Opinion
C.A. No. N14C-06-048 WCC CCLD
12-11-2020
VERIZON COMMUNICATIONS INC., VERIZON FINANCIAL SERVICES LLC, and GTE CORPORATION, Plaintiffs, v. ILLINOIS NATIONAL INSURANCE COMPANY, et al., Defendants.
Jennifer C. Wasson, Esquire; Carla M. Jones, Esquire; Potter Anderson & Corroon LLP, Hercules Plaza, Sixth Floor, 1313 North Market Street, Wilmington, DE 19801. Attorneys for Plaintiffs. Robin L. Cohen, Esquire; Keith McKenna, Esquire; Michelle R. Migdon, Esquire; McKool Smith, P.C., One Manhattan West, 395 9th Avenue, 50th Floor, New York, New York 10001. Attorneys for Plaintiffs. Kurt M. Heyman, Esquire; Aaron M. Nelson, Esquire; Heyman Enerio Gattuso & Hirzel LLP, 300 Delaware Avenue, Suite 200, Wilmington, DE 19801. Attorneys for Defendant Illinois National Insurance Company. Scott B. Schreiber, Esquire; James W. Thomas, Jr., Esquire; Arnold & Porter Kaye Scholer LLP, 601 Massachusetts Avenue, NW Washington, DC 20001. Attorneys for Defendant Illinois National Insurance Company. Bruce W. McCullough, Esquire; Bodell Bové, LLC, 1225 N. King Street, Suite 1000, P.O. Box 397, Wilmington, DE 19801. Attorney for Defendant Zurich American Insurance Company. Ronald P. Schiller, Esquire; Daniel J. Layden, Esquire; Jason A. Levine, Esquire; Hangley Aronchick Segal Pudlin & Schiller, One Logan Square, 27th Square, Philadelphia, PA 19103. Attorneys for Defendant Zurich American Insurance Company.
Plaintiffs' Motion for Partial Summary Judgment Against Illinois National Insurance Company on Remand - GRANTED in Part and DENIED in Part
MEMORANDUM OPINION
Jennifer C. Wasson, Esquire; Carla M. Jones, Esquire; Potter Anderson & Corroon LLP, Hercules Plaza, Sixth Floor, 1313 North Market Street, Wilmington, DE 19801. Attorneys for Plaintiffs. Robin L. Cohen, Esquire; Keith McKenna, Esquire; Michelle R. Migdon, Esquire; McKool Smith, P.C., One Manhattan West, 395 9th Avenue, 50th Floor, New York, New York 10001. Attorneys for Plaintiffs. Kurt M. Heyman, Esquire; Aaron M. Nelson, Esquire; Heyman Enerio Gattuso & Hirzel LLP, 300 Delaware Avenue, Suite 200, Wilmington, DE 19801. Attorneys for Defendant Illinois National Insurance Company. Scott B. Schreiber, Esquire; James W. Thomas, Jr., Esquire; Arnold & Porter Kaye Scholer LLP, 601 Massachusetts Avenue, NW Washington, DC 20001. Attorneys for Defendant Illinois National Insurance Company. Bruce W. McCullough, Esquire; Bodell Bové, LLC, 1225 N. King Street, Suite 1000, P.O. Box 397, Wilmington, DE 19801. Attorney for Defendant Zurich American Insurance Company. Ronald P. Schiller, Esquire; Daniel J. Layden, Esquire; Jason A. Levine, Esquire; Hangley Aronchick Segal Pudlin & Schiller, One Logan Square, 27th Square, Philadelphia, PA 19103. Attorneys for Defendant Zurich American Insurance Company. CARPENTER, J.
Before the Court is Plaintiff Verizon Communications Inc., Verizon Financial Services LLC, and GTE Corporation's ("Verizon" or "Plaintiffs") Motion for Partial Summary Judgment Against Illinois National Insurance Company on Remand. For the reasons set forth in this Opinion, Plaintiffs' Motion for Partial Summary Judgment is GRANTED in part and DENIED in part.
I. Factual & Procedural Background
This action stems from the denial of insurance coverage. In 2006, Plaintiffs finalized a spinoff that involved the transferring of Plaintiffs' directories business into a corporation named Idearc, Inc. ("Idearc") Plaintiffs appointed John Diercksen—a Verizon Officer—as the sole director of Idearc. Before the Idearc spinoff, Plaintiffs purchased insurance policies to cover liabilities that might arise from the transaction. Defendant Illinois National Insurance Company ("Illinois National") provided the primary policy for the Idearc spinoff ("the Policy"), which contained a $7 million retention floor and a $15 million limit.
Verizon Commc'ns Inc. v. Ill. Nat'l Ins. Co., 2015 WL 1756423, at *2 (Del. Super.). A more detailed factual and procedural history of this case can be found in the Court's prior Opinions.
Id. at *1.
Id.
Id.
Id.
About three years after the spinoff, Idearc filed for bankruptcy and per the bankruptcy plan, a Litigation Trust was established. The Litigation Trustee filed suit alleging that the Idearc spinoff was fraudulent ("U.S. Bank Action" or "Underlying Case"), and naming both Verizon and Mr. Diercksen as defendants. Plaintiffs have incurred over $48 million in litigation defense costs for Verizon and Mr. Diercksen. Plaintiffs submitted these defense costs to Illinois National and have not been extended coverage under the Policy.
Id.
Id.
Verizon Commc'ns Inc. v. Illinois Nat'l Ins. Co., 2017 WL 1149118, at *1 (Del. Super.), rev'd and remanded sub nom. In re Verizon Ins. Coverage Appeals, 222 A.3d 566 (Del. 2019).
Verizon Commc'ns Inc., 2015 WL 1756423, at *2.
In 2014, Plaintiffs initiated this suit seeking coverage for Mr. Diercksen's defense costs incurred during the U.S. Bank Action. At the outset, Plaintiffs filed for partial summary judgment which the Court denied. Instead, noting its concern that discovery would be driven towards allocation and ignore dispositive issues, the Court bifurcated the case and permitted narrowly focused discovery. During Phase I, the Court concentrated on whether Plaintiffs' insurance claim was a Securities Claim. Under Clause 8(e) of Endorsement #7 ("§8(e)") of the Policy, if the U.S. Bank Action was a Securities Claim, Plaintiffs would be entitled to a full reimbursement for defense costs subject to the retention amount and limit. After Phase I discovery, Plaintiffs and Illinois National moved for summary judgment on the Securities Claim issue.
Id.
Id. at *3.
Id.
Id.
Id. at *2; See Pls.' Opening Br. at 13, 16.
Verizon Commc'ns Inc., 2017 WL 1149118, at *1.
Before the Court made its ruling, the Court inquired into what the parties believed jointly incurred costs included. Illinois National informed the Court that costs incurred while Verizon and Mr. Diercksen shared counsel and after Mr. Diercksen retained separate counsel may be deemed jointly incurred. Illinois National explained that Verizon's and Mr. Diercksen's counsel seemed to have an arrangement where, in pursuing a unified defense, Verizon's counsel took the lead and Mr. Diercksen's counsel was consulted when necessary. Although this Court ruled that Plaintiffs' insurance claim was a Securities Claim, the Delaware Supreme Court ultimately held that the U.S. Bank Action does not constitute a Securities Claim under §8(e). Consequently, the subject of litigation now revolves around coverage under Clause 8(f) of Endorsement #7 ("§8(f)" or "Allocation Provision") of the Policy.
Ill. Nat.'l's Letter from Edward M. McNally, Esquire Responding to His Honor's Req. During the Aug. 22, 2017, Hr'g Regarding Verizon's Mot. for Entry of J., D.I. 401, at 1 (Sept. 29, 2017).
Id. at 3, 7.
Id. at 4, 7-8.
In re Verizon Ins. Coverage Appeals, 222 A.3d 566, 580 (Del. 2019), reh'g denied (Nov. 18, 2019).
A. The Policy's Allocation Provision
Clause 8(f) is essentially the Policy's Allocation Provision and is only applicable when the underlying claim is not a Securities Claim. The Allocation Provision states the following:
In connection with any Claim, other than a Claim that is or includes a Securities Claim, with respect to: (i) Defense Costs jointly incurred by, (ii) any joint settlement entered into by, or (iii) any Judgment of joint and several liability against any Organization and any insured Person, there shall be a fair and equitable allocation as between any such Organization and any such Insured Person, taking into account the relative legal and financial exposures and the relative benefits obtained by any such Insured Person and any such Organization, without any presumption that the coverage afforded to the Insured Person shall in any way reduce the allocation to the Organization which shall not be Insured for such allocation. In the event that a determination as to the amount of Defense Costs to be advanced under the policy cannot be agreed to, then the Insurer shall advance Defense Costs excess of any applicable retention amount which the insurer states to be fair and equitable until a different amount shall be agreed upon or determined pursuant to the provisions of this policy and applicable law.
Pls.' Mot. for Summ. J., D.I. 470, Exhibit H, Endorsement #7, at 3-4.
B. The Instant Motion
On March 2, 2020, Plaintiffs filed a Motion for Partial Summary Judgment Against Illinois National Insurance Company on Remand. Plaintiffs seek a ruling that there is no genuine issue of material fact regarding jointly incurred defense costs and allocation As a result, Plaintiffs request a holding that requires Illinois National to pay the full policy limit for Mr. Diercksen's defense costs incurred during the U.S. Bank Action.
Pls.' Opening Br. in Supp. of Their Mot. for Partial Summ. J. Against Ill. Nat'l Ins. Co. on Remand, D.I. 477, at 1 [hereinafter "Pls.' Opening Br."].
See Pls.' Opening Br. at 1.
Pls.' Opening Br. at 1.
II. Standard of Review
In reviewing a motion for summary judgment pursuant to Superior Court Civil Rule 56, the Court must determine whether any genuine issues of material fact exist. The moving party bears the burden of showing that there are no genuine issues of material fact, such that he or she is entitled to judgment as a matter of law. In reviewing a motion for summary judgment, the Court must view all factual inferences in a light most favorable to the non-moving party. Where it appears that there is a material fact in dispute or that further inquiry into the facts would be appropriate, summary judgment will not be granted.
Super. Ct. Civ. R. 56(c); Wilm. Tru. Co. v. Aetna, 690 A.2d 914, 916 (Del. 1996).
Moore v. Sizemore, 405 A.2d 679, 680-81 (Del. 1979).
Alabi v. DHL Airways, Inc., 583 A.2d 1358, 1361 (Del. 1990).
Ebersole v. Lowengrub, 180 A.2d 467, 470 (Del. Super. Ct. 1962), rev'd in part on procedural grounds and aff'd in part, 208 A.2d 495 (Del. 1965).
III. Discussion
A. Jointly Incurred Defense Costs
Plaintiffs contend that there is no genuine issue of material fact regarding Verizon's and Mr. Diercksen's jointly incurred defense costs. Plaintiffs note that previously, during the Phase I proceedings, Illinois National maintained that Verizon's and Mr. Diercksen's defense costs were jointly incurred while Verizon and Mr. Diercksen shared counsel. Illinois National also informed the Court that it believed Verizon's and Mr. Diercksen's defense costs were jointly incurred even after Mr. Diercksen retained separate counsel, because Verizon and Mr. Diercksen had a unified defense in which Verizon's counsel took the lead. Plaintiffs argue that, as a matter of law, Illinois National is bound to the definition of jointly incurred costs that it presented to the Court. Specifically, Plaintiffs contend that Delaware law requires a term used in a contract provision to maintain its same meaning throughout the entire contract, unless distinctly stated otherwise.
Pls.' Reply Mem. in Supp. of Their Mot. for Partial Summ. J. Against Ill. Nat'l Ins. Co. on Remand, D.I. 483, at 6 [hereinafter "Pls.' Rely"].
Pls.' Opening Br. at 17; Ill. Nat.'l's Letter from Edward M. McNally, Esquire Responding to His Honor's Req. During the Aug. 22, 2017, Hr'g Regarding Verizon's Mot. for Entry of J., D.I. 401, at 3 (Sept. 29, 2017).
Ill. Nat.'l's Letter from Edward M. McNally, Esquire Responding to His Honor's Req. During the Aug. 22, 2017, Hr'g Regarding Verizon's Mot. for Entry of J., D.I. 401, at 4 (Sept. 29, 2017).
Pls.' Reply at 7.
Id.; Pls.' Mot. for Partial Summ. J. Hr'g Tr., July 16, 2020, at 13.
To the contrary, Illinois National asserts that its prior definition of jointly incurred costs was limited to use in §8(e)—the Preset Allocation provision. Illinois National contends that it was not defining jointly incurred with respect to §8(f)—the Equitable Allocation Provision now in dispute. Essentially, Illinois National claims that its prior definition of jointly incurred was a "tentative statement[] and made in a particular context." Therefore, Illinois National argues that there is a genuine issue of material fact as to which defense costs were jointly incurred.
Def. Ill. Nat'l's Answering Br. at 21.
Id.
Pls.' Mot. for Partial Summ. J. Hr'g Tr., July 16, 2020, at 58; Def. Ill. Nat'l's Answering Br. at 22-23.
Def. Ill. Nat'l's Answering Br. at 19.
The Court finds that Illinois National's arguments are simply the insurance company's effort to distance itself from a clear and unequivocal statement that it too believed the defense costs associated with the coordinated and joint defense of the U.S. Bank Litigation for Verizon and Mr. Diercksen would, by any definition, be considered jointly incurred. In their letter to the Court on September 29, 2017, Illinois National's counsel stated:
Verizon and Diercksen shared the same counsel from the beginning of the U.S. Bank litigation in September 2010 until April 6, 2012, when Verizon's lawyers withdrew as counsel of record for Diercksen. Counsel for Verizon appear to have nevertheless continued to take the lead in defense of the litigation and Verizon and Diercksen pursued a unified defense. Similarly, experts appear to have been retained for the benefit of both Verizon and Diercksen.
...
Indeed, it appears that counsel for Verizon and counsel for Diercksen had an arrangement that counsel for Verizon would do a substantial share of the defense work, with individual counsel for Diercksen weighing in as needed and appropriate.The Court finds that these comments were a frank and honest acknowledgement by counsel that the U.S. Bank Litigation was jointly defended and that costs associated with that defense were jointly incurred. If Illinois National was now candid with the Court, it would agree there is no other logical or legally sound argument to make and that litigation must move on to the allocation issue. Instead, Illinois National attempts to unpersuasively assert that there is a difference in "jointly incurred" between §§ 8(e) and 8(f) of the Policy in order to distinguish its earlier response to the Court both orally and in writing when asked to define jointly incurred.
Ill. Nat.'l's Letter from Edward M. McNally, Esquire Responding to His Honor's Req. During the Aug. 22, 2017, Hr'g Regarding Verizon's Mot. for Entry of J., D.I. 401, at 4, 7-8 (Sept. 29, 2017).
The Court notes that the same language is used in both sections and the distinction between the sections is not in the term "jointly incurred" costs but in whether the matter is a Securities Claim or not. Now having their position on the Securities Claim issue confirmed by the Delaware Supreme Court, Illinois National attempts to manipulate its representations to the Court to justify its non-payment under the Policy. Moreover, although Illinois National argues that its concession to the meaning of jointly incurred during Phase I should be limited to §8(e), Illinois National does not explain why jointly incurred should have a disparate meaning in §8(f). Significantly, Illinois National has failed to point to any policy language or extrinsic evidence indicating that §§ 8(e) and 8(f) define jointly incurred differently.
In addition, the Court has already addressed whether the costs were jointly incurred in its May 16, 2018 Opinion. There the Court granted judgment since the Insurers only denied coverage asserting the Underlying Litigation was a Securities Claim and never asserted that the costs were unreasonable, unfair, or not jointly incurred. Those same findings are still applicable. There has never been a reasonable dispute regarding whether the defense costs were jointly incurred as there is no other logical way to characterize them. The only change in circumstances is that the Delaware Supreme Court has determined the litigation was not a Securities Claim, which has now opened up the issue of allocation. While the Court is sure that counsel would like this litigation to last forever, the only issue remaining to resolve is allocation under §8(f) and nothing more.
See Verizon Commc'ns Inc. v. Illinois Nat'l Ins. Co., 2018 WL 2317821, at *8 (Del. Super.), rev'd and remanded sub nom. In re Verizon Ins. Coverage Appeals, 222 A.3d 566 (Del. 2019), reh'g denied (Nov. 18, 2019).
See Id.
Therefore, the Court finds there is no genuine issue of material fact and, consistent with common sense and logic, that the previously agreed upon definition of jointly incurred applies equally in §8(f). Consequently, the Court finds the costs associated with the defense in the Underlying Litigation were jointly incurred by Verizon and Mr. Diercksen. The Court grants Plaintiffs' Motion for Partial Summary Judgment Against Illinois National finding the costs incurred by Verizon for the defense in the U.S. Bank Litigation were jointly incurred defense costs covered under §8(f) of the Policy.
B. Allocation
The Court notes that Plaintiffs and Illinois National cited several out-of-state cases in support of their arguments. However, the Court will not address these out-of-state cases as the Court finds that Arch Insurance Co. v. Murdock 2020 WL 1865752 (Del. Super.)—the case adopting the Larger Settlement Rule—provides enough instruction for the Court to make a decision. Thus, the Court finds no reason to rely on nonbinding case law.
Plaintiffs assert that Delaware law requires the Larger Settlement Rule to govern over this case. Relying on and likening its case to Arch Insurance Co. v. Murdock, Plaintiffs argue that because the Allocation Provision does not provide a sufficiently specific allocation method, the Larger Settlement Rule must be applied to protect Plaintiffs' economic expectation. In opposition, Illinois National argues that Murdock is unlike this case because the policy language in Murdock was different, and thus the Larger Settlement Rule does not apply. Illinois National further contends that §8(f) requires a fair and equitable allocation, which is an inherently fact-intensive undertaking that cannot be resolved on summary judgment.
Pls.' Reply at 15.
2020 WL 1865752 (Del. Super.).
Pls.' Reply at 16-17.
Def. Ill. Nat'l's Answering Br. at 30-31.
Id. at 31.
Id. at 24-25.
After a thorough review of Murdock, the Court finds that Murdock does not govern over this case, and accordingly the Larger Settlement Rule does not apply. In Murdock, plaintiffs—excess insurance carriers—were seeking declaratory judgments that plaintiffs had no obligation to indemnify defendant—the insured—and that plaintiffs were entitled to subrogation. In its opinion, the Murdock court was focused on determining whether the policy's allocation provision or the Larger Settlement Rule applied. In determining whether the Larger Settlement Rule applied, the Murdock court posed a key question that this Court must also ask: does the allocation provision provide an allocation method that would govern over the Larger Settlement Rule? The relevant policy language the Murdock court analyzed is as follows:
Arch Ins. Co. v. Murdock, 2020 WL 1865752, at *1, *3 (Del. Super.).
Id. at *1.
Id. at *8.
If in any Claim, the Insureds who are afforded coverage for such Claim incur Loss jointly with others (including other Insureds) who are not afforded coverage for such Claim, or incur an amount consisting of both Loss covered by this Policy and loss not covered by this Policy because such Claim includes both covered and uncovered matters, then the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of covered Loss. The Insurer's obligation shall relate only to those sums allocated to matters and Insureds which are afforded coverage. In making such determination, the parties shall take into account the relative legal
and financial exposures of the Insureds in connection with the defense and/or settlement of the Claim.
Id. at *3 (emphasis added).
After finding that the allocation provision was unambiguous, the Murdock court held that if the parties failed to agree, the allocation provision's plain language did not provide a sufficient allocation method, and thus the Larger Settlement Rule must be applied. The Murdock court reasoned that the allocation provision's relative legal and financial exposure method was informative only when the parties agreed to use their best efforts to reach an allocation. The Murdock court explained that "the Allocation Provision is not drafted in a manner that would provide for a specific allocation manner in the event that the Insureds and Insurers cannot agree to allocation." Absent policy language contemplating a disagreement, the Murdock court held that the allocation provision did not provide an allocation method that would govern over the Larger Settlement Rule.
Id. at *6.
Id. at *7.
Id. at *6.
Id. at *8.
Id. at *7.
The Court finds that the language in §8(f) is significantly different from that which was at issue in Murdock. Notably, in Murdock, the policy charged the parties with using the relative legal and financial exposure method when coming to an allocation agreement and failed to explicitly require that the same allocation method be applied upon disagreement. In contrast, the Allocation Provision in this case unambiguously provides a method that is independent of an agreement and reads as a completely controlling allocation method. The Allocation Provision instructs that with jointly incurred defense costs, there must be a fair and equitable allocation that accounts for the relative legal and financial exposures and the relative benefits obtained by those insured and uninsured.
Pls.' Mot. for Summ. J., D.I. 470, Exhibit H, Endorsement #7, at 3-4.
More importantly, unlike in Murdock, the Allocation Provision contemplates a disagreement. The Provision requires that upon a disagreement on allocation, Illinois National will pay what it believes is fair and equitable until a different amount is either agreed upon or determined in accordance with the Policy and law. Considering the Provisions' general allocation directive, it must follow that upon disagreement the relative legal and financial exposures and benefit method must be applied. Clearly this procedure could and should have been defined more precisely, and using the Policy standards will be difficult at best. However, the Court finds that the Allocation Provision sufficiently provides a governing allocation method and thus the Larger Settlement Rule is inapplicable.
Id. at 4.
2. Breach of Contract
Plaintiffs next contend that because Illinois National breached the Policy, Illinois National is not entitled to use the Policy's Allocation Provision. Specifically, Plaintiffs argue that Illinois National conceded that the defense costs before and after Mr. Diercksen received separate counsel were jointly incurred and that all experts were hired for the benefit of Mr. Diercksen and Verizon. Considering these defense costs, Plaintiffs assert that Illinois National cannot argue that the jointly incurred costs did not exceeded the Policy's $7.5 million retention and $15 million limit. Plaintiffs thereby conclude that Illinois National had an obligation to pay the maximum policy limit.
Pls.' Reply at 12, 14; Pls.' Opening Br. at 24; Pls.' Mot. for Partial Summ. J. Hr'g Tr., July 16, 2020, at 18-19.
Pls.' Opening Br. at 23; Ill. Nat.'l's Letter from Edward M. McNally, Esquire Responding to His Honor's Req. During the Aug. 22, 2017, Hr'g Regarding Verizon's Mot. for Entry of J., D.I. 401, at 3-4 (Sept. 29, 2017).
See Pls.' Opening Br. at 22-24.
Id. at 23.
Additionally, notwithstanding a disagreement on allocation, Plaintiffs contend that, per the Policy and the Court's previous Opinion, Illinois National was required to advance fair and proper defense costs "contemporaneously and to resolve doubts regarding its defense obligations in favor of the insured." However, Illinois National did not make any payments. Also relying on the Court's same Opinion, Plaintiffs argue that Illinois National should be prohibited from "rais[ing] allocation issues now for the first time in this action[.]"
Verizon Commc'ns Inc. v. Illinois Nat'l Ins. Co., 2018 WL 2317821 (Del. Super.), rev'd and remanded sub nom. In re Verizon Ins. Coverage Appeals, 222 A.3d 566 (Del. 2019), reh'g denied (Nov. 18, 2019).
Pls.' Reply at 14; Pls.' Opening Br. at 24-25.
Pls.' Opening Br. at 24-25; Pls.' Reply at 14; Pls.' Mot. for Partial Summ. J. Hr'g Tr., July 16, 2020, at 18-19.
Pls.' Opening Br. at 25.
Finally, Plaintiffs assert that Illinois National failed to state what it believed was a fair and equitable allocation as required under §8(f), because Illinois National did not provide the dollar amount it was allocating to Mr. Diercksen and did not specify how it came to its fair and equitable determination. Plaintiffs contend that Illinois National had a good faith obligation to provide Verizon with its allocation details. Considering Illinois National's failure to pay and alleged failure to state a fair and equitable amount in accordance with the Policy and the Court's previous Opinion, Plaintiffs maintain that Illinois National is precluded from using the Policy's Allocation Provision to exclude coverage.
Pls.' Reply at 12-14.
Id. at 12-13.
Id. at 14; See Pls.' Opening Br. at 26.
Illinois National asserts that it did not breach its obligation to pay because it believes that an allocation under §8(f) was unnecessary and would not result in an amount in excess of the Policy's retention. Illinois National emphasizes that it was not required to accept what Verizon determined was a fair and equitable allocation; rather, Illinois National maintains that it was only required to pay what Illinois National believed was fair and equitable.
See Def. Ill. Nat'l's Answering Br. at 34-35.
Def. Ill. Nat'l's Answering Br. at 35-36; Pls.' Mot. for Partial Summ. J. Hr'g Tr., July 16, 2020, at 35-36.
Moreover, Illinois National asserts that it did not breach the Policy by failing to state Mr. Diercksen's fair and equitable allocation. Rather, Illinois National believes it satisfied §8(f) because it "consistently told Verizon that Diercksen's share of the jointly incurred defense costs does not exceed the $7.5 million retention." Illinois National claims that it acted in good faith and requested information from Plaintiffs so that Illinois National and Plaintiffs could arrive at an allocation. However, no allocation discussion took place and both parties claim that the other avoided such discussion. In essence, Illinois National maintains that it did not breach its obligation to make fair and equitable payments because Illinois National had determined that no fair and equitable payments were due.
Def. Ill. Nat'l's Answering Br. at 35.
Id.
Id. at 3, 35.
Def. Ill. Nat'l's Answering Br. at 3, 10-14; Pls.' Opening Br. at 13-14.
Def. Ill. Nat'l's Answering Br. at 35.
The crux of Plaintiffs' first breach of contract argument is that Illinois National agreed to the jointly incurred defense costs, which in total exceeded the retention amount and policy limit, and thus obligated Illinois National to make full or partial payments. The Court cannot make the inference Plaintiffs are requesting. On its face, §8(f) requires that the jointly incurred defense costs be allocated between those insured and those uninsured under the Policy. Logically, once the jointly incurred defense costs are determined, it does not necessarily follow that an allocation will obligate Illinois National to cover the full, or even a specific amount of the cost incurred. What is a fair and equitable allocation under §8(f), and consequently whether Illinois National has an obligation to pay, appears to be a genuine issue of material fact. Although the Court finds it hard to believe that the retention floor was not reached, the Court cannot conclude on summary judgment that Illinois National breached its obligation to pay.
Pls.' Mot. for Summ. J., D.I. 470, Exhibit H, Endorsement #7, at 3-4.
Even though the Court in its previous Opinion found that Plaintiffs' claim was a Securities Claim and ordered the Defendants to pay, the Court acknowledges that under §8(f) an allocation of defense costs is prescribed. Alas, allocation is far from a new issue in this case. It is clear from the record that allocation has been highly contentious for Plaintiffs and Illinois National since before Plaintiffs initiated this suit. In fact, the Court recognized the allocation dispute when it bifurcated the case in 2015 and feared exactly what has come to pass. The parties are now over six years into litigation, have without a doubt spent millions in attorney's fees, and are set to spend millions more. It is clearly unfortunate that a more reasonable and common sense view of this issue has not prevailed between the parties.
Although the Court finds Illinois National's conduct to be disturbing and lacking in candor, and while tempted, the Court cannot find a breach of contract. To find that Illinois National breached the Policy would be to rewrite a critical section of the contract. However, it does appear that those responsible for managing this Policy for Illinois National failed to perform any reasonable review of the invoices for costs provided by Verizon and were more intent on delaying payment than complying with the terms of the Policy. Nevertheless, the Court cannot find using a summary judgment standard that Illinois National breached the Policy when Illinois National informed Plaintiffs of its position that the retention amount had not been reached and failed to pay under the policy. In sum, the Court cannot as a matter of law find a breach of contract as suggested by Plaintiff.
3. Fair and Equitable Allocation
In the alternative, Plaintiffs argue that a fair and equitable allocation under the Policy would require Illinois National to pay the full policy limit. Plaintiffs reason that because (1) Illinois National conceded that Verizon and Mr. Diercksen had a unified defense, (2) Mr. Diercksen's conduct indispensably formed the basis of the Underlying Case, and (3) the Underlying Case was resolved in a single-issue trial in Mr. Diercksen's and Verizon's favor, the joint defense costs must be shared evenly. Accordingly, Plaintiffs assert that at least half of the jointly incurred defense costs—estimated at about $24.3 million—surpass the $7.5 million retention and the $15 million policy limit.
Pls.' Reply at 21.
Id. at 21-22.
Id. at 21, 24.
Illinois National argues that a fair and equitable allocation requires a factual inquiry into "a number of factors bearing on [the] parties' relative exposures and benefits," which cannot be accomplished on summary judgment. Noting the relative exposure factors, Illinois National particularly argues that (1) Mr. Diercksen's exposure in the Underlying Case was nominal as compared to Verizon because Mr. Diercksen's exposure was limited by his insurance coverage and his insurance would cover a "tiny fraction" of the overall potential damages, (2) one out of eleven claims named only Mr. Diercksen, (3) Verizon's counsel made some arguments solely on Verizon's behalf, and (4) Mr. Diercksen was not at the center of litigation but rather the case was centered on Verizon's fraudulent transfer.
Def. Ill. Nat'l's Answering Br. at 25-26.
Id. at 25, 26-28.
In response, Plaintiffs contend that Mr. Diercksen's liability was not minimal because the U.S. Bank Action "sought to hold Mr. Diercksen and Verizon 'jointly and severally' liable for damages" and the U.S. Bank court determined that if Mr. Diercksen was found to have acted with gross negligence, Mr. Diercksen would have not been covered by his insurance making him personally liable. Additionally, Plaintiffs argue that whether Mr. Diercksen was the target of ligation should not be considered when determining coverage because an insurers' obligation is determined by the facts alleged and Mr. Diercksen's conduct was crucial to the Underlying Case. Plaintiffs note that "the claims against Diercksen were sufficiently strong to allow the Trust to overcome summary judgment and proceed to trial against both Diercksen and Verizon."
Pls.' Reply at 23-24.
Id. at 22-23. Plaintiffs also argue that Illinois National wrongly reasons that Mr. Diercksen did not receive a benefit from the spin-off and therefore should be allocated a minimal amount of the defense costs. However, because Plaintiffs have not provided a correct citation to Illinois National's assertion, the Court will not address Plaintiffs' argument.
Pls.' Reply at 22-23. --------
Despite the Court's belief that granting summary judgment will save the parties from a needlessly laborious and costly future, the Court finds that there are genuine issues of material fact regarding allocation. Considering the Policy's prescribed relative legal and financial exposures method and viewing all factual inferences in a light most favorable to Illinois National, whether the jointly incurred defense costs indeed surpassed the retention floor and policy limit appears to be a genuine issue of material fact. Therefore, the Court denies Plaintiffs' Motion for Partial Summary Judgment on the allocation issue.
C. Path Forward
While the Court has refused to grant the total relief requested by Verizon, the Court is concerned that, in spite of having information regarding defense costs for years, it appears that Illinois National has failed in any meaningful way to review that information and to professionally and candidly provide any rational reason for its nonpayment. Simply saying it will not reach the retention amount without a reasonable and fair explanation is and continues to be insufficient. Refusing payment without justification appears to be the method used by Illinois National to deny payment and to extend this dispute as long as possible. With allocation on the forefront, the Court is confident that without judicial intervention this conduct will continue.
As a result, the Court believes the following is necessary to manage this litigation and to bring it to a conclusion within a reasonable time frame:
- The Court is ordering that by January 15, 2021, Illinois National is to deposit with the Court a bond that would be sufficient to cover a judgment in the amount of 15 million dollars. This amount reflects the financial obligation of Illinois National if half of the defense costs claimed by Verizon is ordered which, until the hearing below is conducted, would appear to be a reasonable allocation of costs. The Court takes such action as it appears Illinois National has failed to comply in any meaningful way with §8(f) of the policy to advance costs required by the Policy.
- The Court orders Illinois National to review the documentation that has been provided regarding defense costs and to provide to Verizon and the Court by April 30, 2021 a detailed accounting of what it finds to be fair and reasonable defense costs for Mr. Diercksen recognizing the Court has already ruled they were jointly incurred.
- The Court orders Verizon to review and respond to the accounting made by Illinois National and to provide to the Court by July 30, 2021 a detailed accounting of what additional costs it believes should be included.The Court appreciates that under the present pandemic situation this is a tight time frame but it believes it is time, at least for the benefit of the parties, to bring this litigation to a conclusion. After years of contentious litigation, it is now clear which provisions of the Policy apply to these defense costs and now it is time to determine whether Illinois National has a payment obligation under the Policy.
- The Court will allow limited discovery during this phase of the litigation which may only include depositions of the attorneys that may have been involved in the U.S. Bank Litigation or requesting of additional documents that may explain or clarify a particular claimed cost. Discovery should be precise to address a particular issue and not a general request for documents. Discovery will not be extended beyond the deadlines imposed above.
- Once the Court receives the information above, it will hold a hearing or appoint a Master to conduct a hearing to determine the amount of defense costs that should be allocated to the defense of Mr. Diercksen using the standards set forth in the Policy.
IV. Conclusion
For the foregoing reasons, Plaintiffs' Motion for Partial Summary Judgment Against Illinois National Insurance Company on Remand is GRANTED in part and DENIED in part.
IT IS SO ORDERED.
/s/ William C. Carpenter, Jr.
Judge William C. Carpenter, Jr.