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Darwin Nat'l Assurance Co. v. Matthews & Megna LLC

United States District Court, D. South Carolina, Columbia Division

July 29, 2014

Darwin National Assurance Co., Plaintiff,
v.
Matthews & Megna LLC; Benjamin R. Matthews; and Tony R. Megna, Defendants

Page 637

For Darwin National Assurance Company, Plaintiff: Jefferson Boone Aiken , III, LEAD ATTORNEY, Aiken Bridges Law Firm, Florence, SC; Richard A Simpson, LEAD ATTORNEY, PRO HAC VICE, Charles Collins Lemley, Jennifer Adrienne Williams, PRO HAC VICE, Wiley Rein, Washington, DC.

For Matthews & Megna LLC, Benjamin R Matthews, Tony R Megna, Defendants: Jeffrey Ryan Heiskell, LEAD ATTORNEY, Bell Legal Group, Georgetown, SC; James Mixon Griffin, Lewis Babcock and Griffin, Columbia, SC.

For Benjamin R Matthews, Matthews & Megna LLC, Tony R Megna, Counter Claimants: James Mixon Griffin, Lewis Babcock and Griffin, Columbia, SC.

For Darwin National Assurance Company, Counter Defendant: Jefferson Boone Aiken , III, LEAD ATTORNEY, Aiken Bridges Law Firm, Florence, SC; Charles Collins Lemley, Jennifer Adrienne Williams, PRO HAC VICE, Wiley Rein, Washington, DC.

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OPINION AND ORDER

TERRY L. WOOTEN, Chief United States District Judge.

The Plaintiff, Darwin National Assurance Co. (hereinafter " Darwin" or " Plaintiff" ), filed the above-captioned declaratory judgment action pursuant to the Federal Declaratory Judgment Act, 28 U.S.C. § 2201, and Fed.R.Civ.P. 57 on May 15, 2013. (Doc. #1). In this action, Darwin seeks to obtain a determination and declaration by this Court of the rights and obligations arising out of four separate Lawyers Professional Liability Insurance Policies issued by Darwin to the Defendants, Matthews & Megna, LLC; Benjamin R. Matthews; and Tony R. Megna (collectively the " Defendants" ). (Doc. #1). This matter is now before the Court for consideration of the Plaintiff Darwin's Motion for Summary Judgment. (Doc. #22).

Darwin filed a Motion for Summary Judgment on February 28, 2014 seeking summary judgment on the merits of the above-captioned declaratory judgment action. (Doc. #22). The Defendants filed a response opposing Darwin's motion on March 24, 2014 (Doc. #32), to which Darwin replied on April 10, 2014 (Doc. #38). On June 13, 2014, this Court held a hearing on Darwin's Motion for Summary Judgment, wherein counsel for both parties presented arguments. (Doc. #45). The Court has carefully considered the arguments, pleadings, motions, memoranda, and exhibits of the parties. Darwin's motion for Summary Judgment is now ripe for disposition.

I. FACTUAL AND PROCEDURAL BACKGROUND

The Plaintiff Darwin initiated this declaratory judgment action against the Defendants on May 15, 2013 seeking a declaration from the Court that Darwin has no obligation to defend or indemnify the Defendants for any matters in connection with the four separate Professional Liability Insurance Policies (the " Insurance Policies" ) issued to the Defendants by Darwin in the years 2010, 2011, 2012, and 2013. (Doc. #1 at 21). Further, Darwin seeks a declaration from the Court that it is entitled to rescind all four of the aforementioned Insurance Policies or, alternatively, that even if it may not rescind, that there would be no coverage under the Insurance Policies for certain matters in state court that the Defendants have requested Darwin to defend pursuant to the Policies. (Doc. #1 at 21). The following facts are drawn from the parties' motions, memoranda, and other relevant filings, as well as the June 13, 2014 hearing and the record

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in this matter. The parties have not demonstrated that there are any genuine issues of material fact in dispute. In addition, there has been no request for a bench trial.

The Plaintiff Darwin issued four " claims made" Professional Liability Insurance Policies to the Defendants beginning in 2010.[1] (Doc. #32 at 2). The yearly contracts of insurance were generally renewed annually after the Defendants submitted an application to Darwin for the new Policy. (Doc. #32). Each of the Insurance Policies provided one year of coverage, and each Policy Coverage Period began March 1 of the year of issuance and continued through March 1 of the following year.[2]

On January 18, 2012, the Defendants reported to Plaintiff Darwin a potential claim under their current 2011-2012 Policy (the " 2012 Claim" ). (Doc. #32-10 at 2-3). It is undisputed that the 2012 Claim was submitted by the Defendants to Darwin within the Policy Period covered by the 2011-2012 Insurance Policy. The 2012 Claim arose out of a state court filing that purported to be a motion for sanctions against Defendant Megna, yet also stated that monetary damages would be sought. The motion for sanctions was filed by Defendant Megna's opposing counsel, Douglas N. Truslow (" Truslow" ), in a closed state court case pursuant to Rule 11 of the South Carolina Rules of Civil Procedure (hereinafter the " 2011 Truslow Motion" ). (Doc. #22-21 at 2).

In short, the 2011 Truslow Motion formed the basis of the 2012 Claim that the Defendants reported and requested coverage for from Darwin on January 18, 2012. The 2011 Truslow Motion made reference, in a footnote, to a separate motion for sanctions that had previously been filed on November 7, 2007 by Truslow (hereinafter the " 2007 Truslow Motion" ), against Defendant Megna and/or Defendant Megna's client, while the state court case was still pending and unresolved. The record reflects that the 2007 Truslow Motion was never resolved, but instead was mooted out. (Docs. #32-1 at 3; 32-4). The more recently filed 2011 Truslow Motion sought the imposition of both damages and sanctions in excess of $500,000.00 against Defendant Megna alone, rather than against both Defendant Megna and his client. (Doc. #22-21 at 2).

The 2011 Truslow Motion for which the Defendants sought coverage under the 2011-2012 Policy expressly stated that " [d]amages and sanctions are expected to exceed $500,000.00," and, as stated in the motion, the basis for such relief included Defendant Megna's conduct in the previous state court litigation in which, Truslow alleged, Defendant Megna " interjected frivolous defenses, pleadings and Affidavits and otherwise engaged in wrongful conduct, the result of which has been to harm [Truslow's client]." (Doc. #22-21 at 2). The rule under which relief was expressly sought in the motion was South Carolina

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Rule of Civil Procedure 11.[3]

Following the submission of the 2012 Claim by the Defendants to Plaintiff Darwin on January 18, 2012, Darwin later issued and renewed the Defendants' 2011-2012 Insurance Policy with two subsequent Professional Liability Insurance Policies for the years 2012-2013 and 2013-2014, with coverage periods of March 1, 2012 to March 1, 2013 and March 1, 2013 to March 1, 2014, respectively. (Docs. #32-15; 32-16).

By letter dated February 29, 2012 (" February 2012 Denial Letter" ), Plaintiff Darwin denied the Defendants' request for coverage and defense of the 2012 Claim submitted under the 2011-2012 Insurance Policy. (Docs. #22-14 at 2; 32-7 at 2). Plaintiff Darwin explained in the February 2012 Denial Letter that Darwin was denying coverage for the 2012 Claim because Darwin had determined that the 2012 Claim was based upon the same " wrongful acts or omissions" as the prior sanctions motion first made by Truslow in 2007. (Docs. #22-14; 32-7). Therefore, according to Darwin, the 2012 Claim was first made in 2007 and was excluded from coverage. (Docs. #22-14 at 2-4; 32-7). Thus, Plaintiff Darwin denied coverage on the basis that the 2012 Claim predated the inception date of the 2011-2012 Policy. (Docs. #22-14; 32-7).

In addition to denying coverage based on the assertion that the 2012 Claim was first made in 2007 outside of the 2011-2012 Policy Period, the February 2012 Denial Letter additionally noted that another basis for denying coverage was a " condition precedent to coverage set forth in Insuring Agreement I (A) has not been met." (Doc. #22-4 at 5; 32-7).

Moreover, Darwin further stated in the February 2012 Denial Letter that the 2007 Truslow Motion " provided the basis for you [Defendant Megna] to believe that either you had breached a professional duty, or to foresee that Wrongful Acts referenced

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in the Motions and/or supporting memorandum might reasonably be expected to be the basis of a Claim against you or the firm. . . Therefore, Darwin reserves its rights to rescind the Policy pursuant to the Policy and Application terms and conditions." (Docs. #22-14 at 4-5; 32-7).

In essence, Darwin concluded that the 2007 Truslow Sanctions Motion filed in November 2007, which was not reported on any of the Defendants' Applications for Insurance, was a " claim" or an " incident that could result in a claim" that should have been reported and disclosed by the Defendants in its answer to Question 4.c on its Application for Insurance. (Docs. #22-14 at 4; 32-7). Darwin thus reserved its right to rescind the 2011-2012 Policy on that basis. Question 4.c. on the Application asked the applicant specifically whether " any attorney was aware of any claims against the law firm or its attorneys, or any incidents that could result in a claim against the law firm or its attorneys within the past five (5) years." (Docs. #32-7 at 5; 32-4).

This declaratory judgment action now comes before the Court on motion for summary judgment by Plaintiff Darwin. (Doc. #22). The Court has carefully reviewed all of the submissions of the parties, the record, as well as the transcript of the June 13, 2014 hearing. The Plaintiff's motion is now ripe for decision.

II. LEGAL STANDARD OF REVIEW

Pursuant to Federal Rule of Civil Procedure 56(a), a party is entitled to summary judgment if the pleadings, responses to discovery, and the record reveal " that 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 genuine issue of material fact exists " 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, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The party seeking summary judgment bears the initial responsibility of informing the court of the basis for its motion. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). This burden requires the movant to identify those portions of the " pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of any genuine issues of fact. Celotex, 477 U.S. at 323; see also Anderson, 477 U.S. at 249.

Though the moving party bears the initial burden, the nonmoving party must then produce specific facts showing that there is a genuine issue for trial. See Celotex, 477 U.S. at 334. In satisfying this responsibility, the nonmoving party must offer more than a mere " scintilla of evidence" that a genuine issue of material fact exists, Anderson, 477 U.S. at 252, or that there is " some metaphysical doubt" as to material facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Rather, the nonmoving party must produce evidence on which a jury could reasonably find in its favor. See Anderson, 477 U.S. at 252.

In considering the motion for summary judgment, this Court must construe all facts and reasonable inferences in the light most favorable to the nonmoving party. See Miltier v. Beorn, 896 F.2d 848 (4th Cir. 1990). Summary judgment is proper " [w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there [being] no genuine issue for trial." Matsushita, 475 U.S. at 587

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(1986) (internal quotations omitted).

Summary judgment should only be granted in those cases in which there is no issue of material fact involved and inquiry into the facts is not necessary to clarify application of the law. McKinney v. Bd. of Trustees Mayland Cmty. Coll., 955 F.2d 924 (4th Cir. 1992). A district court should not grant summary judgment " unless the entire record shows a right to judgment with such clarity as to leave no room for controversy and establishes affirmatively that the adverse party cannot prevail under the circumstances." Campbell v. Hewitt, Coleman & Assocs., 21 F.3d 52, 55 (4th Cir. 1994).

The Court has subject matter jurisdiction in the instant case pursuant to 28 U.S.C. § 1332, diversity jurisdiction. The parties agree that South Carolina law governs this case; therefore, the Court will apply South Carolina law.

III. DISCUSSION

1. RESCISSION

Plaintiff Darwin first asserts that it is entitled to rescind all four Insurance Policies it provided to the Defendants because the Defendants' answer of " NO" to Question 4.c on the 2010 Application was a false warranty. Darwin attempts to distinguish the legal standards required for rescission based upon whether the misstatement is determined to be a false warranty or a material misrepresentation. Darwin contends the Defendants' answer constituted a false warranty, and that an insurer is entitled to rescind the Insurance Policies without demonstrating any intentionality on the part of the insured or the materiality of the alleged misstatement. Therefore, Darwin argues, under South Carolina law, Darwin is entitled to rescind all four Insurance Policies due to the false warranty as they are void ab initio.

In turn, the Defendants argue that there is no distinction in the legal standard required for rescission based upon whether a false statement constitutes a false warranty or a material misrepresentation. Rather, the Defendants contend, that distinction is irrelevant and not recognized under South Carolina law. The Defendants assert that an insurer seeking to rescind an insurance policy must always demonstrate that the false statement was made by an insured with the intent to deceive, and that it was material to the risk and relied upon by the insurer.

The Court agrees with the Defendants. The case law demonstrates that South Carolina courts do not recognize a distinction between a false warranty and a material misstatement in an application for insurance in terms of the legal standard governing rescission of the insurance policy. See A. Life Ins. Co. v. Beckham, 240 S.C. 450, 458-59, 126 S.E.2d 342, 345 (1962) (citations omitted). Rather, South Carolina law dictates that, regardless of whether a statement is classified as a warranty or a representation, rescission is governed by the same legal standard, and a false statement will not void the policy unless certain elements are proven. See Carroll v. Jackson Nat'l Life Ins. Co., 307 S.C. 267, 268, 414 S.E.2d 777, 778 (1992).

In South Carolina, the common law principally governs when an insurer may rescind a policy based upon information provided or not provided in an insurance application. See id. South Carolina courts have adopted a five-part test to determine when ab initio rescission is appropriate. Strickland v. Prudential Ins. Co., 278 S.C. 82, 292 S.E.2d 301, 304 (1982) (citations omitted). In order to rescind a policy of insurance, the insurer must demonstrate: 1) the falsity of the statements

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complained of; 2) that the falsity was known to the applicant; 3) were material to the risk; and 4) made with intent to defraud the insurer; and 5) relied upon by the insurer in issuing the policy. Id.; see also Carroll v. Jackson Nat'l Life Ins. Co., 307 S.C. 267, 268, 414 S.E.2d 777, 778 (1992).

Generally, " an insurer is entitled to rely on an applicant's answers to specific questions [in an Insurance Application]; it has no obligation to make an independent inquiry as to their truth." Am. Centennial Ins. Co. v. Sinkler, 903 F.Supp. 408, 411 (E.D.N.Y. 1995) (interpreting South Carolina law). Under South Carolina law, an " insurance policy is to be liberally construed in favor of the insured and strictly construed against the insurer. . . [and] exclusions in an insurance policy are always construed most strongly against the insurer." Am. Credit of Sumter, Inc. v. Nationwide Mut. Ins. Co., 378 S.C. 623, 628-29, 663 S.E.2d 492, 495 (citing Kraft v. Hartford Ins. Co., 279 S.C. 257, 305 S.E.2d 243 (1983)).

A. Was There A False Statement?

Plaintiff Darwin argues it is entitled to rescind all four Insurance Policies it issued to Defendants because, Darwin contends, the Defendants intentionally made false statements in the Application for Insurance that were known to the Defendants, material to Darwin's risk, and relied on by Darwin in issuing the Policies.

Under South Carolina law, insurance policies are contracts and are subject to the general rules of contract construction. Am. Credit of Sumter, Inc. v. Nationwide Mut. Ins. Co., 378 S.C. 623, 628, 663 S.E.2d 492, 495 (2008) (citation omitted). When interpreting an insurance application or insurance policy, the courts " must give policy language its plain, ordinary, and popular meaning." Id. Therefore, this Court begins its review of the Insurance Applications and Policies, and specifically, the meaning of Question 4.c, by considering the words according to their plain, ...


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