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CAMICO Mutual Insurance Co. v. Jackson CPA Firm

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

December 22, 2016

CAMICO Mutual Insurance Company, Plaintiff,
Jackson CPA Firm f/k/a Jackson and Hammond, LLC f/k/a Jackson and Hill LLC; Brent Hill; Frank Jackson; David Brooks; Marcia Brooks; Jarrod Brooks; Zita, Inc.; AAA Fence Company of Charleston, Inc.; and Mike Dohoney's Barrier Island Construction Specialists, Inc., Defendants.


          PATRICK MICHAEL DUFFY, United States District Judge.

         This matter is before the Court following a bench trial. For the reasons stated herein, the Court enters judgment for Plaintiff CAMICO Mutual Insurance Company.


         This is a professional liability insurance coverage dispute between an insurance carrier, the accountants and accounting firm it insured, and several of the firm's clients. The dispute relates to three state-court malpractice lawsuits the clients have filed against the accountants over the alleged mishandling of their taxes. In this case, CAMICO seeks a judicial declaration of the extent of its obligation to defend and indemnify Defendants Jackson CPA Firm, Brent Hill, and Frank Jackson (the “Accountants”) in those malpractice cases. The Accountants contend CAMICO has breached one or more of the insurance policies it sold them and that it has acted in bad faith. Defendants David Brooks, Marcia Brooks, Jarrod Brooks, Zita, Inc., AAA Fence Company of Charleston, Inc., and Mike Dohoney's Barrier Island Construction Specialists, Inc. (the “Clients”) also seek a declaratory judgment regarding CAMICO's obligations in their lawsuits.

         CAMICO filed this action in April 2015. After the parties conducted discovery and filed cross-motions for summary judgment, the Court found there were genuine issues of material fact and therefore denied the motions. The parties tried the case on August 16 and 17, 2016. Having considered the evidence admitted at trial, as well as the parties' pre-trial briefs and post-trial submissions, the Court now makes the following findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52(a).


         Based on the preponderance of the evidence in the record, the Court finds as follows:[1]

         I. The Accountants and Their Insurance Policies

         1. For years, certified public accountants Frank Jackson and Brent Hill worked together in their two-member accounting firm, Jackson and Hill, LLC. Their association ended with Hill's retirement in August 2011. Following some additional personnel changes, Jackson now practices alone in Jackson CPA Firm, LLC.

         2. Since 2005, CAMICO has insured the Accountants under a series of professional liability, claims-made-and-reported policies. The policies have a retroactive date of July 1, 1998.

         3. Each policy provides a year of coverage that begins on January 28 of the year. For example, the main policy at issue here has an effective date that runs from January 28, 2011, to January 28, 2012 (the “2011-2012 policy”).

         4. Each policy's declarations page lists a general indemnity limit of $1, 000, 000 per claim and $2, 000, 000 aggregate. An endorsement to each policy provides a separate limit of $250, 000 for defense costs and other claim expenses.

         5. Each policy contains an identical insuring agreement. However, each policy also has an endorsement titled “Limited Coverage for ‘Known Claims' Endorsement” that changes parts of the insuring agreement. For example, the known-claims endorsement for the 2011-2012 policy deletes section A of that policy's insuring agreement and replaces it with an insuring agreement that provides, in relevant part, as follows:

         A. Coverage for Damages and Reporting Requirements

         1. The Company will pay those sums that an Insured becomes legally obligated to pay as Damages because of a Claim arising out of an Insured's negligent act, error or omission in rendering or failing to render Professional Services performed after the Retroactive Date and before the end of the Policy Period, provided that:

(a) The Claim was first made against the Insured and reported to the Company during the same Policy Period; and
(b) The Claim was not reported to any professional liability insurer, including the Company, prior to the effective date of the Policy Period identified in the policy's Declarations.
. . . .

         4. If any Insured became aware of a Claim or a Potential Claim either after the Retroactive Date of this Policy or during the twelve (12) months prior to the Effective Date of this Policy Period, whichever is later, and reports that Claim or Potential Claim to the Company during the Policy Period, that Claim or Potential Claim shall be deemed timely reported to the Company during the Policy Period; however, the Limits of Liability applicable to such Claim or Potential Claim shall be limited to the amount stated in section I. INSURING AGREEMENTS, C. Limits of Liability, Sub-Limits and Deductibles, paragraph 1.c.

         6. The policies define “Claim” as follows:

a demand received by any Insured for money or services, and includes the service of suit(s), a request that an Insured agree to waive a legal right or sign an agreement to toll a statute of limitations, or a demand for arbitration. A Claim also includes two or more Claims arising out of or resulting from a single act, error or omission in rendering Professional Services, or from Multiple Acts, Errors or Omissions in rendering Professional Services, whether such demands are made: (1) against one or more Insureds; (2) by one or more Persons, or (3) during one or more Policy Periods.

         7. The policies define “Multiple Acts, Errors or Omissions” as “all acts, errors or omissions in rendering Professional Services that are logically or causally connected by any common fact(s), circumstances, situation, transaction(s), event(s), advice or decision(s).” The policies go on to state that a single per-claim coverage limit “applies to a Claim arising from Multiple Acts, Errors or Omissions, regardless of the number of claimants, lawsuits, or Insureds involved.”

         8. The policies define “Potential Claim” as “an event or circumstances that any Insured might reasonably expect would be the basis for a Claim.” In turn, Insured includes Hill, Jackson, their firm, and its employees.

         9. As mentioned above, paragraph A.4 of the known-claims endorsement's insuring agreement limits the coverage for certain claims to “the amount stated in section I. INSURING AGREEMENTS, C. Limits of Liability, Sub-Limits and Deductibles, paragraph 1.c.” That subparagraph, which the endorsement adds, provides as follows:

The maximum amount payable by the Company for Damages and Claim Expenses for each covered Claim reported during this Policy Period pursuant to section I. INSURING AGREEMENTS, A. Coverage for Damages and Reporting Requirements, paragraph 4., shall be either $100, 000 or 25% of the Per Claim Limit of Liability stated on the Declarations, whichever is less. Amounts paid on behalf of an Insured pursuant to this paragraph are chargeable against the applicable Deductible and the Limits of Liability.

         10. Finally, the known-claims endorsement eliminates separate defense limits for claims that are afforded coverage under the known-claims endorsement.

         II. Hill's Declining Health and Work Performance

         11. Hill was diagnosed with Parkinson's disease in 2006. After being diagnosed, he continued to practice accounting for several years.

         12. Over those years, the symptoms of Parkinson's disease gradually worsened, affecting Hill's work. The disease caused Hill to experience tremors, fatigue, and a loss of concentration, such that he became disorganized and frequently could not complete much work in a typical work day.

         13. As those physical and mental impediments worsened, they were also exacerbated by certain stressors, including the demands of caring for his mother as her own health declined and financial difficulties that arose due to his inability to produce billable time. As a result, Hill's ability to work suffered even more. Among other things, he could no longer complete his work in time to either meet his clients' filing deadlines or seek extensions. Hill's failures to file resulted in clients being assessed interest and late penalties.

         14. By 2010, Hill's conditions reached, as he put it, “critical mass.” Due to the symptoms of his Parkinson's disease and those external stressors, on many days he could barely accomplish three hours of work over the course of a twelve-hour workday. However, he did not notify clients of his growing inability to work or the consequent tax problems they were facing.

         15. At Jackson's suggestion, the firm began delegating some of Hill's work. Staff accountant Rita Hammond recommended the firm contract with accountant Marty Hicks to help Hill. Hicks' primary responsibility was to negotiate with state and federal tax agencies in an effort to reduce or abate interest and penalties they had assessed against Hill's clients for Hill's late filings. The firm also hired an assistant to help Hill with organization and to communicate with clients.

         16. In February and March 2011, Hill sent the IRS a series of letters relating to late penalties it had assessed against several of his clients due to their returns not being timely filed. Each letter included the following:

I would like to take responsibility for the failure to file on time and for any lack of a prompt response to notices regarding the matter. Due to personal circumstances, I was unable to complete returns for all of my clients by the extended deadlines, and am just now finding myself able to pay proper attention to wrapping up my commitments to some of my clients related to 2009.
On-going adjustments to living with Parkinson's disease and problems with the side effects of medications reduced my productivity greatly for most of last year. Also, I have been the only family member available to see to the care of my 83-year old mother, and that role intensified through 2010 as her mental and physical conditions deteriorated. The last four months of the year have proved to be the most stressful of my life, as most of my time and energy was spent seeing her through seven hospital visits, a move from her home to an assisted living facility, then to a nursing home, where she spent her final six weeks under hospice care. She passed away January 2nd. With that behind me, and with a recent change in medication making the Parkinson's more tolerable, I am now getting my health and life back in balance and better able to do the job of helping my clients meet their tax-filing responsibilities in a timely manner.

         He concluded at least one of the letters by declaring, under penalty of perjury, that the blockquoted language above was true.

         17. Hill concluded several of the letters by asking the IRS to abate his clients' late penalties “due to circumstances beyond taxpayer control”; in at least one other letter, he sought abatement “due to circumstances beyond taxpayer control (and preparer) control.”[2]

         18. Hill retired in August 2011. He announced his retirement to his clients through a mass letter he sent on August 22, in which he stated, “Most Parkinson's patients reach a point when they can no longer function effectively in a job that involves a high volume of deadline-intensive work. I am past that point.”

         19. When Hill retired in August 2011, Hicks and staff accountant Rita Hammond took over Hill's files. Hammond joined with Jackson to form the firm Jackson and Hammond, LLC, which continued contracting with Hicks. Hammond and Hicks thereafter continued to work with tax agencies on behalf of Hill's former clients in an attempt to mitigate the consequences of missed filing deadlines. Hammond and Hicks left the accounting firm in September 2012, taking with them all the files for Hill's former clients. They formed their own firm and performed work for a number of Hill's former clients.

         20. Hill's health has continued to decline since he retired. By the time of trial, Hill's memory of his work for the Clients was significantly diminished due to his disease. Thus, through no fault of his own, his testimony carried little weight.

         III. ...

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