Never Trust a Close Relative of Your Opponent

No Duty to Defend

Although the duty to defend is broader than the duty to indemnify under a liability insurance policy that duty is not without limit. To defeat a motion for summary judgment the defendant, seeking defense and/or indemnity from an insurer must present evidence that they are entitled to receive a defense or indemnity. Simply denying the plaintiff’s allegations is insufficient.

In State Farm Fire and Casualty Co., an Illinois Corporation v. Telecomm Consultants, Inc., an Oklahoma corporation; Myron C. Butler, Iball Instruments LLC, an Oklahoma limited liability company; Carl P. Bright, No. 18-6061, United States Court of Appeals for the Tenth Circuit (December 13, 2018) State Farm Fire and Casualty Company (“State Farm”) obtained a declaration that it had no obligation to defend and indemnify Myron Butler, an individual sued for misappropriation of trade secrets and breach of contract in Oklahoma state court.

FACTS

In 2007, Butler and Carl Bright formed iBall Instruments LLC (“iBall”) to manufacture and market a gas detection and monitoring system for use in oil and gas exploration. Disagreements developed between the two about iBall’s operation. In December 2010, they reached several agreements to resolve their dispute. One agreement created a “Joint Server,” a computer on which company-related data was stored and to which both men would have access.

In January 2011, Bright filed suit in Oklahoma state court, seeking a declaration concerning the ownership and control of iBall. The court appointed David Rhoades to administer iBall’s business and assets while the litigation was pending. Rhoades hired Butler’s son, Aaron Butler, and his son’s company, The Computer Lab, to upgrade iBall’s computer facilities. Butler’s son-in-law, Mark Davis, was also affiliated with The Computer Lab. As part of the upgrade, Rhoades allegedly approved the transfer of data from the Joint Server to new computers and the destruction of iBall’s Joint Server and other computers.

In June 2013, Bright and Butler executed a Settlement and Release Agreement (“Settlement Agreement”) to resolve the 2011 lawsuit. That Agreement granted Bright 100% ownership of iBall and assigned to him iBall’s intellectual property. It further provided that Bright, Myron Butler, TCI, and Bright’s company, Carl Bright, Inc. (“CBI”), assigned to iBall all intellectual and intangible property related to iBall or to its products and services offered to iBall’s customers.

Before the scheduled closing date of the settlement, Bright hired a forensic computer analyst to examine iBall’s computers. That examination showed software was installed on iBall computer hard drives to allow the user to delete and remove information permanently from the computer, and that software was then uninstalled a month later, likely to evade detection. The examination could not recover the deleted information. However, emails reference documents not otherwise produced during the transfer of iBall’s intellectual property to Bright.

On November 8, 2013, Bright and iBall sued Aaron Butler and Davis in Oklahoma state court. The amended petition alleges that Davis and Aaron Butler caused the destruction of iBall’s physical and intellectual property, including the possible destruction of the Joint Server. It also alleges that Butler and Davis violated the Settlement Agreement’s non-compete covenant by forming a company to actively compete with iBall and to sell a device developed using iBall’s property.

Prior to the initiation of the 2013 lawsuit, State Farm issued a businessowners policy and a commercial liability policy to TCI. Each policy names TCI as the insured. Butler is insured under the policies as an executive officer of TCI, “but only with respect to [his] duties” as a corporate officer.

State Farm initially defended Butler in the 2013 Oklahoma suit under a reservation of rights. Although he withdrew his request for defense and indemnification in August 2014, Butler asked State Farm to reopen his claim and to defend and indemnify him in the Oklahoma action in January 2017. State Farm agreed to defend him, again subject to a reservation of rights. State Farm sued in federal district court seeking declaratory relief that it had no obligation to defend and indemnify Butler. The district court granted summary judgment in favor of State Farm, absolving it of any obligation to defend and indemnify Butler..

ANALYSIS

There are five factors district courts should consider in determining whether to exercise their discretion to hear and decide claims for declaratory judgment:

  • whether a declaratory action would settle the controversy;
  • whether it would serve a useful purpose in clarifying the legal relations at issue
  • whether the declaratory remedy is being used merely for the purpose of procedural fencing or to provide an arena for a race to res judicata;
  • whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and
  • whether there is an alternative remedy which is better or more effective.

Under Oklahoma law, the duty to defend is broader than the duty to indemnify, and arises when the insurer ascertains the presence of facts that give rise to the potential of liability under the policy. The focus is on the facts of the incident not merely the allegations in the complaint.

When presented with State Farm’s properly supported motion, which included the policies, the first amended petition, and other pleadings from the state court action showed there was no possibility of coverage. Butler and TCI could not defeat the motion by trying to “rest upon the mere allegations or denials of [their] pleading, but [were required to] set forth specific facts showing that there [was] a genuine issue for trial.” Schneider v. City of Grand Junction Police Dep’t, 717 F.3d 760, 767 (10th Cir. 2013) (quotations omitted).

Because they failed to do so, the district court properly entered summary judgment in State Farm’s favor.

ZALMA OPINION

This business dispute with wrongful conduct by the business partners who deleted the software to punish one for bringing the suit was less than commendable. It was, rather, wrongful. State Farm alleged there was no coverage and Butler presented no evidence to defeat the motion but simply relied on its denials of State Farm’s allegations. Failing to present evidence in opposition to a motion for summary judgment is just plain stupid and resulted in a loss of the right to a defense.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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