SUSAN WEBBER WRIGHT, District Judge.
The Arkansas Insurance Commissioner (the "Receiver") serves as the official receiver for Cosmopolitan Life Insurance Company ("Cosmo"), and in that capacity, he commenced this action in state court pursuant to Ark. Code Ann. § 23-case 89-101
From 2005 through March 2009, John Mathis Lile, III ("Lile") served as the president of Cosmo, and he owned a minority share of the company. Lile also had majority or sole ownership of a separate company, Advanced Brokerage of America, Inc. ("AIBA"), and he served as the company's CEO.
In 2009, Cosmo was insolvent, and the Arkansas Insurance Department took the company into receivership. The Receiver filed suit against Lile and AIBA, charging that Lile had misappropriated Cosmo's funds. The Receiver sought relief under two causes of action: breach of fiduciary duties and conversion.
The facts alleged in the renewed complaint are these.
To fund the ECHP, participating employers paid monthly fees to AIBA. Pursuant to an unwritten business plan (the "Business Plan"),
Prior to 2006, Cosmo and AIBA operated independently. Each company maintained separate financial records and followed the Business Plan.
Subsequently, Lile hired one person to handle the finances of both AIBA and Cosmo, which enabled Lile to misuse funds earmarked for Cosmo under Business Plan. By April 2007, Cosmo was 75 days behind on paying claims, and some health care providers refused to honor ECHP insurance.
Lile misapplied or misappropriated Cosmo's funds by (1) failing to distribute fee payments to Cosmo, in the total amount of $1,405,749.50;
With the renewed complaint, the Receiver sought a $2,371,358.50 judgment under three theories of relief: breach of fiduciary duties, conversion, and negligence. In support of each claim, the Receiver realleged and incorporated the factual allegations set forth above and additional allegations:
• In support of the claim for breach of fiduciary duties, the Receiver alleged that as President of Cosmo, Lile breached his fiduciary duties to Cosmo and its shareholders "to [ensure] Cosmo's compliance with the terms of the business model, the ELC treaty, or both, and not to use Cosmo's funds to pay for obligations for which Cosmo was not liable."
• Under the conversion claim, the Receiver alleged that "Lile made improper and unauthorized disbursements from Cosmo to or on behalf of himself, [AIBA], and ECHA in the amount of at least $2,371,358.50."
• Under the heading "alternatively, negligence," the renewed complaint stated: "In the event the jury determines that the Receiver failed to carry the burden to show that Defendants acted intentionally, the Receiver asks for an alternative finding . . . that Defendants acted negligently."
In 2013, with the Underlying Lawsuit still pending, Lile and AIBA filed suit ("the Coverage Lawsuit") against Gotham, the defendant in this case, charging that the insurer breached a duty under errors-and-omissions policies to defend AIBA in the Underlying Lawsuit and three additional suits brought by small businesses that had self-funded insurance plans administered by AIBA.
In 2014, Lile pleaded guilty in this Court to theft or embezzlement in connection with health care, in violation of 18 U.S.C. § 669. The elements of the federal crime included that Lile converted to his own personal use, without lawful authority, assets belonging to Cosmo, and that he acted knowingly and willfully. In pleading guilty, Lile acknowledged that from 2005 through March 2009, he used a credit card issued to him as president of Cosmo for thousands of dollars of nonbusiness-related expenses, all of which were paid by Cosmo or AIBA. On July 23, 2015, Lile was sentenced to serve twelve months and one day in prison, three years of supervised release, and he was ordered to pay $118,500 in restitution to Cosmo.
In 2017, the Receiver, Lile, and AIBA entered a settlement agreement in the Underlying Lawsuit, which called for a $2 million Consent Judgment in favor of the Receiver. The Receiver agreed that he would never collect or attempt to collect the Consent Judgment from Lile or AIBA.
In 2018, the Receiver filed this action against Gotham pursuant to Ark. Code Ann. § 23-89-101, seeking to collect the $2 million Consent Judgment from Gotham, pursuant to the Policy. Section 23-89-101 allows a party injured by an insured to maintain a direct action against the insurer and collect, by way of subrogation, an unsatisfied judgment against the insured. "The statute . . . is contractual in nature . . . and places [the injured party] in the shoes of the insured suing the insurer alleging coverage under the insurance agreement." Equity Fire & Cas. Ins. Co. v. Coleman, 326 Ark. 100, 102, 928 S.W.2d 796, 797 (1996).
The Receiver seeks judgment in its favor, asserting that the Policy covers the amount owing under the Consent Judgment. Gotham also seeks judgment in its favor, asserting that (1) the Consent Judgment is not covered under the Policy's insuring agreement, (2) the Receiver's claim for satisfaction of the Consent Judgment is excluded under several Policy provisions, and (3) the Collection Lawsuit settlement released Gotham from all obligations under the Policy before entry of the Consent Judgment.
Summary judgment is proper if the evidence, when viewed in the light most favorable to the non-moving party, shows that there is no genuine issue of material fact and that the defendant is entitled to entry of judgment as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 371, 322 (1986). When a nonmoving party cannot make an adequate showing on a necessary element of the case on which that party bears the burden of proof, the moving party is entitled to judgment as a matter of law. Celotex, 477 at 322-23. A factual dispute is genuine if the evidence could cause a reasonable jury to enter a verdict for either party. Miner v. Local 373, 513 F.3d 854, 860 (8
Here, the Receiver, who stands in the shoes of the insured, has the burden to make a prima facie case of coverage by showing that the Consent Judgment is covered under the Policy's Insuring Agreement. Reynolds v. Shelter Mut. Ins. Co., 313 Ark. 145, 852 S.W.2d 799 (1993) (citing Southern Farm Bureau Casualty Ins. Co. v. Reed, 231 Ark. 759, 332 S.W.2d 615 (1960)). If the Receiver makes that showing and Gotham relies on an exclusionary provision to deny coverage, Gotham has the burden to show that the Receiver's claim is excluded under the Policy.
Arkansas law governs the substantive issues in this case and holds that "an insurance policy, having been drafted by the insurer without consultation with the insured, is to be interpreted and construed liberally in favor of the insured and strictly against the insurer." Noland v. Farmers Ins. Co., 319 Ark. 449, 892 S.W.2d 271, 272 (1995). However, "[t]he terms of an insurance contract are not to be rewritten under the rule of strict construction against the company issuing it so as to bind the insurer to a risk which is plainly excluded and for which it was not paid." Smith v. Shelter Mut. Ins. Co., 327 Ark. 208, 937 S.W.2d 180, 182 (1997) (quotations and citations omitted).
The Policy's Insuring Agreement provides coverage for "Damages . . . arising out of a negligent act, error, or omission resulting in a claim for financial loss" provided, among other things, that the "negligent act, error, or omission took place in the rendering of or failure to render Professional Services."
The "Named Insured" is AIBA, and "Covered Persons and Entities" include "any present or former principal, partner, officer, director, or employee of the Named Insured . . ., but only as it respects Professional Services rendered on behalf of the Named Insured."
Gotham argues that the Consent Judgment is not covered under the Policy because (1) Lile is not an insured or "Covered Person" with respect to the Consent Judgment, (2) the Consent Judgment does not meet the Policy's definition of "Damages," and (3) coverage is excluded under several provisions.
The negligence claim charged that Lile breached legal duties to Cosmo to ensure the company's compliance with terms of the Business Model, ELC treaty, or both, and to refrain from using Cosmo's funds to pay for obligations for which Cosmo was not liable. The Receiver alleged no negligent act apart from Lile's breach of duty to Cosmo, and he sought to hold AIBA vicariously liable for Lile's conduct. Gotham argues Lile did not qualify as a "Covered Person" for the purpose of the negligence claim because his failure to carry out legal duties owed to Cosmo did not amount to rendering "Professional Services" (specified in the Policy as third-party administration of employee benefits and/or placement and administration of stop loss) on behalf of AIBA.
The Receiver counters that the renewed complaint charged that Lile used AIBA to administer the ECHP product "so as to" damage Cosmo,
Gotham next argues that even assuming that Lile qualified as a "Covered Person," the Consent Judgment represents money to which Lile and, by extension, AIBA, were not entitled and therefore does not qualify as "Damages" under the Policy.
Each cause of action set forth in the renewed complaint sought $2,371,358.50. The amount sought was not based on an assessment of monetary compensation for an injury such as lost profits or property damage. Instead, as alleged in the renewed complaint, it was the specific amount that Lile took from Cosmo. Despite that the Receiver sought $2,371,358.50 under the label "Alternatively, Negligence" and that AIBA and Lile consented to a $2 million judgment on that claim, the amount sought represented or was the "substantial equivalent" of the "return of . . . monies to which [the] insured was not entitled." Assuming only for the sake of review that Lile qualified as a "Covered Person" under the Policy, the Court finds that the Consent Judgment does not qualify as "Damages" as defined under the Policy.
While the Court finds that the undisputed record shows that the Receiver's claim is not covered under the Policy's Insuring Agreement, the Court will also address Gotham's claim that the Receiver's claim is precluded under Policy Exclusions A, C, Q, X, and CC, which provide that the Policy does not apply to any claim
Exclusion A bars coverage for Claims based on or arising out of:
Gotham argues that Exclusion A precludes coverage because the Underlying Lawsuit charges that Lile diverted funds from Cosmo and that Lile pleaded guilty to criminal conduct—specifically, that he converted to his own personal use, assets belonging to Cosmo. The Receiver responds that Lile's guilty plea was limited to his misuse of a credit card, and he argues that Exclusion A is inapplicable because the Consent Judgment is based only on the negligence claim, which he contends "does not include damages from the intentional misuse of the [credit] card."
First, the "Alternatively, Negligence" claim did seek recovery of money that Lile took via the misuse of a credit card. With each claim set forth in the renewed complaint, the Receiver sought the total amount that he claimed Lile appropriated from Cosmo by several means, one being the misuse of a credit card. Second, while Exclusion A does not exclude claims that include allegations of a "negligent act . . . in the performance of your Professional Services," the allegations in the renewed complaint and the undisputed record show that Lile misappropriated Cosmo's funds by intentionally disregarding the Business Plan, not by means of a negligent act in the performance of "your Professional Services." The Court finds that Exclusion A, in unambiguous terms, excludes coverage in this case.
Exclusion C bars coverage for claims based upon or arising out of "any business entity not named in the Declarations or an Endorsement to this Policy for which the Insured does not have Management Control . . ."
Gotham's argument assumes that the Receiver's claim is based upon or arises out of the conduct of Cosmo's business. However, it is undisputed that Lile ignored the Business Plan that governed the distribution of employer fees to Cosmo, a function assigned to AIBA, and he diverted money according to his own scheme. Given these facts, it is far from clear that the Consent Judgment arose out of the conduct of Cosmo's business and that Exclusion C applies in this case.
Exclusion Q, in unambiguous language, bars claims based upon or arising out of "the return, restitution, disgorgement, forfeiture or recession of any personal profit, remuneration or financial advantage, or monies to which an insured was not entitled."
Exclusion X appears in an endorsement section of the Policy listing additional exclusions under the heading Third Party Administrators. Exclusion X states: "This policy does not apply to any Claim or Claim Expenses based upon or arising out of . . . the commingling, conversion, misappropriation or defalcation of funds or other property."
The Supreme Court of Arkansas interprets the term "arising out of" broadly and requires only a "but-for" causal relation or connection. See Hartford Fire Ins. Co. v. State Farm Mut. Auto. Ins. Co., 574 S.W.2d 265, 267 (Ark.1978). The allegations set forth in the Underlying Lawsuit clearly demonstrate that Lile's commingling, conversion, misappropriation or defalcation of Cosmo's funds is causally related to the Consent Judgment. Based on the undisputed facts, the Court finds, as a matter of law, that a causal connection exists between the Lile's misappropriation of Cosmo's funds and the Consent Judgment.
Exclusion CC, which appears under the Third Party Administrator endorsement, excludes any claim "based upon or arising out of . . . due to or involving directly or indirectly, the insolvency, receivership, bankruptcy, liquidation or financial inability to pay, of any insurance company or of any self-funded or partially self-funded insurance or benefit plan or trust."
The Receiver asserts that Exclusion CC is ambiguous due to the language: "based upon or arising out of . . . due to or involving directly or indirectly . . . ." Language is ambiguous if there is doubt or uncertainty as to its meaning and it is susceptible to more than one reasonable interpretation. Harasyn v. St. Paul Guardian Ins. Co., 349 Ark. 9, 75 S.W.3d 696 (2002). Here, although the language of the prefatory phrase is somewhat awkward, the meaning is certain: Exclusion CC is broadly written to encompass claims that are based upon, arising out of, due to or involving directly or indirectly, the insolvency of an insurance company or self-funded benefit plan.
The Receiver next argues that even though the receivership proceedings triggered his claim, the negligence claim in the Underlying Lawsuit did not depend on insolvency. The plain language of Exclusion CC, however, does not require that a claim "depend" on insolvency. The allegations set forth in the Underlying Lawsuit, including those asserted in support of the negligence claim, leave no question that the Receiver's claims were "due to or involving directly or indirectly" Cosmo's insolvency, which the Receiver alleged was caused by Lile's misappropriation of funds.
Gotham notes, correctly, that § 23-89-101 permits a judgment creditor to step into the shoes of the insured and claim the insured's right to payment of covered claims. Gotham argues that Cosmo's rights are no greater than those of AIBA, the insured, and that the settlement agreement entered in 2013 by Gotham, Lile, and AIBA in connection with the Collection Lawsuit precludes the Receiver's claim.
The Receiver argues that the subrogation rights of an injured party under § 23-89-101, which are contractual in nature, arise immediately upon the happening of the injury giving rise to his claim, and they cannot be destroyed by a subsequent settlement between the insured and insurer. The Court agrees. Once a cause of action accrued to Cosmo based the injury inflicted by Lile's misconduct, Cosmo's subrogation rights were fixed and could not be destroyed via agreement between Gotham, Lile, and AIBA. Obtaining a judgment and unsuccessful efforts to collect it were conditions precedent to bringing this direct action, but Cosmo's rights remained despite the settlement agreement. In addressing a prior version of § 23-89-101, the Eighth Circuit observed:
Spann v. Commercial Standard Ins. Co. of Dallas, Tex., 82 F.2d 593, 599 (8th Cir. 1936) (internal citations omitted).
For the reasons stated, the Court finds that Plaintiff's claim is not covered under the insurance policy at issue, and Defendant is entitled to judgment in its favor. Defendant's cross-motion for summary judgment [ECF No. 25] is GRANTED, and pursuant to the judgment entered together with this order, Plaintiff's claim is DENIED, and this action is DISMISSED WITH PREJUDICE.
IT IS SO ORDERED.
Ark. Code Ann. § 23-89-101.
