O Coverage Part of the policy insuring agreements Clause (A) and (B) and no retention would apply, as there is no separate part of the claim left to be indemnified by the EPL Coverage Part.
28. The retention clause of the EPL Coverage Part becomes ambiguous when a singular loss is fully covered by more than one part of the policy. The policy language infers that it must be a whole part, not a divided part of the loss to apply the retention. There is no clarity if two (2) coverage parts provide coverage for a singular loss as in this situation, whether or not Federal may determine which part of the policy to pay the loss from in order to collect a retention. Nor is there any language in the policy that would allow Federal to choose which part of the policy a singular claim will be applied to for the purpose of enforcing the retention. In the case at bar the language of this section of the policy is unclear and therefore creates an ambiguous conundrum, and should be ruled in favor of the Insured. Therefore No retention would be applied.
29. There exists an actual controversy between the Plaintiffs and the Defendant as to whether or not the alleged loss should be indenmified under the terms, conditions and policy language of the contract.
30. Plaintiffs have complied with all the conditions under the policy(ies) and hereby reserve any and all rights under the policy and applicable laws.
31. Plaintiffs have sustained expenses including attorneys’ fees and costs, and said
expenses are continuing to accrue. The Court should award Plaintiffs reasonable
attorneys’ fees as the prevailing party in declaratory judgment action, see 36 0.5. Section
3629.
WHEREFORE, premises considered Plaintiffs pray that this Court enter a judgment in their favor declaring:
A. That coverage for indemnification of the loss exists under D&O Coverage Part of the Federal policy.
B. That coverage for indemnification of the loss exists under EPL Coverage Part of the Federal policy.
C. That no retention is enforceable due to the ambiguity of the policy language.
D. That Plaintiffs should recovery their attorneys’ fees and costs.
E. That Plaintiffs are entitled to recover any and all other relief as allowed under Oklahoma law.

Outcome: Settled and dismissed with prejudice.

Plaintiff's Experts:

Defendant's Experts:

Comments: