JOHN J. McCONNELL, JR., District Judge.
Bank Rhode Island ("BankRI") lost a civil trial in Rhode Island Superior Court and the jury rendered a multimillion-dollar damages award against it. BankRI is now before the Court seeking its defense costs and indemnification from its insurer. The question presented in this case is whether BankRI's Directors and Officers ("D & O") insurance policy ("Policy") with Progressive Casualty Insurance Company ("Progressive") covers defense costs and/or indemnifies the settlement. More specifically, this Court must decide whether the Policy provides coverage for the loss and, if so, whether the Policy's "Internet Services Exclusion" excludes any coverage. Also at issue is the applicability of the Policy's "Allocation Provision." The Court concludes that the Amended Judgment represents a covered loss, that the Internet Services Exclusion does not apply to significant aspects of the loss but does apply to some aspects of the loss, and that the Allocation Provision governs how the determination is made between covered and uncovered losses.
Empire Merchandising Corporation and its principal, Joseph Pietrantonio (collectively "EMC"), had been a BankRI (or its predecessor
Beginning around 2003, an EMC employee, Rhonda Hastings engaged in a scheme to embezzle funds from EMC. The state court trial justice, Justice Michael A. Silverstein, in his post-trial motions decision, described the embezzlement scheme as follows:
Empire Merch. Corp., 2011 WL 4368923, at 2-3 (internal citations omitted).
EMC filed a seventeen-count complaint
A month-long trial proceeded in Rhode Island Superior Court in February 2011.
The jury returned a mixed verdict. (ECF No. 23-5.) It found for EMC on its breach of written contract claim and breach of implied covenant of good faith and fair dealing, finding "BankRI breached its `business loan agreement' with plaintiffs by providing online access to Ms. Hastings," but finding that BankRI did not breach its "deposit account agreement." (Id. at 1-2.) It also found for EMC on its negligence claim, finding that "BankRI breached its duty of ordinary care owed to Plaintiffs," but again finding that it did not breach its "deposit account agreement." (Id. at 3.) It also found 15% comparative fault by EMC. (Id. at 4.) Finally, it found for EMC on its "Intentional Infliction of Emotional Distress" claim. (Id. at 5.)
Progressive issued a claims-made D & O Policy to BankRI, effective during the pertinent time period from June 1, 2005 through June 1, 2008. (ECF No. 23 at ¶ 1.) The Policy includes an Entity Errors and Omissions Liability Endorsement that provides up to $5 million of coverage per claim for losses resulting from claims arising from "Wrongful Acts" made during the policy period. (Id. at ¶ 2.) The Policy defines "Wrongful Acts" to include "any actual or alleged ... neglect or breach of duty by the Company or by any person or entity for which the Company is legally responsible." (Id. at ¶ 3.) The Policy also contains an "Internet Services Exclusion" that excluded coverage for a loss arising out of "(1) services through the transmission of data to or from an Internet website." (ECF No. 23-2 at 39-40.)
In the face of EMC's initial claim and the resulting Rhode Island Superior Court litigation, BankRI timely notified Progressive of the potential loss. (ECF Nos. 29-9, 29-11.) Progressive informed BankRI that it believed "the vast majority of the Lawsuit is outside the scope of coverage afforded by the policy or excluded from coverage under the Policy [and therefore] it will be necessary for Progressive and the Bank to agree upon a fair and reasonable
After the state court trial, and knowing Progressive's position on coverage, BankRI filed this four-count action against Progressive.
BankRI moved for summary judgment as to Counts I and II (declaratory judgment and breach of contract) (ECF No. 22), to which Progressive filed an opposition and a cross-motion for summary judgment. (ECF No. 26.) BankRI filed an objection to Progressive's cross-motion (ECF No. 38) and a reply to Progressive's objection to its Motion for Summary Judgment. (ECF No. 39.) Progressive filed a reply to BankRI's objection to its cross-motion. (ECF No. 44.) Both parties filed numerous statements of disputed and undisputed facts. (ECF Nos. 23, 28, 32, 40, 41, 45.) The Court held a hearing on the motions on February 21, 2014.
Rule 56(a) of the Federal Rules of Civil Procedure directs courts to "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." Wilson v. Moulison N. Corp., 639 F.3d 1, 6 (1st Cir.2011). The Court must view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in his [or her] favor. Id. However, the non-moving party "must point to `competent evidence' and `specific facts' to stave off summary judgment." Tropigas de P.R., Inc. v. Certain Underwriters at Lloyd's of London, 637 F.3d 53, 56 (1st Cir.2011) (quoting McCarthy v. Nw. Airlines, Inc., 56 F.3d 313, 315 (1st Cir.1995)). A summary judgment motion cannot be defeated by "conclusory allegations, improbable inferences, acrimonious invective, or rank speculation." Ahern v. Shinseki, 629 F.3d 49, 54 (1st Cir.2010).
When evaluating "cross-motions for summary judgment, the standard does not change; [courts] view each motion separately and draw all reasonable inferences in favor of the respective non-moving party." Bonneau v. Plumbers & Pipefitters Local Union 51 Pension Trust Fund ex rel. Bolton, 736 F.3d 33, 36 (1st Cir.2013) (quoting Roman Catholic Bishop of Springfield v. City of Springfield, 724 F.3d 78, 89 (1st Cir.2013)).
Because this case is before this federal court by virtue of diversity jurisdiction, Rhode Island state substantive law applies because Progressive issued the Policy in Rhode Island to BankRI, a Rhode Island corporation. Rosciti v. Ins. Co. of Penn., 659 F.3d 92, 96 (1st Cir.2011).
Under Rhode Island law, "when the terms of an insurance policy are found to be clear and unambiguous, judicial construction is at an end. The contract terms must be applied as written and the parties bound by them." Amica Mut. Ins. Co. v. Stretcker, 583 A.2d 550, 551 (R.I.1990). In determining whether contract language is clear and unambiguous, a court should interpret "the parties' intent based solely on the written words," and give unambiguous words their "plain and natural meaning." In Re Newport Plaza Assocs., 985 F.2d 640, 645 (1st Cir.1993) (applying Rhode Island law). Contract language is ambiguous where it is "reasonably susceptible of different constructions." Westinghouse Broad. Co., Inc. v. Dial Media, Inc., 122 R.I. 571, 410 A.2d 986, 991 (1980). "[W]hen an insurance contract is ambiguous or subject to more than one reasonable interpretation, it will be strictly construed against the insurer." Sentry Ins. Co. v. Grenga, 556 A.2d 998, 999 (R.I. 1989); see also Peloquin v. Haven Health Ctr. of Greenville, LLC, 61 A.3d 419, 431-32 (R.I. 2013).
The analysis in an insurance coverage case begins with a determination of whether there is coverage under the provisions of the policy. The insured carries the burden of proof on the initial question of coverage. Gen. Acc. Ins. Co. of Am. v. Am. Nat. Fireproofing, Inc., 716 A.2d 751, 757 (R.I.1998) (the insured "bears the burden of proving a prima facie case, including but not limited to the existence and validity of a policy, the loss as within the policy coverage, and the insurer's refusal to make payments as required by the terms of the policy.") "[A]ny doubts as to the adequacy of the pleadings to encompass an occurrence within the scope of the policy must be resolved in the insured's favor." Allstate Ins. Co. v. Russo, 641 A.2d 1304, 1306 (R.I.1994) (citing Employers' Fire Ins. Co. v. Beals, 103 R.I. 623, 240 A.2d 397, 403 (1968) (abrogated on other grounds)). After the insured sustains its initial burden, the next step involves a review of any exclusion to the coverage that may apply. The burden shifts to the insurance company to prove the exclusion's applicability. Gen. Acc., 716 A.2d at 757 ("[t]he insurer then bears the burden of proving the applicability of policy exclusions....")
In order to establish coverage and seek indemnification
This D & O Policy contains an Entity Errors and Omissions Endorsement that provides coverage to the insured for a "Loss" resulting from a claim for "Wrongful Acts" for which the insured is legally obligated to pay. "The Insurer will pay on behalf of the Company, Loss in excess of the applicable Retention resulting from Claims first made during the Policy Period against the Company for which the Company is legally obligated to pay for Wrongful Acts." (ECF No. 23-2 at 35.) The relevant terms in the current dispute are "Wrongful Acts" and "Loss."
The Policy defines a Wrongful Act as:
(Id. at 36.)
The plaintiffs in the EMC litigation accused BankRI of, among other matters, negligence and breach of duty. (ECF No. 23-3 at 13-14, Count VI.) At the conclusion of the trial, the jury found that BankRI breached its duty of ordinary care, was negligent, and that this conduct was a proximate cause of the harm to EMC. (See "Jury Interrogatory," ECF No. 23-5 at 3 ("Negligence Claim: 1. Do you find that Defendant BankRI breached its duty of ordinary care owed to Plaintiffs? YES ... 2. Do you find that Defendant BankRI's breach of its duty to plaintiffs was a proximate cause of Plaintiffs' injuries? YES.")).
The jury returned a verdict awarding damages in the EMC litigation totaling $1,415,047 for EMC and $495,678.47 for EMC's principal Joseph Pietrantonio. (ECF No. 23-5 at 8.) The Rhode Island Superior Court entered an Amended Judgment against BankRI. (ECF No. 23-7.) The Amended Judgment provides, in part:
(Id. at 2.) (emphasis added.)
Progressive contends that, because the Amended Judgment provides
The Court agrees with BankRI. An indivisible injury caused by multiple causes of action does not diminish the recovery available to the insured. The language in the Amended Judgment created a legal obligation for BankRI to pay the amount to EMC because of both the breach of contract counts and the negligence count. (ECF No. 23-7 at 2.) In other words, if the Rhode Island Supreme Court overturned the breach of contract counts, BankRI would still be liable for the full amount of damages because of the negligence and breach of duty findings. Simply because the damages could not be parsed between various causes of action does not change the fact that BankRI suffered a Loss because of the jury's negligence verdict and nor does it relieve Progressive of its obligation to pay the Loss incurred. See Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1433 (9th Cir.1995) ("[The insurer] would be responsible for any amount of liability that is attributable in any way to the wrongful acts or omissions of the directors and officers, regardless of whether the corporation could be found concurrently liable on any given claim under an independent theory.").
BankRI has met its burden of establishing coverage for indemnity based on the damages it incurred resulting from the jury's negligence damages award and the Amended Judgment entered. The Court finds that BankRI incurred a covered Loss based on Wrongful Acts. If the Policy did not contain any coverage exclusion, the Court's inquiry would end here and Progressive would have to indemnify BankRI for the entire Loss. There is such an exclusion, however, so the Court continues its analysis.
The Policy's Internet Services Exclusion requires the Court to decide if it excludes indemnification for any or all of the Amended Judgment. Because BankRI established coverage for the Loss, the burden shifts to Progressive to establish that the Internet Services Exclusion applies. Children's Friend & Serv. v. St. Paul Fire & Marine Ins. Co., 893 A.2d 222, 230 (R.I.2006).
The Court will first review how courts look at policy exclusion language. Case law directs that the Court must review the exclusion based on how an ordinary reader of the Policy would have understood it. Sentry Ins., 556 A.2d at 999. The Court must be conscious of the directive that Progressive has the burden of proving the exclusion and that any ambiguities in the language of the Policy are "strictly construed against the insured." Id. Exclusions should be read narrowly and ambiguities in the applicability of the exclusion should be resolved in favor of coverage, consistent with Rhode Island's
With these legal tenets in mind, the Court now turns to the language of the Internet Services Exclusion,
(ECF No. 23-2 at 39-40.) (emphasis added.) Based on this language, the question for the Court is whether Progressive has established that the negligence and breach of duty of ordinary care claims in the EMC litigation "arise[] out of or in any way involve[]" BankRI providing "services through the transmission of data to or from an Internet website." (Id.)
Progressive argues that the "Negligence cause of action primarily, if not exclusively, arose from and involved the Bank's on-line services. Thus very little, if any, coverage is even potentially available for any sums incurred by the Bank in connection with that cause of action." (ECF No. 26-1 at 20.) BankRI disagrees, responding that Progressive's assertion that "an extremely small portion of the settlement amount [BankRI] paid would be allocated as a covered loss strains credulity." (ECF No. 39 at 7.)
After a review of the information the parties submitted from the EMC litigation, it is clear that at least some of the negligence claims against BankRI in some way involved providing services through the transmission of data over the internet. For example, the transfer of money from EMC's line of credit through BankRI's internet banking system by an employee not authorized by EMC appears to be the type of claim that falls within a plain reading of the Internet Services Exclusion.
It is equally clear, however, that many of the facts supporting the negligence claims against BankRI do not fall within the exclusion. The essence of the EMC negligence claims appears to be that BankRI failed to notify EMC about suspicious
(ECF No. 22 at 3.)
BankRI's allegations of mismanagement of EMC accounts, and others, appear to the Court to form a significant part of the negligence claim that EMC brought against BankRI and represent covered Losses and that fall outside of the Internet Services Exclusion. These claims do not arise out of and are not in any way involved with BankRI providing services through the transmission of data to or from an internet website. Therefore, after a review of the evidence submitted to date, this Court agrees with BankRI and rejects Progressive's analysis of the application of the exclusion to the facts of this case.
Generally, "the apportionment of the settlement amounts between covered and non-covered claims is typically resolved through negotiation and private agreement, rather than litigation, as litigation costs can be astronomical." In re Feature Realty Litig., 634 F.Supp.2d 1163, 1171-72 (E.D.Wash.2007). Indeed, the Policy's Allocation Provision provides in part:
(ECF No. 23-2 at 18.)
However, when the parties are unable "to use their best efforts to reach a proper allocation" (though hope springs eternal that the parties will use their best efforts to reach a proper allocation in this case), they can turn to the Allocation Provision of the Policy for guidance on the allocation process. That provision states:
(Id.) The type of situation that the insured and the insurance company are in here appears to be precisely the type of matter that invokes this provision. Because this Court found that there were both covered and uncovered Losses as part of the Amended Judgment and settlement, an allocation must take place.
Plaintiff's Motion for Partial Summary Judgment (ECF No. 22) and Defendant's Motion for Summary Judgment (ECF No. 26) are GRANTED IN PART AND DENIED IN PART. As to Count I (declaratory judgment) the Court finds that:
Plaintiff's partial Motion for Summary Judgment as to Count II is GRANTED with damages to be determined as outlined above.
All other portions of the motions are otherwise DENIED.
IT IS SO ORDERED.
The Court does not place any significance on Progressive's alleged lack of affirmative action in the EMC litigation to demand a jury finding that would have differentiated between excludable and non-excludable acts. Progressive was not a party to the EMC litigation and it had no way to assert its interest in how the EMC litigation was conducted. Although it had an attorney observing parts of the trial, it had no standing to request the trial justice to mold the jury verdict form to answer the insurance coverage questions. The Court, therefore, does not hold the lack of parsing of the jury's verdict against Progressive.
