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West American Insurance Co. v. Atyani

United States District Court, D. New Mexico

February 14, 2019




         This matter is before the Court on Defendants Dennis Bonfantine, Janice Bonfantine, D.B. Kelly, Inc., d/b/a Kelly's Brew Pub and Restaurant and DB Brewery LLC's (collectively, “the Kelly's Defendants”) Motion for Partial Summary Judgment (Doc. 53), and Plaintiffs West American Insurance Company and Peerless Indemnity Insurance Company's (collectively, “the Insurers”) Motion for Summary Judgment (Doc. 74). Together, the motions seek summary judgment for all claims contained in the Insurers' Complaint for Declaratory Judgment (Doc. 1) and the Kelly's Defendants' Counterclaim (Doc. 50).[1] The parties dispute whether several insurance policies require the Insurers to defend and indemnify the Kelly's Defendants in state court actions where it is alleged that they improperly withheld tips, underpaid servers at Kelly's Brew Pub, and violated the City of Albuquerque Minimum Wage Ordinance (MWO). The Insurers seek a declaratory judgment that they are not obligated to defend nor indemnify the Kelly's Defendants in the underlying lawsuits. The Kelly's Defendants argue that the Insurers have a duty to defend the underlying actions and thus have breached their contract, acted in bad faith, and violated the New Mexico Unfair Insurance Practices Act (UIPA) by refusing to defend the claims.

         I. Background

         A. The Underlying State Lawsuits

         In April 2016, former employees of Kelly's Brew Pub brought suit in state court, alleging that the Kelly's Defendants had been violating the MWO by withholding or requiring servers to pay back their earned tips, not paying servers the correct minimum wage, and failing to keep required payroll records. (See Doc. 1 ¶¶ 37, 39-45.) That case-Atyani v. Bonfantine-is currently pending in the Second Judicial District Court, Bernalillo County, New Mexico. See D-202-CV-2016-02775. In February 2017, a different former employee filed suit against the Kelly's Defendants alleging similar violations of the MWO. See Frank v. Bonfantine, D-202-CV-2017-00852. In November 2017, the Frank case was resolved through settlement and the state court dismissed Frank with prejudice. Id., Stipulated Order Gr. Dismissal with Prejudice (2nd Jud. Dist., Bernalillo Cty., N.M. Nov. 13, 2017). (See also Docs. 1 ¶¶ 47-49; 53 at 7.)

         The Insurers issued various insurance policies to DB Brewery LLC d/b/a Kelly's Brew Pub, and the policies were in effect during the period when the alleged MWO violations occurred. (See Doc. 1 ¶¶ 32-34.) The relevant portions of both the Peerless and West policies include identical language covering property damage if the damage “is caused by an ‘occurrence' that takes place in the ‘coverage territory.'” (Id. ¶ 36.) The policies specifically exclude property damage that is “expected or intended from the standpoint of the insured.” (Id.) The policies define an “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” (Id.) “Property damage” is defined to include “[l]oss of use of tangible property that is not physically injured.” (Id.; Doc. 53 at 4-5.)

         The Kelly's Defendants informed the Insurers of the suits and sought defense on the theory that the claims in Frank and Atyani allege “property damage” covered by the policies. (Doc. 1 ¶ 51; Docs. 50 ¶ 51; 50-1, Ex. A.) The Insurers twice declined to defend the underlying actions on the basis that allegations of wage withholding and other MWO violations do not involve property damage resulting from an occurrence and, even if they did, would be further excluded from policy coverage as intended or expected harms. (See Docs. 1 ¶ 52; 53 at 8-10.) In July 2017, the Kelly's Defendants again demanded that the Insurers defend them in the Atyani suit. (Doc. 50-1 at 1-17.)

         B. The Insurers' Complaint for Declaratory Relief

         On October 18, 2017, the Insurers filed a Complaint for Declaratory Judgment Relief seeking a ruling from this Court declaring the parties' rights and obligations under the policies. (Doc. 1.) The Complaint specifically urges the Court to find that the Insurers have no duty to defend nor indemnify the Kelly's Defendants in the underlying suits because the relevant insurance policies do not cover the claims asserted in Frank and Atyani.[2] (Id. at 13-14.) The Kelly's Defendants moved to dismiss the declaratory action, arguing that the Court should decline to issue a declaratory judgment on coverage until the ongoing state case has more fully developed the facts in dispute-e.g., whether the alleged tip withholding occurred at all or occurred intentionally. (See Doc. 15 at 4-5.) The Court disagreed, holding that “federal declaratory relief is the most efficient and logical way to settle the present coverage dispute and will not conflict with any subsequent fact development in the underlying Atyani case.” (Doc. 73 at 9.)

         C. The Kelly's Defendants' Counterclaim

         In answering the Insurers' complaint for declaratory judgment, the Kelly's Defendants also filed a counterclaim alleging that the Insurers: (1) breached their contract by declining to defend and indemnify the Kelly's Defendants in the underlying suits; (2) acted in bad faith by failing to adequately investigate the underlying suits and ultimately declining to defend them; and (3) violated the UIPA by, among other things, failing to promptly respond to communications and provide a reasonable explanation for refusing to defend the claims. (Doc. 50 at 17-21.)

         D. Cross-Motions for Summary Judgment

         Both parties have moved for summary judgment on the question of whether the Insurers have a duty to defend the Kelly's Defendants in the underlying suits. (Docs. 53; 74.) The Kelly's Defendants also moved for partial summary judgment on Count I of their Counterclaim, urging the Court to find as a matter of law that the Insurers breached their contract by refusing to defend the underlying suits.[3] (Doc. 53 at 2, 20.) However, the Kelly's Defendants assert that the issue of indemnity should not be decided until the underlying actions have resolved. (Id. at 20-22.) The Insurers seek summary judgment in their favor as to all counts of the Counterclaim, on the theory that they have no duty to defend and thus could not have breached their contractual duty, acted in bad faith, or violated the UIPA in declining to do so. (Doc. 74 at 21-25.)

         Summary judgment is appropriate when the Court, viewing the record in the light most favorable to the nonmoving party, determines “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); see also Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). A fact is “material” if it could influence the determination of the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The moving party bears the initial responsibility of showing “an absence of evidence to support the nonmoving party's case.” Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir. 1991) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Once the moving party meets this burden, Rule 56 “requires the nonmoving party to go beyond the pleadings and by affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial.” Celotex, 477 U.S. at 324 (internal quotations omitted).

         II. The Duty to Defend

         The question at the heart of these motions is whether the Insurers had a duty to defend the Kelly's Defendants in the underlying lawsuits. In New Mexico, the duty to defend is distinct from the duty to indemnify. See Found. Reserve Ins. Co. v. Mullenix, 642 P.2d 604, 605 (N.M. 1982) (“[t]his jurisdiction recognizes the distinction between an insurer's duty to defend under the terms of an insurance policy and the duty to pay under the terms of the same policy” (citing Am. Emp'rs' Ins. Co. v. Cont'l Cas. Co., 512 P.2d 674 (N.M. 1973)). The duty to defend is broader than the duty to indemnify and may exist “even if [an insurer] can show in [a] collateral proceeding that it has no duty to pay under the terms of the policy.” Id.

         An insurer's duty to defend “is a matter of contract law and must be determined by the terms of the insurance policy[, ]” Miller v. Triad Adoption & Counseling Servs., Inc., 65 P.3d 1099, 1102 (N.M. Ct. App. 2003), by “comparing the factual allegations in the complaint with the insurance policy.” Lopez v. N.M. Pub. Sch. Ins. Auth., 870 P.2d 745, 747 (N.M. 1994). “In New Mexico, a court considering a collateral action will hold that the insurer has a duty to defend unless the insurer shows as a matter of law that all claims arise from the injury excluded by the insurance policy.” Union Ins. Co. v. Bandido Hideout, Inc., No. 11-CV-351 MCA/LFG, 2012 WL 13076230, at *5 (D.N.M. Sept. 28, 2012) (citing Lopez, 870 P.2d at 748-49). Thus, the insurer bears the burden of proving that there is no duty to defend, and “any doubt about whether the allegations are within policy coverage is resolved in the insured's favor.” State Farm Fire & Cas. Co. v. Price, 684 P.2d 524, 528 (N.M. Ct. App. 1984), overruled on other grounds by Ellington v. N.N. Inv'rs Life Ins. Co., 805 P.2d 70 (N.M. 1991). “If the allegations on the face of the complaint are ‘potentially' or ‘arguably' within the scope of coverage, the insurer is obligated to defend.” Servants of Paraclete, Inc. v. Great Am. Ins. Co., 857 F.Supp. 822, 829 (D.N.M. 1994); see also Dove v. State Farm Fire & Cas. Co., 399 P.3d 400, 404 (N.M. Ct. App. 2017). “The duty of an insurer to defend arises from the allegations on the face of the complaint or from the known but unpleaded factual basis of the claim that brings it arguably within the scope of coverage.” Am. Gen. Fire & Cas. Co. v. Progressive Cas. Co., 799 P.2d 1113, 1116 (N.M. 1990).

         Whether the Insurers have a duty to defend the Kelly's Defendants in the underlying suits hinges on three distinct questions: (1) whether loss of earned cash tips could potentially constitute “property damage” under the policies; (2) if so, whether the property damage was potentially caused by an “occurrence”; and (3) if so, whether any policy exclusions clearly prevent the complaints from falling within the scope of coverage. Having reviewed both parties' motions for summary judgment on the issue of the Insurers' duty to defend, the Court finds that there are no material facts in dispute[4] and this issue is properly resolved through summary judgment.

         The Court finds that while the underlying complaints allege at least some facts that arguably show “property damage” resulting from an “occurrence” sufficient to obligate the Insurers to defend the lawsuits, the alleged harm was the type of result intended or expected by the Kelly's Defendants in crafting their tip policy, and is thus clearly outside the scope of coverage per the provision excluding “expected or intended injury.” Thus, the Insurers properly declined to defend the underlying actions.

         A. The underlying actions potentially allege “property damage” as defined in the policies.

         The policies define “property damage” as “[l]oss of use of tangible property that is not physically injured.” (Docs. 1 ¶ 36; 53 at 4-5.) Though the Insurers believe that addressing the issue of whether there was potential “property damage” in the underlying suits “puts the proverbial cart before the horse” (Doc. 58 at 13), the Court finds that it makes more sense to determine at the outset whether the underlying complaints allege a type of injury that could be covered by the insurance policies at all. The Kelly's Defendants argue that the underlying suits allege “the loss of tangible property, i.e., tips in the form of cash, as a result of the Kelly's Defendants' alleged conduct.” (Doc. 53 at 13.) They point out that “numerous courts” in various jurisdictions have held that cash may be ...

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