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Security National Insurance Co. v. H.O.M.E., Inc.

United States District Court, D. North Dakota

May 18, 2018

SECURITY NATIONAL INSURANCE COMPANY, Plaintiff,
v.
H.O.M.E., INC., and LAURIS MOLBERT, Defendants. Jerry's Enterprises H.O.M.E. D&O Policy

          MEMORANDUM AND ORDER

          WILLIAM G. YOUNG, JUDGE.[1]

         I. INTRODUCTION

         This diversity suit asks this Court to construe two provisions of a Directors & Officers liability insurance policy (the “D&O Policy”) between Security National Insurance Company (“Security National”) and H.O.M.E., Inc. (“H.O.M.E.”), a closely-held company incorporated under the laws of North Dakota. Security National seeks declaratory relief stating it has no obligation to pay for any costs or losses resulting from the legal defense of H.O.M.E.'s President, Lauris Molbert, in an unrelated suit brought against him by his three siblings. Because the siblings allege their brother acted simultaneously in covered and noncovered capacities, the Court must determine as a threshold matter whether the siblings' suit is covered under the policy, which limits coverage to “insured persons acting solely in their capacity as director [or] officer.” If the Court finds coverage it must then decide whether the insurance company is nevertheless exempted from coverage under the policy's exception for suits brought by “any insured person in any capacity.” Specifically, the Court must decide whether the siblings' joint claims are excepted given that one of the siblings is also an insured person under the policy.

         Because the language of the insurance policy is clear on its face, Security National is entitled to judgment as matter of law. For the reasons stated herein, the Court grants Security National's motion for summary judgment and denies H.O.M.E.'s motion for partial summary judgment.

         II. UNDISPUTED FACTS[2]

         A. Allegations in the Underlying Litigation Giving Rise to the Instant Action.

         Ralph Molbert co-founded H.O.M.E., the parent corporation of Northland Financial (the “Bank”) and Northland Insurance Company. Mem. Defs.' Supp. Mot. Partial Summ. J. (“Defs.' Mem.”) 2, ECF No. 20; Mem. Supp. Pl.'s Mot. Summ. J. (“Pl.'s Mem.”) 3, ECF No. 25. During the 1990s, he began to transfer some of his shares in H.O.M.E., via a stock purchase agreement, to his four children: Lauris Molbert (“Lauris”), Kristi Benz (“Kristi”), Karna Kornkven (“Karna”), and Eric Molbert (“Eric”). Pl.'s Mem. 3; Defs.' Mem. 4. For the past twenty years, Lauris has served as President and a director of H.O.M.E. Pl.'s Mem. 2; Defs.' Mem. 2. Lauris is a licensed attorney in North Dakota and has provided legal advice to the Bank as an independent contractor. Pl.'s Mem. 3; H.O.M.E. Answer & Countercl. (“H.O.M.E. Answer”) ¶ 16, ECF No. 6; Compl. ¶ 3; Lauris Molbert Answer & Countercl. (“Molbert Answer”) ¶ 16, ECF No. 8. In 2005, Kristi began serving as a director at the Bank. Pl.'s Mem. 3; H.O.M.E. Answer ¶ 4; Molbert Answer ¶ 4.

         In 2015, Lauris sued Kristi, Karna, and Eric to enforce a provision in the stock purchase agreement that would allow him to exercise a call option and buy his siblings' shares. Compl. Ex. A., ECF No. 1-1; Defs.' Mem. 4. Kristi, Karna, and Eric jointly filed an answer in which they alleged nine counterclaims against Lauris. Compl. Ex. B, Answer & Countercl. (“Siblings' Countercl.”) ECF No. 1-2; Defs.' Mem. 4. The counterclaims form a single docket entry and make no distinction between the counter-claimants. Siblings' Countercl. 15-25; Pl.'s Mem. 5; Defs.' Mem. 4-5. Specifically, the siblings alleged:

1. Fraud related to the stock purchase agreement. Siblings' Countercl. 15.
2. Breach of fiduciary duty as a “shareholder, officer, director, and controller of, and as an attorney representing H.O.M.E.” Id. at 16.
3. Breach of fiduciary duty as a Trustee of the Molbert Farms Limited Partnership. Id. at 17.
4. Breach of fiduciary duty as “an attorney providing legal advice” to the siblings. Id. at 19.
5. Breach of fiduciary duty as a Trustee of the Ralph N. Molbert's Family Trust and two marital trusts. Id. at 20.
6. Violation of N.D.C.C. § 10-19.1-115, which prohibits directors from acting “in an unfairly prejudicial manner” toward shareholders. Id. at 21.
7. Violation of N.D.C.C. § 10-19.1-50 by failing to discharge his duties as a director in good faith and in the best interest of the corporation. Id. at 22.
8. Declaratory judgment stating that the Stock Purchase Agreement is not enforceable. Id. at 23.
9. Unjust enrichment for tortious and inequitable conduct.

Id. at 24.

         All the above claims arise from an event in 1993, in which the siblings allege Lauris presented the stock purchase agreement for them to sign and misrepresented various provisions relating to his ability to exercise the call option on their shares. Id. at 13-14.

         B. Undisputed Facts Surrounding Security National's Denial of Liability Insurance Coverage.

         In his capacity as President and a director of H.O.M.E., Lauris emailed Security National, H.O.M.E.'s D&O liability insurance provider, to request coverage for the costs of defending him against the siblings' counterclaims. Aff. Counsel Supp. of Security National's Mot. Summ. J. (“Pl.'s Aff.”), Ex. 8, ECF No. 26-8; Pl.'s Mem. 6; Defs.' Mem. 5. Security National responded with a letter denying coverage based on the D&O Policy's Insured vs. Insured Exclusion while also reserving the right to deny coverage based on other provisions. Compl., Ex. D, Aug. 10, 2015 Letter from Security National to H.O.M.E. (“Rejection Letter”) 10-11, ECF No. 1-4; Pl.'s Mem. 6; Defs.' Mem. 5. The Insured v. Insured Exclusion (“IvI Exclusion”) provides that Security National will not be liable to cover “any claim[3] by, on behalf of, or at the behest of . . . any insured person in any capacity.” Compl., Ex. C, Directors and Officers Liability Insurance Policy (“D&O Policy”) 17-18 (Section IV.A.20), ECF No. 1-3. Because directors and officers of H.O.M.E.'s subsidiaries are insured under the Policy, and Kristi was a director at the Bank, Kristi was an insured person under the D&O Policy -- a fact that is not contested. Pl.'s Mem. 11; Defs.' Mem. 12. The initial letter denying coverage stated that as an insured person, Kristi's counterclaims against Lauris, who was also an insured person, brought “her claim within the scope of the insured-versus-insured exclusion.” Rejection Letter 10.

         In correspondences between the parties at the end of 2015, Security National reaffirmed its denial of coverage several times and reserved all rights and defenses with regard to coverage. Pl.'s Aff., Ex. 9, ECF 26-9; Pl.'s Aff., Ex. 10, ECF 26-10; Defs.' Mem. 5. Security National nevertheless agreed to cover some defense costs under an arrangement, the terms of which are currently disputed by the parties. Defs.' Mem. 5; Defs.' Mem. Opp'n Pl.'s Mot. Summ. J. (“Defs.' Opp'n”) 3-4, ECF No. 32; Pl.'s Mem. Opp'n Defs.' Partial Mot. Summ. J. (“Pl.'s Opp'n”) 3-5, ECF No. 30. Under this contested arrangement, Security National paid, over the course of the following year, around $142, 000 in defense costs. Defs.' Mem. 6; Compl. 10.

         In a subsequent letter to H.O.M.E., Security National described the coverage arrangement as a “provisional offer to reimburse . . . defense costs for the Lawsuit . . . as an accommodation to the insureds, and in order to potentially avoid the expense of a declaratory judgment action.” Pl.'s Aff., Ex. 11, at 2, ECF 26-11; Pl.'s Mem. 6; Defs.' Mem. 5. Lauris and H.O.M.E. dispute this characterization and argue the arrangement was made pursuant to Security National's obligation under Section VIII.B of the D&O Policy to “pay defense expenses, determined by the Insurer to be part of a covered loss, on a current basis.” Defs.' Opp'n 3-4, 24-25. In addition to contesting the extent and nature of this arrangement, the parties dispute whether H.O.M.E. exceeded the agreed upon coverage by hiring a different lawyer and whether Security National withdrew coverage prior to the trial in the underlying litigation. Defs.' Opp'n 3-4; Defs.' Mem. 5 n.1; Pl.'s Opp'n 5.

         III. ANALYSIS

         A. Legal Framework

         1. Standard of Review for Summary Judgment

         Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A material fact is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The “interpretation and construction of insurance policies is a matter of law, and therefore, issues involving the duty to defend are particularly amenable to summary judgment.” First S. Ins. Co. v. Jim Lynch Enters., Inc., 932 F.2d 717, 719 (8th Cir. 1991); John Deere Ins. Co. v. Shamrock Indus., Inc., 929 F.2d 413, 417 (8th Cir. 1991).

         The Court is not asked to determine the nature of the temporary coverage arrangement or whether either party breached its obligations under it. Pl.'s Mot. Summ. J., ECF No. 24; Defs.' Partial Mot. Summ. J., ECF No. 19. The Court is tasked only with resolving whether the counterclaims in the underlying litigation give rise to a legal obligation to cover any costs or losses associated with Lauris's legal defense. Pl.'s Mot. Summ. J.; Defs.' Partial Mot. Summ. J.

         H.O.M.E. argues “[a]t a minimum, Security National's motion for summary judgment should be denied” to permit discovery “into Security National's drafting intent, internal claims handling manuals and guidelines, and claims-handling intentions in paying over $140, 000 in defense costs.” Defs.' Opp'n 24. Yet this argument assumes the parties' intent cannot by determined by the “four corners” of the D&O Policy. In North Dakota, “intention of the parties is to be ascertained from the writing alone if possible.” N.D. Cent. Code § 9-07-04 (2017). Indeed, “extrinsic evidence is not admissible to alter, vary, explain, or change the contract” if “the parties' intentions can be ascertained from the writing alone.” Hallin v. Inland Oil & Gas Corp., 903 N.W.2d 61, 64 (N.D. 2017). “When the parties' intent can be determined from the contract language alone, interpretation of a contract presents a question of law.” THR Minerals, LLC v. Robinson, 892 N.W.2d 193, 197 (N.D. 2017) (quoting Border Res., LLC v. Irish Oil & Gas, Inc., 869 N.W.2d 758, 763 (N.D. 2015)).

         Because Security National posits its obligation to defend can be determined based on the unambiguous terms of the D&O Policy, it is entitled to summary judgment if the court can effectuate the parties' intent based on the Policy's language. See Hallin, 903 N.W.2d at 64.

         2. General Principles of Insurance Policy ...


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