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Attorneys Liability Protection Society, Inc., A Risk Retention v. Ingaldson & Fitzgerald

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ALASKA


December 21, 2012

ATTORNEYS LIABILITY PROTECTION SOCIETY, INC., A RISK RETENTION GROUP,
PLAINTIFF,
v.
INGALDSON & FITZGERALD, P.C., DEFENDANT.

The opinion of the court was delivered by: Sharon L. Gleason United States District Judge

ORDER GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY

JUDGMENT

Defendant Ingaldson & Fitzgerald, P.C. (IF) filed a motion for partial summary judgment on May 9, 2012.*fn1 Plaintiff Attorneys Liability Protection Society, Inc. (ALPS) opposed on June 11, 2012.*fn2 On June 28, 2012, IF replied.*fn3 Oral argument was held in Anchorage on August 10, 2012. The Court requested supplemental briefing on October 4, 2012,*fn4 which the parties submitted on October 18, 2012.*fn5

FACTUAL AND PROCEDURAL BACKGROUND

The facts relevant to this motion are not disputed and are as follows:*fn6

In its Complaint, ALPS describes itself as "an insurance company and risk retention group" organized and with its principal place of business in Montana.*fn7 IF is a professional corporation organized and with its principal place of business in Alaska.*fn8

From April 29, 2007 to April 29, 2008, IF was covered by an attorneys' liability policy issued by ALPS (Policy).*fn9

On October 22, 2008, an adversary proceeding was initiated against IF in the U.S. Bankruptcy Court for the District of Alaska (Underlying Suit) seeking recovery of a retainer that had been paid to IF.*fn10 IF notified ALPS of the Underlying Suit on October 28, 2008.*fn11 On October 31, 2008, ALPS accepted IF's tender of the defense in the Underlying Suit, but reserved "all rights."*fn12 IF then retained independent counsel, which ALPS paid for in full.

In 2011, summary judgment was rendered against IF in the Underlying Suit.*fn13

ALPS asserts that because the judgment in the Underlying Suit was entered on claims of restitution, disgorgement, and conversion, each of which is specifically excluded under the Policy, all amounts awarded against IF in the Underlying Suit are outside the Policy's coverage.*fn14

On September 23, 2011, ALPS initiated this action seeking (1) declaratory judgment that the Policy does not provide coverage for the Underlying Suit; (2) declaratory judgment that ALPS has no obligation to apply for, furnish, finance, or provide collateral for any appeal bond of the Underlying Suit; and (3) reimbursement of the costs that ALPS paid for IF's defense in the Underlying Suit.*fn15 As of the date the Complaint was filed, ALPS had paid all of the costs of IF's independent counsel in the Underlying Suit.*fn16

In this current motion, IF seeks partial summary judgment on ALPS' third claim.*fn17

DISCUSSION

I. Jurisdiction.

This Court has diversity jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1).

II. Summary Judgment Standard.

In this diversity action, the Court applies federal law to procedural issues and Alaska law to substantive legal issues.

Federal Rule of Civil Procedure 56(a) directs a court 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."

III. Analysis

ALPS argues that § 1.2.1 of the Policy gives it the right to obtain reimbursement from IF of the costs it paid for IF's independent counsel.*fn18 In relevant part, this section provides:

For any claim covered under this policy, the Company shall have the right and the duty to defend such claim even if any or all of the allegations of the claim are groundless, false, or fraudulent. . . The Company shall not have a duty to defend or to pay such expenses as to any claimnot covered under this policy, and shall have the right to seek reimbursement from any Insured, who shall promptly provide such reimbursement, for any amount paid by the Company in defending any such non-covered claim, including any amount paid in defending a non-covered claim that is asserted together with one or more covered claims.*fn19

IF does not dispute that this section of the Policy provides a right to reimbursement. But it maintains that Alaska law, specifically AS 21.96.100(d), is at odds with this language and thus this section of the Policy is not enforceable.*fn20

AS 21.96.100(d) provides in relevant part:

In providing independent counsel, the insurer is not responsible for the fees and costs of defending an allegation for which coverage is properly denied and shall be responsible only for the fees and costs to defend those allegations for which the insurer either reserves its position as to coverage or accepts coverage.*fn21

IF argues that this "unequivocal statutory mandate" is a codification of the Alaska Supreme Court's decision in CHI of Alaska, Inc. v. Employers Reinsurance Corp.*fn22 and precludes ALPS from obtaining reimbursement for the cost of IF's independent counsel in the Underlying Suit.*fn23

ALPS characterizes IF's construction of the statute as "tortured."*fn24 It argues that AS 21.96.100(d) only obligates an insurer to pay accruing defense costs, and does not make the insurer ultimately responsible for the cost of that defense when it pays under a reservation of rights and it is later determined that there is no coverage.*fn25 ALPS reasons that without coverage, there is no duty to defend.*fn26

An insurer's duty toward the insured has two separate components: the duty to defend and the duty to indemnify (i.e., to pay the costs and judgments of the claim itself).*fn27 The duty to defend is broader than the duty to indemnify; the Alaska Supreme Court has held that "[an] insurer may have an obligation to defend although it has no ultimate liability under the policy."*fn28

In support of its position, ALPS cites to a prior decision of this federal court, Unionamerica Insurance Co. Ltd. v. General Star Indemnity Co.*fn29 That case arose after Bristol Environmental and Engineering Services Corp. (Bristol) had been named as a defendant in a separate action brought in the Alaska District Court by Remtech and Hartford Fire Insurance Company (Remtech suit). Bristol tendered its defense in the Remtech suit to General Star (GenStar), another insurance company, and then to Unionamerica. Both GenStar and Unionamerica accepted the tender, but each reserved its right to contest coverage and Unionamerica explicitly reserved the right to seek reimbursement of the cost of defense. GenStar paid Bristol's defense costs in Remtech as they accrued. Unionamerica then initiated a separate federal action (Unionamerica suit) seeking a declaratory judgment that it had no duty to defend or indemnify the parties in Remtech. The Remtech suit subsequently settled, but the settlement agreement did not resolve the allocation of Bristol's defense expenses in that litigation as between Unionamerica and GenStar. GenStar then sought to recover 50% of those costs from Unionamerica in the Unionamerica suit.

The District Court first concluded that Bristol had no coverage under the Unionamerica policy and hence Unionamerica had no duty to indemnify.*fn30 Turning to the duty to defend, after acknowledging that the Alaska Supreme Court had not expressly addressed the issue, the court then predicted that the state's highest court would rule that an insurer "has a right to seek reimbursement of defense expenses paid under a reservation of that right if there was no coverage and hence no duty to defend."*fn31

Unionamerica involved a dispute between two insurance companies, while here the Court is faced with a dispute between an insurance company and an insured. Thus, although the Unionamerica court framed the issue as a "right of reimbursement," GenStar was not seeking to recover its defense costs from Bristol. Rather, one insurance company was seeking to recover the insured's defense costs from another insurance company.

In Unionamerica, the District Court interpreted AS 21.89.100(d) (subsequently renumbered as AS 21.96.100(d)) to require an insurer to pay defense costs as they accrued, but not to prevent the insurer from later seeking reimbursement of those costs.*fn32 The decision, however, did not discuss CHI of Alaska, Inc. v. Employers Reinsurance Corp.,*fn33 the case which led to the statute's enactment.*fn34 In CHI,Oceanic Research Services (Oceanic) sued its insurer, CHI of Alaska, Inc. (CHI). CHI tendered the defense of the suit to its insurer, Employers Reinsurance Corporation (Employers). Employers accepted the tender, but reserved its right to disclaim coverage with regard to one of the claims asserted against CHI. CHI demanded independent counsel, arguing that Employers' reservation of rights created a conflict of interest. Employers proposed a joint counsel defense. On cross motions for summary judgment, the Superior Court held that the joint counsel plan adequately resolved any potential conflicts of interest.

On appeal, the Alaska Supreme Court reversed. The Court discussed and reaffirmed its prior decisions in National Indemnity Co. v. Flesher and Continental Insurance Co. v. Bayless & Roberts, Inc.*fn35 In National Indemnity, the Alaska Supreme Court had "recognized the right of the insured to independent counsel under circumstances involving a coverage defense," stating that "[i]n such circumstances, the insurer must provide the insured with independent counsel."*fn36 In Continental, the Court had noted that conflicts might be avoided "if the insurance company were to offer its insured the right to retain independent counsel to conduct his defense, and agree to pay all the necessary costs of that defense."*fn37 The CHI decision also cited extensive case law from other jurisdictions that describes an insurer's duty to provide independent counsel as a duty to pay the costs of that counsel-not a duty to advance those costs.*fn38

While CHI does not address the issue central to the present case head-on, there is a strong implication throughout CHI-and in the case law cited in the decision-that an insurer's obligation to provide independent counsel necessarily includes an obligation to pay for that counsel, without a right to reimbursement from the insured. This is in accord with the language of AS 21.96.100(d) that an insurer "shall be responsible" for the cost of defense after a reservation of rights. This accord is logical, as the legislative history of AS 21.96.100(d) makes it clear that the statute was enacted to codify the Alaska Supreme Court's ruling in CHI.*fn39

During the 1997 session, attorney Michael Barcott testified to the House Judiciary Committee that independent counsel appointments often led to abuse; that "independent lawyers had no fiscal responsibility to anyone, and were working just to make the litigation expensive, which in turn makes the cost for the insurance carrier extraordinary."*fn40

This testimony initiated a discussion among the committee members that appears to have been predicated on the assumption that when independent counsel was appointed after a reservation of rights, the ultimate cost of that counsel- not merely the costs as they accrued-would be borne by the insurance company.*fn41

ALPS also argues that even if AS 21.96.100(d) requires an insurer to cover the costs of defense after reserving its rights, the parties to the insurance agreement should be permitted to contract around that statutory requirement. *fn42 ALPS notes it is well-settled in Alaska that "[w]here the terms of [an insurance] policy are clear and unambiguous, [the courts] will, of course, give effect to the language."*fn43 IF responds that under Alaska law, insurance policies are considered "form contracts of adhesion, in which the insured ordinarily has no power to negotiate over terms."*fn44 ALPS responds that here, both parties to the Policy were highly sophisticated entities with expertise in the area of insurance.

AS 21.42.220 is dispositive on this issue, as it provides:

An insurance policy, rider, or endorsement issued and otherwise valid that contains a condition or provision not in compliance with the requirements of this title, is not thereby rendered invalid but shall be construed and applied in accordance with the conditions and provisions as would have applied had the policy, rider, or endorsement been in full compliance with this title.

This statute does not permit contractual avoidance of the requirements of Title 21. The Policy's reimbursement provision is not in compliance with the requirements of AS

21.96.100(d) and that provision is therefore unenforceable.

The parties have also addressed preemption in their motion briefing and at oral argument. After oral argument, the Court requested supplemental briefing on the applicability of the federal Liability Risk Retention Act (LRRA), 15 U.S.C. § 3901 et seq.,and any implications that Act may have for federal preemption of otherwise applicable Alaska law. The parties submitted thorough responses to the Court's request.*fn45 IF subsequently filed a Motion to Strike certain components of ALPS' response and a Request for Oral Argument.*fn46

"A federal statute may preempt state law by express statement, by occupying a field, or by conflicting with state law."*fn47 Section 3902 of the LRRA provides that "a risk retention group is exempt from any State law, rule, regulation, or order" that seeks to regulate its operation, subject to a limited category of exceptions, thereby expressly preempting state law. Title 21 of the Alaska Statutes, which governs the insurance industry in Alaska and applies to "[a]ll persons transacting a business of insurance in this state, or relative to a subject resident, located or to be performed in this state,"*fn48 recognizes this preemption. AS 21.03.010(c) provides that A person who transacts insurance in this state, or relative to a subject resident, located, or to be performed in this state as or on behalf of a risk retention group or purchasing group formed under and in compliance with 15 U.S.C. 3901-3906 (Liability Risk Retention Act), shall comply with the provisions of this title not preempted by federal law. § 3905(c) of the LRRA makes clear that the federal law is not intended to preclude a state from regulating the terms of RRG policies in the same manner as all other insurance policies in the state. This federal statute provides:

The terms of any insurance policy provided by a risk retention group or purchased by a purchasing group shall not provide or be construed to provide insurance policy coverage prohibited generally by State statute or declared unlawful by the highest court of the State whose law applies to such policy.

Here, Alaska law prohibits the inclusion of a right to reimbursement in insurance policies in the state and does not allow ALPS to provide insurance policy coverage that contradicts this prohibition. Accordingly, preemption is inapplicable to this dispute. IF's Motion to Strike and Request for Oral Argument are denied as moot.

CONCLUSION

For the foregoing reasons, the Court orders as follows:

1. Ingaldson & Fitzgerald's Motion for Partial Summary Judgment at Docket 30 is GRANTED. ALPS is not entitled to reimbursement of the cost of independent counsel that ALPS provided to IF in the underlying suit.

2. Ingaldson & Fitzgerald's Motion to Strike at Docket 54 is DENIED as moot. 3. Ingaldson & Fitzgerald's Request for Oral Argument at Docket 55 is DENIED as moot.


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