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Weeks & Irvine LLC v. Associated Industries Insurance Company, Inc.

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

January 6, 2020

WEEKS & IRVINE LLC, Plaintiff,
v.
ASSOCIATED INDUSTRIES INSURANCE COMPANY, INC., Defendant.

          ORDER

          DAVID C. NORTON, UNITED STATES DISTRICT JUDGE

         This matter is before the court on defendant Associated Industries Insurance Company, Inc.'s (“AIIC”) motion for summary judgment, ECF No. 35. For the reasons set forth below, the court grants the motion.

         I. BACKGROUND

         This case arises out of a dispute over two insurance policies. From October 27, 2015 to October 27, 2016, Weeks & Irvine LLC (“Weeks”) held a Lawyers Professional Liability Insurance Policy with AIIC (the “2015-2016 Policy”). On or around September 16, 2016, Weeks submitted an application for renewal of its professional liability insurance with AIIC. AIIC renewed the policy with effective dates of October 27, 2016 to October 27, 2017 (the “2016-2017 Policy”). In short, this coverage dispute results from an insured committing and failing to report a mistake during the former policy period and seeking coverage for the resulting claim during the latter policy period.

         In March 2016, Prairie Son Properties LLC (“Prairie Son”), the original plaintiff in this matter, hired Weeks to handle the closing of a $400, 000 loan from Prairie Son to Moss Construction of the Lowcountry, LLC (“Moss Construction”). Weeks was insured by AIIC during this time. To secure the loan, Moss Construction issued a mortgage to Prairie Son on a property in Beaufort County, South Carolina (the “Property”). Under the terms of this agreement, Prairie Son would be in first lien position on the Property.

         On March 11, 2016, Weeks closed the loan and the funds were disbursed by Prairie Son to Moss Construction. Weeks alleges that it promptly sent the mortgage and filing fee to the Beaufort County Register of Deeds but that instead of being filed, the mortgage was returned to Weeks because the payment exceeded the fee required for recording. By the time Weeks resubmitted the mortgage for filing with the correct fee and had the recording perfected on May 23, 2016-over 70 days after the closing-three additional mortgages on the Property had been recorded. As a result, the Prairie Son mortgage had fourth priority on the Property.

         Weeks alleges that on August 1, 2016, it discovered that the Prairie Son mortgage was in fourth priority, not first. ECF No. 41-2. Weeks claims that it discussed the issue with Prairie Son's attorney, who Weeks believed had come to an agreement with the intervening mortgagees to subordinate their superior-priority mortgages to Prairie Son's mortgage (the “Subordination Agreement”). The Subordination Agreement, Weeks believed, would put Prairie Son back in first priority position. ECF No. 41-3; ECF No. 41-16, Weeks Aff. ¶ 7.

         On or about September 16, 2016, Weeks submitted an application for renewal of its professional liability insurance with AIIC (the “Renewal Application”). Question 35 of the Renewal Application asked whether Weeks was “aware of any fact, circumstance, incident, error, situation or accident that may result in a claim.” ECF No. 35-3 at 4. Weeks answered “no” to this question and now claims that it did so because at the time it submitted the application, it believed that the Subordination Agreement had resolved any potential issues from the Prairie Son case that could potentially result in a claim.

         Weeks states that it learned in November 2016 that the Subordination Agreement fell through after Moss Construction declared bankruptcy. On November 23, 2016, Weeks contacted its insurance agent and advised him that there was an incident that needed to be reported, which may or may not turn into a claim. ECF No. 41-5. The insurance agent advised that Weeks would need to file a Supplemental Claim Application, which Weeks received from the agent on November 28, 2016, with instructions to complete it and “email it back to us [and] we will get the matter reported to Am Trust and then they will assign a claims representative and will contact you.” ECF No. 41-6. Weeks completed the form and emailed it to its insurance agent on December 9, 2016. ECF No. 41-7; ECF No. 41-8.

         On December 16, 2016, Prairie Son's attorney sent Weeks a demand letter in connection with the loss of mortgage priority (“December 2016 Demand Letter”). ECF No. 35-5. This letter stated that Prairie Son “understand[s] from our discussions that [Weeks] has placed its professional liability insurance carrier on notice of this claim [and] hereby demands that the principal be paid and made whole at this time.” Id. Prairie Son's letter demanded “that the principal be paid in the amount of $400, 000.00, accrued interest in the amount of $23, 333.31, accrued late charges in the amount of $1, 166.66, attorney's fees in the amount of $10, 340.00, for a total of $434, 839.97, as of December 15, 2016.” Id. Weeks did not provide the December 2016 Demand Letter to AIIC, because, Weeks claims, AIIC had not responded to Weeks' submission of the Supplemental Claim Application and had not requested any documentation regarding the potential claim.

         On September 28, 2017, Prairie Son filed suit against Weeks, at which point Weeks submitted the claim to AIIC (the “Prairie Son Claim”). In November 2017, AIIC agreed to provide a defense to the underlying suit under a reservation of rights. On November 30, 2017, Weeks received another demand letter from Prairie Son, which it forwarded to AIIC along with a copy of the December 2016 Demand Letter. In January 2018, AIIC denied coverage for Weeks in the underlying suit, asserting that “there is no coverage under the Associated Policy for the [Prairie Son] Lawsuit, given that the Insured had knowledge of the Wrongful Act prior to the inception Date of the Policy.” ECF No. 41-12.

         On April 4, 2018, then third-party plaintiff Weeks filed a third-party complaint against AIIC, seeking a declaratory judgment that AIIC must provide coverage under the policies and asserting causes of action for breach of contract and bad faith. ECF No. 25. On August 16, 2018, AIIC filed a motion for summary judgment. ECF No. 35. On September 17, 2108, Weeks filed its response. ECF No. 41. On September 27, 2018, AIIC filed a reply. ECF No. 45. On October 1, 2018, the parties filed a consent stipulation of partial dismissal of all claims among and between Prairie Son, Weeks, and Stewart Title Guaranty Company; this stipulation realigned the parties such that third-party plaintiff Weeks became the only plaintiff, and third-party defendant AIIC became the only defendant. ECF No. 48. On December 12, 2018, the court held a hearing on the matter where the court dismissed Weeks's bad faith cause of action. On December 13, 2018, AIIC filed a sur-reply. ECF No. 56. On January 11, 2019, Weeks replied. ECF No. 58. Thus, the motion has been fully briefed and is ripe for the court's review.

         II. STANDARD

         Summary judgment is appropriate if the pleadings, the discovery and disclosure materials on file, and any affidavits show that “there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). “By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Id. at 248. “[S]ummary judgment will not lie if the dispute about a material fact is ‘genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. “[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Id. at 249. The court views the evidence in the light most favorable to the non-moving party and draw all inferences in its favor. Id. at 255.

         “The party seeking summary judgment shoulders the initial burden of demonstrating to the district court that there is no genuine issue of material fact.” Major v. Greenville Hous. Auth., 2012 WL 3000680, at *1 (D.S.C. Apr. 11, 2012). Nevertheless, “when a properly supported motion for summary judgment is made, the adverse party ‘must set forth specific facts showing that there is a genuine issue for trial.'” Id. (quoting Fed.R.Civ.P. 56(e)). The plain language of Federal Rule of Civil Procedure 56(c) “mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “[C]onclusory allegations or denials, without more, are insufficient to preclude the granting of the summary judgment motion.” Major, 2012 WL 2000680, at *1.

         III. DISCUSSION

         AIIC argues that summary judgment is warranted because the 2016-2017 Policy does not extend coverage to the Prairie Son Claim as a matter of law. AIIC denies that coverage exists on two related grounds. First, AIIC contends that Weeks' omission of its mistake with respect to the Prairie Son mortgage in the Renewal Application precludes coverage for the claim under the 2016-2017 Policy. Alternatively, AIIC contends that the terms of the 2016-2017 Policy do not extend coverage to the Prairie Son Claim because Weeks had knowledge of the claim's underlying “wrongful act” prior to the policy's inception date.[1] Because the court agrees with AIIC's latter argument, summary judgment is appropriate. The court discusses each argument in turn.

         A. Exclusion of Coverage Based on the Renewal Application

         Weeks submitted the Renewal Application on September 16, 2016, seeking coverage for the following year. ECF No. 35-3. Question 35 of the application asked Weeks if it was “aware of any fact, circumstance, incident, error, situation, or accident that may result in a claim being made against the firm.” Id. at 4. Weeks responded “No.” Id. AIIC subsequently issued the 2016-2017 Policy to Weeks, under which Weeks now seeks coverage for the Prairie Son Claim. AIIC argues that it does not owe coverage to Weeks for the Prairie Son Claim because Weeks made a misrepresentation on its Renewal Application. As AIIC points out, the 2016-2017 Policy states: “[i]f any of the statements, representations or information in the Application are not true and accurate, there shall be no coverage for any Claim under this Policy with respect to any Insured Person who knew . . . of such information that was not truthfully and accurately disclosed in the Application.” ECF No. 35-9 at 23-24.

         In response, Weeks argues that its answer on the Renewal Application was true and accurate because of the words “may result in a claim being made against the firm.” ECF No. 35-3 at 4 (emphasis added). According to Weeks, in September 2016, when it submitted the Renewal Application, it did not believe that its mistake would result in Prairie Son bringing a claim against it. Weeks contends that it held this belief because, at that time, the Subordination Agreement was going to put Prairie Son back into first priority position, thus remedying Weeks' recording mistake.[2] Therefore, according to Weeks, when it submitted the Renewal Application, it did not believe that its mistake would result in a claim and thus did not disclose it. In November 2016, when Weeks learned that something was wrong with the Subordination Agreement, it contends, it concluded that a claim may result from its mistake and notified AIIC.

         Whether Weeks made a misrepresentation on the Renewal Application requires a factual determination. If Weeks did not believe that its recording error “may [have] result[ed] in a claim, ” then its “no” response to Question 35 of the Renewal Application was truthful, and coverage is not precluded. If Weeks' belief was not genuine, and it hid its “wrongful act” from AIIC to prevent higher premium costs, as AIIC contends, then coverage for the Prairie Son Claim would be precluded. This is an issue of fact that implicates credibility determinations. As such, it is within the sole purview of the factfinder. See United States v. Burgos, 94 F.3d 849, 868 (4th Cir. 1996) (“Determining credibility of witnesses and resolving conflicting testimony falls within the province of the factfinder . . . .”). Therefore, summary judgment on this ground is inappropriate.

         Moreover, analysis of this issue under South Carolina insurance law, rather than the terms of the 2016-2017 Policy, leads the court to the same conclusion. In South Carolina, an insurer may decline to provide ...


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