Opinion
CAUSE NO. NA 01-182-C-H/K
August 29, 2002
ENTRY ON MOTIONS FOR SUMMARY JUDGMENT
In this diversity action, plaintiff National Casualty Company seeks a declaratory judgment that it has no obligation to defend or to indemnify defendant Floyd County Plan Commission ("the Plan Commission") and its members in a lawsuit currently pending in the Floyd Circuit Court in Floyd County, Indiana. Steven E. Klein, also a defendant in this action, brought the underlying lawsuit against the Plan Commission after it denied Klein request for approval to build a residential subdivision in Floyd County, Indiana.
All parties have filed motions for summary judgment. Klein seeks summary judgment on the theory that he is not a proper defendant in this action. The court finds, however, that he has a sufficiently immediate interest in the insurance coverage question to make him a proper defendant, so his motion is denied. National Casualty contends that the insurance policy issued to the Plan Commission does not provide coverage for Klein's claims, both because exclusions in the policy apply and because the Plan Commission failed to provide timely notice of Klein's lawsuit. Defendants Floyd County Board of Commissioners ("the Board"), the Plan Commission, and its individual members (collectively the "Floyd County defendants") filed a cross-motion for partial summary judgment arguing that National Casualty breached its policy by denying coverage for Klein's lawsuit. As explained below, the undisputed facts show that the Floyd County defendants failed to provide timely notice of Klein's claims and that National Casualty was prejudiced by the failure. In fact, the Floyd County defendants did not notify National Casualty of the lawsuit until after the state court had already entered its findings of fact and conclusions of law against the Plan Commission on several core issues in the case. The court therefore denies the Floyd County defendants' motions and grants National Casualty's motion for summary judgment.
Standard on Summary Judgment
The purpose of summary judgment is to "pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Summary judgment is appropriate when there are no genuine issues of material fact, leaving the moving party entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party must show there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A factual issue is material only if resolving the factual issue might change the suit's outcome under the governing law. A factual issue is genuine only if there is sufficient evidence for a reasonable jury to return a verdict in favor of the non-moving party on the evidence presented. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Undisputed Material Facts
National Casualty issued a Public Officials Liability Policy to the Board. The effective policy period began July 6, 2000 and ran through July 6, 2001. The policy's coverage extends to the Plan Commission and its members.
On April 17, 2000, defendant Steven Klein filed an application with the Plan Commission seeking approval to develop a new residential subdivision to be called Bauman's Bluff. Following meetings on April 17, May 15, June 19, and July 17, 2000, the Plan Commission denied Klein's application.
On July 28, 2000, Klein filed a seven-count complaint in the Floyd Circuit Court requesting both damages and injunctive relief, including a writ of certiorari for review of the Plan Commission's denial and a writ of mandamus directing the Plan Commission to approve Klein's application for Bauman's Bluff. The lawsuit named as defendants the Board, the Plan Commission, and the Plan Commission members.
The Circuit Court held a hearing on Klein's petition for writ of certiorari on November 3, 2000. On December 5, 2000, the Circuit Court issued its Findings of Fact, Conclusions of Law and Judgment on the writ. It found that the Plan Commission's denial was "illegal, arbitrary, capricious and unjust" and ordered the Plan Commission to grant conditional approval of Bauman's Bluff. The Circuit Court further instructed the Plan Commission that any request by Klein for final approval should be governed only by the standards set out in the applicable subdivision control ordinance, and that if Klein's request for final approval met those standards, it should be granted.
The Floyd County defendants point out that the state court's action on December 5, 2000 did not amount to a final judgment on the count seeking a writ of certiorari. For practical purposes of evaluating prejudice from delayed notice, however, the entry of of the findings of fact and conclusions of law was far more important than the timing of the court's later decision to certify its earlier decision as final for purposes of appeal under Indiana Trial Rule 54(B). Similarly, the pendency of the appeal does not affect the notice issue here.
On December 8, 2000, three days after the Circuit Court issued its findings of fact and conclusions of law on the writ of certiorari, the Plan Commission first notified National Casualty of Klein's claims. Floyd County Attorney Richard Rush handled the Plan Commission's defense in all legal matters prior to the notification of National Casualty.
On December 14, 2000, National Casualty sent a letter to the Plan Commission stating that it would not defend the Plan Commission or provide indemnification for any damages or expenses arising out of Klein's lawsuit.
National Casualty asserted that Klein requested relief outside the scope of its policy. National Casualty also stated:
Our decision on coverage is based only on the facts as presented to us to date and should not be construed as applicable to a new suit or an amendment to this suit. Our right to have notice of either situation is reserved, as are the notice conditions of the policy.
On May 4, 2001, National Casualty rescinded its December 14 letter denying coverage and agreed to defend the Plan Commission in Klein's lawsuit.
However, National Casualty expressly reserved the right to assert all defenses to coverage under the policy, and stated: "In investigating the claim, defending any suit, or attempting any compromise settlement, National Casualty Company is not waiving any rights nor admitting any obligation under the policy."
National Casualty brought this declaratory judgment action on May 9, 2001, requesting a declaration that it did not have any obligation to indemnify or defend the Floyd County defendants in Klein's lawsuit. The Floyd County defendants filed a counterclaim against National Casualty for breach of the policy, requesting reimbursement plus interest for its attorney's fees and costs in defending against Klein's lawsuit. On July 31, 2001, National Casualty filed an answer to the counterclaim asserting several defenses, including that the Plan Commission failed to provide timely notice of Klein's claims and lawsuit.
Discussion I. Klein's Motion for Summary Judgment Klein argues that he has been improperly named a defendant in this case because he lacks a sufficient legal interest in the insurance policy. This is a diversity action, so the court applies federal procedural law and state substantive law. Allen v. Cedar Real Estate Group, LLP, 236 F.3d 374, 380 (7th Cir. 2001) (applying Indiana contract law), citing Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78 (1938). The parties and the court agree that the substantive law of Indiana applies here.
Klein's argument fails under federal and Indiana law. In the Seventh Circuit, an injured party can have a legally protectable interest in an alleged tortfeasor's insurance policy sufficient to support Article III jurisdiction and the discretionary exercise of power under the Declaratory Judgments Act. Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677, 682 (7th Cir. 1992); Truck Insurance Exchange v. Ashland Oil, Inc., 951 F.2d 787, 789 (7th Cir. 1992); accord, Community Action of Greater Indianapolis, Inc. v. Indiana Farmers Mutual Insurance Co., 708 N.E.2d 882, 885 (Ind.App. 1999) (following Seventh Circuit's decisions and holding that "the injured victim of an insured's tort has a legally protectable interest in the insurance policy before he has reduced his tort claim to judgment"). As the law now stands in Indiana and the Seventh Circuit, Klein can be a proper defendant in National Casualty's declaratory judgment action.
When this case was filed, the state court had already ruled in Klein's favor on one major claim that encompasses several critical issues. Under those circumstances, the probability that Klein may have a valid claim against the Floyd County defendants is sufficient to support both Article III jurisdiction and the exercise of jurisdiction under the Declaratory Judgments Act.
Because both federal and Indiana law permit National Casualty to name Klein as a defendant, federalism concerns do not affect the court's determination of Klein's motion. Cf. Allstate Insurance Co. v. Charneski, 286 F.2d 238 (7th Cir. 1960) (ordering dismissal of action under the federal Declaratory Judgments Act because Wisconsin state law would prohibit such an action by the plaintiff insurance company in state court).
II. National Casualty's Motion for Summary Judgment
National Casualty argues it is entitled to summary judgment based on the Plan Commission's failure to provide timely notice and based on several coverage exclusions in the policy. The court agrees with National Casualty on the notice issue and does not reach National Casualty's arguments based on the exclusions in the policy. For purposes of discussing the notice issue, the court assumes that Klein's lawsuit against the Plan Commission asserts claims within the scope of the policy.Under Indiana law, an insurance policy is construed according to the law of contracts. Allstate Insurance Co. v. Kepchar, 592 N.E.2d 694, 696 (Ind.App. 1992). Accordingly, clear and unambiguous language in a policy is given its plain and ordinary meaning. Id. at 697, citing City of Muncie v. United National Insurance Co., 564 N.E.2d 979, 982 (Ind.App. 1991). Under an indemnification policy, a duty to notify an insurer of potential liability is a condition precedent to the insurer's liability to its insured. Paint Shuttle, Inc. v. Continental Casualty Co., 733 N.E.2d 513, 520 (Ind.App. 2000). However, to be relieved of liability, an insurer must show that it incurred prejudice as a result of the insured's failure to provide timely notice. Miller v. Dilts, 463 N.E.2d 257, 265-67 (Ind. 1984) (holding that insurers were entitled to summary judgment because insureds' late notice caused prejudice to insurers as a matter of law). Prejudice is presumed from an unreasonable delay in notification. Id. at 265; Kepchar, 592 N.E.2d at 699-700 (reversing trial court's denial of summary judgment for insured where prejudice was established as a matter of law). If an insured presents evidence rebutting a presumption of prejudice, then the issue of whether prejudice occurred can become a question of fact for the jury. Miller v. Dilts, 463 N.E.2d at 265-66.
National Casualty's Public Officials Liability Policy requires the insured to provide notice to National Casualty of any potential claim under the policy. In the "Conditions" section, the policy states in pertinent part:
14. NOTICE OF CLAIM:
a. If, during the POLICY PERIOD or the "Extended Reporting Period," the INSURED receives written or oral notice from any party that it is the intention of such party to hold the INSURED responsible for any WRONGFUL ACT(S), the INSURED shall give written notice to the Company of the receipt of such written or oral notice, as soon as practical.
Policy at 6-7. The Public Officials Liability Policy also required the insured to provide notice under another provision in the "Conditions" section:
16. INSURED'S DUTIES IN THE EVENT OF A LOSS, CLAIM OR SUIT. * * *
b. If a CLAIM is made or a SUIT is brought against the INSURED, the INSURED shall immediately forward to the Company every demand, notice, summons or other process received by them or their representative.
Policy at 7.
The Floyd County defendants concede that the Plan Commission failed to notify National Casualty of Klein's lawsuit "as soon as practical" and failed to forward immediately to National Casualty the documents required by the policy.
Because prejudice from late notice is presumed, the principal issue here is whether the Floyd County defendants have raised a genuine issue of material fact as to the issue of prejudice.
The Floyd County defendants have not come forward with any specific evidence tending to negate the presumption of prejudice. They contend, however, that the Plan Commission's delay did not prejudice National Casualty because it would have denied the Plan Commission's claims under the policy even if it had been notified of Klein's lawsuit immediately. The argument is not persuasive. It would effectively nullify a notice defense any time that an insurer raised any other defense to claims asserting a duty of coverage or a duty to defend. Even if an insurer believes it has other grounds for denying coverage or a defense, it is entitled to timely notice that will give it the opportunity to make an early evaluation of its risks and to decide how to proceed.
In Miller v. Dilts, 463 N.E.2d 257 (Ind. 1984), the Indiana Supreme Court consolidated the appeals in three cases where the insureds failed to give timely notice to their insurers. In the first case, the insured did not give notice until six months after the accident triggering the insurer's potential liability, and ten days after the suit was filed. In the second case, the insured gave notice of the accident but did not give notice of the subsequent lawsuit until after judgment. In the third case, the insurer did not receive notice until seven months after the accident and five days after suit was filed.
The Indiana Supreme Court explained that the notice requirement gives the insurer an opportunity to make a "timely and adequate investigation" of the circumstances of a claim. Id. at 265. Accordingly, the court held that it could presume prejudice to the insurer's ability to prepare an adequate defense from unreasonable delay in notifying the insurer about the accident or about the filing of the lawsuit. Id. Because the insureds did not present any evidence to rebut that presumption, the insurers were entitled to summary judgment based on the untimely notice in all three cases.
The delay in this case is even more serious than the delays in Miller v. Dilts. The insureds in Miller v. Dilts waited several months after accrual of their potential claims before informing their insurers. In this case, the Plan Commission did not give National Casualty notice of Klein's lawsuit until four months after it was filed, and three days after the trial court's entry of its adverse findings of fact and conclusions of law on Klein's petition for writ of certiorari. The Plan Commission's delay in this case is more unreasonable and prejudicial than the delays in Miller v. Dilts.
This case is also similar to Paint Shuttle, Inc. v. Continental Casualty Co., 733 N.E.2d 513 (Ind.App. 2000), and Milwaukee Guardian Insurance, Inc. v. Reichhart, 479 N.E.2d 1340 (Ind.App. 1985).
In Paint Shuttle, a law firm sued its malpractice insurer for indemnification of its litigation expenses and the payment of an adverse judgment in a malpractice suit. The law firm had orally notified the insurer of the malpractice suit shortly after it was filed, but did not provide the written notice required by the policy until several months later. The law firm also chose to defend the lawsuit without the insurer's assistance in the early stages of the litigation. The Indiana Court of Appeals affirmed summary judgment for the insurer because the law firm failed to comply with the notice provisions of its policy and "voluntarily undertook the investigation and defense of the claim in contravention of [the insurer's] rights under the policy." 733 N.E.2d at 521.
In Milwaukee Guardian, an insured sought indemnification under an insurance policy for the costs of defending a lawsuit. As in Paint Shuttle, the insured also chose to proceed in the litigation with privately retained counsel even though he was alerted during trial that the claim might be covered by his policy. 479 N.E.2d at 1341. The insured did not provide written notice of the suit to his insurer, as required by the policy, until approximately eleven months after the suit was filed and after the trial had concluded. After a bench trial on the insured's claim for indemnification, the trial court entered judgment for the insured. The Indiana Court of Appeals reversed, holding as a matter of law that the insurer was prejudiced by the late notice. Id. at 1343.
The insured in Milwaukee Guardian argued that the late notice did not prejudice the insurer because he prevailed in his defense of the underlying lawsuit. The Indiana Court of Appeals rejected that argument:
Although [insured] was successful at trial, [insurer] was denied any opportunity to offer settlement or to guide the course of litigation, a right conferred by the insurance contract. [Insurer] was prohibited from selecting its own attorney to defend the suit, one which might have been more familiar with insurance defense litigation. [Insurer] was unable to negotiate the amount of attorney's fees it would be required to pay. An insurance company cannot be forced to pay fees and expenses incurred wholly without its knowledge or consent pursuant to an insurance contract when the insured has made no effort to fulfill his duties under that contract.
Id. at 1343.
As in Milwaukee Guardian, the late notice in this case caused prejudice to National Casualty as a matter of law. National Casualty did not have the opportunity to select counsel, to negotiate attorney's fees or to participate in the early stages of the litigation. The entry of findings of fact and conclusions of law on Klein's request for a writ of certiorari certainly had an adverse effect on National Casualty's potential ability to guide the litigation and to negotiate a favorable settlement.
The Floyd County defendants suggest that National Casualty could not have been prejudiced by the adverse findings because they addressed only one count of Klein's seven-count complaint. According to the Floyd County defendants, liability and damages are still very much at issue in the state court action. Def. Reply at 5. The argument is not convincing. The state court decision on that count required the court to decide the critical factual and legal issues regarding whether the Plan Commission's denial of Klein's petition had been lawful. It remains to be seen whether Klein might eventually recover damages, but he has already overcome one of the biggest hurdles by convincing the state court that the Plan Commission violated Indiana law. For example, the Floyd Circuit Court stated as findings of fact:
61. The Floyd County Plan Commission went beyond the concrete standards of the Subdivision Control Ordinance in denying the Conditional Approval of Petitioner's Plat, and certain members reflected their motive, prejudice, bias and considerations in correspondence concerning the plat.
* * *
63. That the Petitioner/Plaintiff, Steven E. Klein, presented competent evidence that all requirements of the Subdivision Control Ordinance had been met, which evidence was not rebutted, and actually confirmed by the Director of the Floyd County Plan Commission by the acknowledgment of the checklist for Conditional Subdivision Plat had been met.
Pl. Ex. F at 12-13. Based on such findings (which were drafted by Klein's attorney), the Floyd Circuit Court held that the Plan Commission's denial of approval was "illegal, arbitrary, capricious and unjust," and directed the Plan Commission to grant preliminary approval of Klein's plat. Pl. Ex. F at 13-14 (stating six reasons for the court's characterization of the Plan Commission's denial) 17 ("It is a mandatory duty of the Floyd County Plan Commission to approve the plat of the Petitioner.").
In light of these findings, at this point pursuing an aggressive defense against Klein's remaining claims might not be the most efficient use of resources. National Casualty was entitled to prompt notice and an early opportunity to decide upon the best approach in terms of litigation strategy and tactics and settlement position. National Casualty might have chosen not to contest coverage or the duty to defend, for example, if it thought the dispute could be resolved quickly and less expensively through a different approach. National Casualty might have decided to provide coverage, to defend the Plan Commission with a reservation of rights, or to deny coverage altogether. More important, it would have been able to make that decision under better circumstances, and certainly long before the parties had invested time and money in litigation, and before the state trial court had issued its ruling on several critical issues. Because National Casualty was denied those opportunities, the Plan Commission's unreasonable delay in providing notice caused prejudice to National Casualty as a matter of law.
The Floyd County defendants' final argument is that even if the Plan Commission's untimely notice caused prejudice, National Casualty waived its notice defense by failing to assert it specifically in its initial correspondence and even in its original complaint. National Casualty first raised the defense in its answer to the Floyd County defendants' counterclaim in this action. However, National Casualty expressly reserved its rights to assert additional defenses to coverage, including the notice issue, in its December 14 and May 4 letters to the Plan Commission. In any event, the Floyd County defendants have not shown that they or the Plan Commission suffered prejudice by any delay in raising the notice defense.
Under Indiana law, to apply the doctrine of waiver to an insurer's assertion of a defense, the insured must demonstrate both delay and prejudice. See Terre Haute First National Bank v. Pacific Employers Insurance Co., 634 N.E.2d 1336, 1338 (Ind.App. 1993) (policy exclusion not waived even though insurer did not raise defense until its answer to insured's complaint); Johnson v. Payne, 549 N.E.2d 48, 53 (Ind.App. 1990) (affirming declaratory judgment for insurer where insured did not show prejudice to support waiver and estoppel defenses); Protective Insurance Co. v. Coca-Cola Bottling Co., 423 N.E.2d 656, 662 (Ind.App. 1981) (insurer's 15 month delay in denying coverage did not establish waiver without a showing of prejudice to the insured).
Even if the Floyd County defendants could prove that National Casualty did not effectively reserve its right to raise the notice defense, they have not shown any prejudice from such a delay. There is nothing that the Floyd County defendants could have done at that point to remedy their earlier failure to provide timely notice of the Klein claim and lawsuit. Accordingly, National Casualty was and is entitled to rely on the undisputed failure to comply with the policy's notice provision.
The court acknowledges the asymmetry in Indiana law, in which prejudice to the insurer from the insured's failure to give notice is presumed, while an insured must affirmatively prove prejudice to show that the insurer has waived a policy defense. The asymmetry is well-established in Indiana law, though, and a federal court is not free to rewrite state law on the subjects. The court also notes that the doctrine of "mend the hold" does not apply here. National Casualty has not taken inconsistent positions; it has always reserved its rights to add defenses; and it raised the notice issue early in this litigation, as part of its reply to the defendants' counterclaims, which reply was filed only about two months after this action was filed. Cf. Herremans v. Carrera Designs, Inc., 157 F.3d 1118, 1123 (7th Cir. 1998) (applying doctrine under Indiana law where statute of frauds defense was not raised until after action had been pending 13 months and defendant offered no excuse for delay); see generally Harbor Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 362-65 (7th Cir. 1990) (explaining doctrine).
Conclusion
The court denies Klein's and the Floyd County defendants' motions for summary judgment. Plaintiff National Casualty's motion for summary judgment is granted. Final judgment will be entered accordingly.So ordered.