Greed often overrules common sense. When an insurer refuses to defend or indemnify its insured the plaintiff will take an agreed judgment against the defendant, then agree not to execute on the judgment in exchange for an assignment from the defendant of its right to sue the insurer. In so doing it takes a sure thing and exchanges it for a chance to collect from an insurer the bonus of punitive damages. If the defendant is financially able to pay a judgment the potential for punitive damages overcomes the desire to be indemnified.
In P&S LLC, v. National Union Fire Insurance Company of Pittsburgh, PA, Slip Copy, 2015 U.S. Dist. LEXIS 98881 (D.Colo., 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the District Court for the District of Colorado was faced with just such a situation where the insurer asked for declaratory judgment that an exclusion barred coverage.
During the summer of 2007, the manager at P&S contacted Private Escapes Platinum LLC (“Private Escapes”) seeking membership in its luxury destination travel club. Mr. Richard Keith was the CEO of Private Escapes. On September 13, 2007, Private Escapes announced it would be merging with Ultimate Resorts LLC, to create a new entity called Ultimate Escapes Holdings, LLC (“Ultimate Escapes”).
Before the merger, P&S entered into a Membership Agreement with Private Escapes and asserts that Mr. Keith induced it to enter into the agreement because he represented that P&S’s benefits under the Membership Agreement would be protected or grandfathered after the planned merger. Mr. Keith became Co-CEO of Ultimate Escapes.
After the merger, P&S was informed that it was now a member of Ultimate Escapes and that the terms of its Membership Agreement with Private Escapes would not be honored. Instead, P&S would be required to sign a new agreement with Ultimate Escapes in order to continue its travel club membership. Thereafter, P&S sought a refund of its membership deposit from Private Escapes.
Ultimately, on July 23, 2010, P&S entered into an agreement with Private Escapes and Ultimate Escapes in which Private Escapes and Ultimate Escapes agreed to pay P&S $135,000, in 18 installments, as “a partial refund of the Membership Fee” (the “2010 Settlement Agreement”). After Private Escapes and Ultimate Escapes failed to make the first settlement payment on August 1, 2010, P&S sent them notices of default. Then, on September 15, 2010, P&S filed a lawsuit against Private Escapes and Ultimate Escapes for breach of the 2010 Settlement Agreement. Directly thereafter, on September 20, 2010, Ultimate Escapes filed for Chapter 11 bankruptcy protection. As such, the lawsuit was stayed and eventually administratively closed.
Then, on May 20, 2011, P&S filed a complaint against Private Escapes and Richard Keith, as its CEO, in Denver County District Court (Case No. 11CV3742). In this underlying lawsuit, P&S alleged that Mr. Keith induced P&S to sign the Membership Agreement with Private Escapes by making misrepresentations about having grandfathered rights after the pending merger. In addition, P&S alleged that they failed to disclose Ultimate Escapes’ financial situation when negotiating and signing the 2010 Settlement Agreement.
Mr. Keith sought defense coverage from National Union under the Executive & Organization Liability Insurance Policy (the “Policy”) issued to Ultimate Escapes. National Union declined to provide Mr. Keith with a defense and denied coverage based on the Policy’s Specific Entity Exclusion – which provided that National Union “…shall not be liable for any Loss in connection with any Claim made against…[Private Escapes]…and/or any Executive or Employee thereof…” – via denial letter dated February 9, 2012.
On February 13, 2013, P&S settled the underlying lawsuit with Private Escapes, Mr. Keith, and Continental Casualty. Continental Casualty agreed to pay P&S $25,000. In addition, Mr. Keith also agreed to a stipulated judgment in P&S’s favor (in the amount of $450,000) and assigned his rights against National Union under the Policy to P&S.
P&S then filed this lawsuit (as Mr. Keith’s assignee) against National Union. In its Amended Complaint, P&S sought declaratory judgment, damages, and statutory damages with respect to benefits due, but unreasonably withheld by National Union under the Policy issued to Ultimate Escapes.
It allegedthat National Union owed coverage to Mr. Keith under the Policy for Executive & Organization liability coverage, but has refused to provide coverage.
National Union argued that the Policy does not provide coverage for P&S’s underlying claims pursuant to the “Specific Entity Exclusion” which excludes coverage for any loss in connection with any claim made against Private Escapes or its executives. National Union asserts that the Specific Entity Exclusion applies, as a matter of law, to bar coverage of the claims in P&S’s underlying lawsuit brought against Private Escapes and Richard Keith.
The court recognized that an insurance policy is a nothing more than a contract that should be interpreted consistently with the well-settled principles of contractual interpretation. As such, the words of the contract should be given their plain meaning according to common usage, and strained constructions should be avoided. Insurance contracts are not to be technically construed, but are to be construed as they would be understood by a person of ordinary intelligence.
To enforce an exclusion in a particular contract of insurance the insurer must establish that the exemption claimed applies in the particular case, and that the exclusions are not subject to any other reasonable interpretation. The insured has the burden to show that a claim is covered by the policy. Once met, the burden shifts to the insurer to show that a covered claim falls solely and entirely within a policy exclusion.
Endorsement #34 of the Policy contains the Specific Entity Exclusion, which provides that: “In consideration of the premium charged, it is hereby understood and agreed that the Insurer shall not be liable for any Loss in connection with any Claim made against or brought by or on behalf of any entity(ies) listed below and/or any Executive or Employee thereof; or by any security holder of the Organization whether directly or derivatively, unless such Claim is instigated and continued totally independent of, or without the intervention of such entity(ies) and/or any Executive or Employee thereof…: Private Escapes Holdings, LLC (including any subsidiary or affiliate thereof).”
The court concluded that the Specific Entity Exclusion is not ambiguous. By its plain language the exclusion applies to any loss “in connection with” any claim against Private Escapes or its executives. Here, the underlying lawsuit is brought against Private Escapes and Mr. Keith in his capacity as a Private Escapes’ executive.
To the extent that the factual assertions within the complaint include an allegation that Mr. Keith wrongfully acted in the underlying situation as an Ultimate Escapes’ executive, it does not change the fact that the loss alleged was in connection with a claim against Private Escapes. As such, it is unambiguously applicable to bar coverage for the loss.
The court rejected P&S’s argument that an “exception to the exclusion” reinstates coverage in this case. P&S maintains that the Specific Entity Exclusion provides coverage for a claim connected with Private Escapes when it is “instigated and continued totally independent of” Private Escapes and its executives.
Accordingly, the court agreed with National Union that the loss sought from Mr. Keith’s actions were clearly a loss in connection with a lawsuit against Private Escapes. The exclusion is unambiguous and applies to the case. The court found, therefore, that National Union has met its burden to prove that the Specific Entity Exclusion applied with regard to the the claim and National Union is entitled to summary judgment.
BAD FAITH CLAIMS
In addition, because the exclusion applies P&S’s claims seeking relief under common law and statutory bad faith are likewise foreclosed as a matter of law.
Insurance is, as the court cogently stated, is nothing more than a contract. When the terms of the contract are clear and unambiguous, it must be applied. In this case National Union knew, before it issued its policy, that there was a problem between the named insured and the entity known as Private Escapes so it specifically excluded any events related to that entity. With such a clear exclusion it is surprising that the plaintiffs were willing to take an assignment rather than try to collect from the defendant. The result proves that the decision to take the assignment was not wise.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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