O'Reilly Auto Enterprises, LLC v. United States Fire Insurance Company

IN THE UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF MISSOURI

SOUTHERN DIVISION

O’REILLY AUTO ENTERPRISES, LLC, )

)

Plaintiff, )

)

v. ) Case No. 6:17-03007-CV-RK

)

UNITED STATES FIRE INSURANCE )

COMPANY, WESTCHESTER SURPLUS )

LINE INSURANCE COMPANY, )

CONTINENTAL CASUALTY )

COMPANY, COLUMBIA CASUALTY )

COMPANY, )

)

Defendants. )

ORDER

Before the Court is Defendant United States Fire Insurance Company’s Motion for

Summary Judgment on Count I. (Doc. 184.) The motion is fully briefed. (Docs. 185, 204, 214.)

Oral argument on the motion was held on January 9, 2020. (Docket Entry 226.) For the reasons

below, the motion for summary judgment on Count I is DENIED.

I. Background

Plaintiff O’Reilly Auto Enterprises, LLC (“Plaintiff” or “O’Reilly”) brings this insurance

dispute lawsuit against four insurance carriers relating to coverage for certain asbestos personal

injury lawsuits. Defendant United States Fire Insurance Company (“U.S. Fire”) is a primary

insurance carrier, and the remaining three defendants are excess/umbrella carriers: Westchester

Surplus Lines Insurance Company (“Westchester”), Continental Casualty Company

(“Continental”), and Columbia Casualty Company (“Columbia”). Plaintiff’s First Amended

Complaint asserts two counts: Breach of Contract/Vexatious Refusal against U.S. Fire (Count I)

and Declaratory Judgment against all defendants (Count II). In the pending motion, U.S. Fire

seeks summary judgment on Count I of Plaintiff’s Amended Complaint.

Plaintiff is the successor-in-interest to Grand Auto, Inc. (“Grand Auto”). Industrial

Indemnity, San Francisco, CA (“Industrial Indemnity”) issued two polices to Grand Auto

identified as Policy No. SG851-5539 (“Policy 5539”) and Policy No. SG857-2271 (“Policy 2271”)

(collectively, the “U.S. Fire Policies”). U.S. Fire holds Industrial Indemnity’s rights and

obligations under the U.S. Fire Policies.1 Policy 5539 provided coverage for the period of May

22, 1984, to May 22, 1987. Policy 2271, at the time it was issued, provided coverage for the period

of May 22, 1987, to May 22, 1990.

At some point prior to November 1, 2012, U.S. Fire provided Plaintiff with a defense and

indemnity for asbestos-related bodily injury lawsuits filed against Grand Auto (the “Asbestos

Suits”) under the U.S. Fire Policies. In correspondence dated November 1, 2012, U.S. Fire

incorrectly declared Policy 5539 to be exhausted. U.S. Fire’s declaration of exhaustion was based

on a mistaken belief that Policy 5539 had total limits of $1,500,000 for Policy’s 5539 three-year

term. However, Endorsement 11, which was effective May 22, 1985, had increased the total limits

for the three-year term to $2,500,000. As a result of the incorrect declaration of exhaustion of

Policy 5539 on November 1, 2012, U.S. Fire began allocating all losses for the Asbestos Suits to

Policy 2271. In correspondence dated August 14, 2013, U.S. Fire incorrectly declared Policy 2271

to be exhausted, and as of that date, stopped providing Plaintiff with defense and indemnity for the

Asbestos Suits.

U.S. Fire denies that it had a copy of Endorsement 11 in its files at the time it declared

Policy 5539 exhausted and submits an affidavit indicating that its best re-creation of Policy 5539

as of September 6, 2013, did not include Endorsement 11. According to U.S. Fire, the original

Policy 5539 was delivered to Plaintiff and U.S. Fire does not maintain the original files. At the

time U.S. Fire received discovery requests from Plaintiff during this litigation, Endorsement 11 as

well as other documents showing an aggregate limit of $2.5 million were in U.S. Fire’s possession.

Plaintiff filed this lawsuit in November 2016, which U.S. Fire subsequently removed to

this Court. In October 2018, U.S. Fire and Plaintiff entered into a Partial Release and Settlement

Agreement (“Partial Settlement”). Under the terms of the Partial Settlement, U.S. Fire paid

Plaintiff a certain sum and agreed it would provide Plaintiff with a defense and indemnity for “all

pending and future asbestos lawsuits” until the aggregate policy limits of Policy 5539 and Policy

2271 are exhausted. At oral argument, the parties represented to the Court that as of that date

(January 9, 2020), the policy limits of Policy 5539 and Policy 2271 are not yet exhausted.

1 For purposes of this Order, references to Grand Auto and Plaintiff are considered interchangeable,

as are references to U.S. Fire and Industrial Indemnity.

The relevant portions of the Partial Settlement are as follows:

RECITALS

M. Subsequent to the filing of [this lawsuit], O’Reilly and US Fire have

determined that the annual aggregate limits of liability under [Policy 5539] were

$500,000 for the annual period May 22, 1984 to May 22, 1985, $1,000,000 for the

annual period May 22, 1985 to May 22, 1986, and $1,000,000 for the annual period

May 22, 1986 to May 22, 1987.

. . .

P. O’Reilly and US Fire have agreed to settle and resolve O’Reilly’s

claim for vexatious refusal to pay and defend claims under [Policy 2271] and/or

[Policy 5539] on the terms and conditions stated herein.

AGREEMENT

. . .

1. Payment to O’Reilly: . . . U.S. Fire . . . will pay O’Reilly

[$984,130.78] . . . [which] represents reimbursement to O’Reilly for payments it

made in excess of $50,000.00 per claim for settlements and defense costs incurred

to defend the claims described in Exhibit ‘A’ hereof.

. . .

5. Partial Release of US Fire. . . . O’Reilly releases US Fire . . . from,

and against any and all claims arising from the failure to pay or defend claims under

[Policy 5539], including, but not limited to, any claim [sic] breach of contract,

vexatious refusal under §375.420 RSMo., or any other statute, for bad faith/good

faith and fair dealing, and/or unfair claims practices. This release shall include a

release from any statutory penalties or attorneys’ fees incurred by O’Reilly with

respect to the enforcement of [Policy 5539] and claims in [this lawsuit] relating to

the alleged vexatious refusal of US Fire to pay or defend claims under [Policy

5539]. In addition, O’Reilly . . . waives all right to recover, or to claim a right to

recover, any attorney fees it has incurred in connection with [this lawsuit] on or

before October 1, 2018, with respect to any claim for vexatious refusal to pay or

bad faith under [Policy 2271].

6. Reservation of Claims by O’Reilly: Except as specifically stated in

Section 5 above, nothing herein shall be deemed to release US Fire or to prohibit

O’Reilly from pursuing all other claims against US Fire in [this lawsuit] including,

without limitation, (a) the policy limits relating to asbestos claims, and the scope,

meaning, applicability or enforceability of any deductible under [Policy 2271], (b)

any penalties, damages or attorney fees for bad faith or vexatious refusal to pay or

defend claims under [Policy 2271], (c) the scope, meaning, applicability or

enforceability of any deductible under [Policy 5539], (d) the recovery of attorney

fees, expenses and indemnity payments made by O’Reilly . . .

(Doc. 185-5 at 2-4.)

The parties agree that Plaintiff’s claims for breach of contract and vexatious refusal under

Policy 5539 were released by the Partial Settlement. What remains in Count I is Plaintiff’s (1)

breach of contract claim under Policy 2271, and (2) vexatious refusal claim under Policy 2271. It

is U.S. Fire’s position that as a result of the Partial Settlement, the factual basis for these claims

under Policy 2271 no longer exist and therefore, U.S. Fire is entitled to summary judgment on

Count I.

II. Legal Standard

A movant is entitled to summary judgment “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter

of law.” Fed. R. Civ. P. 56(c). The rule requires summary judgment to be entered “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).

III. Discussion

A. Choice of Law Analysis

As a threshold issue, the Court must decide which state law applies regarding the rules for

construction of insurance contracts since state law controls the substantive issues. See Interco,

Inc. v. Nat'l Sur. Corp., 900 F.2d 1264, 1266 (8th Cir. 1990) (citing Erie R.R. Co. v. Tompkins,

304 U.S. 64 (1938)). Missouri’s choice-of-law rules determine which state’s law should govern.

Am. Guar. & Liab. Ins. Co. v. United States Fid. & Guar. Co., 668 F.3d 991, 996 (8th Cir. 2012)

(citing Brown v. Home Ins. Co., 176 F.3d 1102, 1105 (8th Cir. 1999) (a federal court sitting in

diversity applies the forum state’s choice-of-law principles)). A court need not undertake the

choice-of-law inquiry unless a conflict of law is demonstrated. See Prudential Ins. Co. of Am. v.

Kamrath, 475 F.3d 920, 924 (8th Cir. 2007) (citation omitted). Because neither party raises an

actual conflict of applicable law as to Count I, the Court will apply Missouri law.

B. Plaintiff’s Breach of Contract Claim as to Policy 2271

Under Missouri law, the elements of a breach of contract claim are: (1) the existence and

terms of a contract, (2) that plaintiff performed or tendered performance pursuant to the contract,

(3) breach of the contract by the defendant, and (4) resulting damages suffered by the plaintiff.

Keveney v. Mo. Military Acad., 304 S.W.3d 98, 104 (Mo. 2010). “A submissible case in a breach

of contract action requires the plaintiff to present substantial evidence to prove” these elements.

United States Neurosurgical, Inc. v. Midwest Div. - RMC, LLC, 303 S.W.3d 660, 664 (Mo. Ct.

App. 2010).

U.S. Fire argues that the Partial Settlement renders moot Plaintiff’s breach of contract claim

under Policy 2271. U.S. Fire maintains that Plaintiff has no evidence of breach because once the

parties entered into the Partial Settlement, U.S. Fire has since complied with the defense and

indemnity obligations under Policy 2271. This position is problematic for several reasons. First,

the Partial Settlement does not explicitly release U.S. Fire from Plaintiff’s breach of contract claim

against it as to Policy 2271. Second, U.S. Fire cites no authority to support its position that entry

of the Partial Settlement constitutes a negation of a breach. In addition, U.S. Fire admits it

incorrectly notified Plaintiff that the limits of Policy 2271 were exhausted and that it then refused

to pay defense and indemnity costs for the next five years.

U.S. Fire also maintains that Plaintiff has no evidence of damages because once the parties

entered into the Partial Settlement, U.S. Fire has since paid Plaintiff all the amounts Plaintiff seeks

as damages under its breach of contract claim under Policy 2271. In response, Plaintiff presents a

declaration by Mr. James Enloe indicating that during the five-year period between

August 13, 2014, and the Partial Settlement, Plaintiff sustained damages additional to the amount

U.S. Fire has reimbursed it per the Partial Settlement. (Doc. 204-1 at ¶¶ 14, 15.) Even if the Court

disregarded this evidence of actual damages, lack of proof of actual damages does not suffice to

negate the damages element of Plaintiff’s breach of contract claim because, under Missouri law,

nominal damages are available where a contract and its breach are established. Shirley’s Realty,

Inc. v. Hunt, 160 S.W.3d 804, 808 (Mo. Ct. App. 2005). Therefore, U.S. Fire has not met its

burden to show it is entitled to summary judgment as to Plaintiff’s breach of contract claim.

C. Plaintiff’s Vexatious Refusal Claim as to Policy 2271

The elements of a vexatious refusal to pay claim are: (1) that plaintiff had an insurance

policy with defendant, (2) the defendant refused to pay, (3) defendant’s refusal was without

reasonable cause or excuse. Dhyne v. State Farm Fire & Cas. Co., 188 S.W.3d 454, 457

(Mo. 2006). Under the Missouri vexatious refusal statute,

where an insurer has refused to pay a claim without reasonable cause or excuse, the

court may award damages not greater than 20% of the first $1,500.00 of the loss

and 10% of the loss in excess of $1,500.00 together with reasonable attorney’s fees,

in addition to the amount of recovery [and interest] owing under the policy.

Morris v. J.C. Penney Life Ins. Co., 895 S.W.2d 73, 76 (Mo. Ct. App. 1995) (paraphrasing

Mo. Rev. Stat. § 375.420). To prove a claim of vexatious refusal, the insured must show the

insurer’s refusal to pay the claim was willful and without reasonable cause, as the facts would

appear to a reasonable and prudent person. Id. Whether an insurer’s refusal to pay is “vexatious”

is determined by the situation as presented to the insurer at the time it was called on to pay.”

Russell v. Farmers & Merchs. Ins. Co., 834 S.W.2d 209, 221 (Mo. Ct. App. 1992) (citation

omitted). “[A]n insurer that persists in its refusal to pay after it becomes aware that it has no

meritorious defense is subject to penalty for vexatious refusal.” Id. (citation omitted).

U.S. Fire argues that there is no evidence of a refusal to pay or vexatiousness given that it

has defended and indemnified the Asbestos Suits tendered by Plaintiff since the Partial Settlement.

This argument fails. As stated above, Plaintiff presents evidence that during the five-year period

between August 13, 2014, and the Partial Settlement, Plaintiff sustained damages additional to the

amount U.S. Fire has reimbursed it per the Partial Settlement. Even if U.S. Fire had paid all actual

damages claimed by Plaintiff under Count I, Plaintiff can maintain its vexatious refusal claim for

interest and punitive damages.

In addition, examples of evidence of vexatiousness include an unreasonable delay in

providing the benefits due under a policy. See Dhyne, 188 S.W.3d at 457-58 (rejecting insurer’s

argument that there was insufficient evidence to find a refusal to pay, in part, because insurer

eventually paid); Merseal v. Farm Bureau Town & Country Ins. Co., 396 S.W.3d 467, 473 (Mo.

Ct. App. 2013) (citation omitted) (jury may find for plaintiff by finding vexatious delay based on

circumstances of the case). “Examples of evidence of vexatiousness [also] include a refusal to pay

based on an inadequate investigation[.]” Russell, 834 S.W.2d at 221. Here, not only is there

evidence of a refusal to pay, genuine issues of material fact remain whether U.S. Fire unreasonably

delayed payment and whether U.S. Fire could have learned of the existence of Endorsement 11

after an adequate investigation. Therefore, U.S. Fire has not met its burden to show it is entitled

to summary judgment on Plaintiff’s vexatious refusal to pay claim.

IV. Conclusion

After careful consideration, U.S. Fire’s Motion for Summary Judgment on Count I is

DENIED.

IT IS SO ORDERED.

s/ Roseann A. Ketchmark

ROSEANN A. KETCHMARK, JUDGE

UNITED STATES DISTRICT COURT

DATED: January 14, 2020