EMCASCO INSURANCE COMPANY v. CUSTOM MECHANICAL EQUIPMENT, INC.

ORDER

VICKI MILES-LaGRANGE, Chief District Judge.

Before the Court are Plaintiffs/Counter-Defendants'1 ("plaintiffs") Motion for Summary Judgment and Brief in Support, filed June 19, 2013, and Defendant/Counter-Plaintiff CE Design LTD.'s ("defendant") Motion and Brief in Support of Summary Judgment, filed June 20, 2013. On July 11, 2013, plaintiffs responded to defendant's Motion for Summary Judgment, and on July 12, 2013, defendant responded to plaintiffs' Motion for Summary Judgment. Based upon the parties' submissions, the Court makes its determination.

I. Introduction

Plaintiffs filed this declaratory action seeking judgment on the availability of insurance coverage under certain policies of insurance issued to Custom Mechanical Equipment, Inc. ("Custom").2 EMCASCO issued the following Commercial General Liability ("CGL") insurance policies to Custom: (1) Policy no. 3D1-73-91-07, effective September 1, 2006-07; and (2) Policy no. 3D1-73-91-08, effective September 1, 2007-08. EMC issued Commercial Liability Umbrella Policy No. 3J1-73-91-08 to Custom for the effective periods of September 1, 2006-07 ("2006-07 EMC UL") and September 1, 2007-08 ("2007-08 EMC UL").3 Amended Complaint for Declaratory Judgment ¶¶ 17-21.

On or around November 10, 2010, defendant filed a lawsuit4 ("underlying case") in the Circuit Court of Cook County, Illinois challenging Custom, CMEOW and CME's ("Custom Entities") practice of faxing unsolicited advertisements. Amended Complaint for Declaratory Judgment Ex. A at 1. In the underlying case, defendant alleged that on April 18, 2008, the Custom Entities sent a telephone facsimile to defendant as well as sent similar telephone facsimiles to other recipients without having permission to do so. Amended Complaint for Declaratory Judgment ¶ 23. Defendant asserted claims in the underlying case against the Custom Entities for violation of the Telephone Consumer Protection Act ("TCPA"), common law conversion, and violation of the Illinois Consumer Fraud and Deceptive Business Practice Act ("ICFA").5 Amended Complaint for Declaratory Judgment ¶ 24.

On or about June 8, 2011, defendant and the Custom Entities filed a Motion for Preliminary Approval of Class Settlement Agreement and Notice to the class in the underlying case. In their motion, the parties informed the court they were agreeing to a settlement in favor of the plaintiff and the class for $1,276,0006, which was enforceable only against the proceeds of the Custom Entities' insurance policies. Amended Complaint for Declaratory Judgment ¶ 29. On June 23, 2011, the court in the underlying case entered an Order Preliminarily Approving the Class Action Settlement, and Approving the Class Action Settlement Notice, and on September 19, 2011, entered the Final Approval of Settlement and Judgment. Plaintiffs' Motion for Summary Judgment ¶ 5 at 3. Judgment was entered against the Custom Entities in the amount of $1,276,000.00.7

II. Summary Judgment Standard

"Summary judgment is appropriate if the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The moving party is entitled to summary judgment where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party. When applying this standard, [the Court] examines the record and reasonable inferences drawn therefrom in the light most favorable to the non-moving party." 19 Solid Waste Dep't Mechs. v. City of Albuquerque, 156 F.3d 1068, 1071-72 (10th Cir. 1998) (internal citations and quotations omitted).

"Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Furthermore, the non-movant has a burden of doing more than simply showing there is some metaphysical doubt as to the material facts. Rather, the relevant inquiry is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Neustrom v. Union Pac. R.R. Co., 156 F.3d 1057, 1066 (10th Cir. 1998) (internal citations and quotations omitted).

III. Discussion

In this declaratory action, both parties agree that Oklahoma law applies to the subject policies.8 The proper construction of an insurance contract is a question of law. Nat'l Am. Ins. Co. v. Am. Re-Ins. Co., 358 F.3d 736, 740 (10th Cir. 2004). The Tenth Circuit has summarized the rules governing insurance contract construction and interpretation as follows:

Id.

A. Plaintiffs' Coverage Obligations to Defendant

Plaintiffs contend that CMEOW and CME do not qualify as "insureds" on the subject policies. Specifically, plaintiffs assert that CMEOW and CME are not the same legal entity as Custom and that the subject policies were issued to Custom. As a result, plaintiffs contend that they "necessarily never had any coverage obligations to CMEOW and CME in the underlying case." Plaintiffs' Motion for Summary Judgment at 28. The Court finds that it is irrelevant whether plaintiffs have coverage obligations to CME or CMEOW. The court in the underlying case entered judgment "on Counts I, II, and III of the First Amended Class Action Complaint against the Custom Entities, jointly and severally, in the total amount of $1,276,000.00." Amended Complaint for Declaratory Judgment Ex. O at 6 ¶ G. The court in the underlying case further found that,

The Judgment shall be satisfied only through the proceeds of

Defendants' insurance policies and against Defendants' insurers. Amended Complaint for Declaratory Judgment Ex. O at 6 ¶ G. The court in the underlying case found the Custom Entities jointly and severally liable, and Custom assigned its rights under the subject policies to defendant. As a result, due to the joint and several liability judgment, if plaintiffs are found to be responsible to indemnify defendant on behalf of Custom, plaintiffs would be responsible for the entire amount.

B. Plaintiffs' Duty to Defend

The Oklahoma Supreme Court summarized the principles of an insurer's duty to defend and indemnify in First Bank of Turley v. Fid. and Deposit Ins. Co. of Maryland, 928 P.2d 298, (Okla. 1996).

Id. at 302. "An insurer has a duty to defend an insured whenever it ascertains the presence of facts that give rise to the potential of liability under the policy." Id. at 303. Further, the court said:

Id. In this case, plaintiffs exercised option three and refused to take any action when defense was demanded in the underlying case. Plaintiffs' actions were well within the law, and plaintiffs are now not estopped from raising defenses to indemnity if the Court finds they had a duty to defend.9

In Counts I, II, and III10 of their Amended Complaint for Declaratory Judgment, plaintiffs assert that the subject policies do not provide coverage for the claims asserted in the underlying case. Plaintiffs contend that the EMCASCO CGL Policy no. 3D1-73-91-08 effective September 1, 2007-08 ("EMCASCO CGL 2007-08") and the 2007-08 EMC UL policy do not provide coverage for the claims asserted in the underlying case because the Statutory Violation Exclusion endorsement, found in both the EMCASCO effective policy and the 2007-08 EMC UL policy, bars any coverage.11 Defendant, in both its Motion and Brief in Support of Summary Judgment and its brief in opposition to plaintiffs' Motion for Summary Judgment, contends that absent the Statutory Violation Exclusion coverage exists for all the claims in the underlying suit and that the Statutory Violation Exclusion does not apply to Count II (conversion) and Count III (violation of the ICFA) of the underlying case. Defendant specifically asserts that coverage exists in the subject policies as to the property damage and the advertising injury that occurred as a result of the Custom Entities sending unsolicited faxes. Plaintiffs assert that even if property damage and/or an advertising injury occurred, there would still be no coverage because of the Statutory Violation Exclusion endorsement added to both policies which excludes coverage if there is a violation of the TCPA.

The court in the underlying case entered judgment on all three Counts of the First Amended Class Action Complaint against the Custom Entities and Count I of the Complaint was an alleged violation of the TCPA. The Statutory Violation Exclusion found in the subject policies is unambiguous and "specifically excludes acts pertaining to `bodily injury', `property damage', or `personal and advertising injury' arising directly or indirectly out of any action or omission that violates or is alleged to violate . . . [t]he . . . TCPA." Amended Complaint for Declaratory Judgment Ex. Q & W. The Court finds that as a matter of law, because of the alleged TCPA violation, plaintiffs had no duty to defend as to Count I (TCPA Violation) of the underlying case.

Defendant contends that the conversion and ICFA claims alleged in the underlying case were independent of the TCPA violation and triggered a duty for plaintiffs to defend. Plaintiffs contend that the conversion and ICFA claims are barred by the Statutory Violation Exclusion and further assert that, "even if the Statutory Violation Exclusion is not considered, the conversion and ICFA claims did not trigger a duty to defend." Plaintiffs' Opposition to Defendant's Motion for Summary Judgment at 7. Plaintiffs contend that conversion is an intentional tort and "under Oklahoma law, the alleged commission of conversion cannot be an `occurrence,'12 and any damages allegedly caused by conversion are within the scope of the Expected or Intended Injury exclusion."13 Plaintiffs' Opposition to Defendant's Motion for Summary Judgment at 7. Defendant contends that the Custom Entities damaged defendant's fax machines by converting defendant's paper and toner to send the unsolicited faxes. Plaintiffs assert that in order for there to be coverage for property damage, the damage must be caused by an accidental occurrence.

In order to establish a conversion claim, a plaintiff must satisfy the following three elements:

Harmon v. Cradduck, 2012 OK 80, 286 P.3d 643, 649 (Okla. 2012). The Court finds that since the second element of conversion requires an intentional diversion of property (i.e. using defendant's paper and toner to print the Custom Entities' unsolicited faxes), and the court in the underlying case entered judgment against the Custom Entities as to Count II (conversion), as a matter of law, plaintiffs had no duty to defend Count II (conversion) of the underlying case because the "Expected or Intended Injury" exclusion within the subject policies excluded coverage for claims of conversion.

Additionally, plaintiffs contend that they did not have a duty to defend the ICFA claim alleged in the underlying case, because despite it being barred by the Statutory Violation Exclusion, coverage would also be denied based on the "Expected or Intended Injury" exclusion or the "Knowing Violation of Rights of Another14" exclusion included within the subject policies. Five elements must be proven to state a claim for an ICFA violation:

Dubey v. Public Storage, Inc., 395 Ill.App.3d 342, 353 (Ill. App. 2009). Since the second element of an ICFA claim requires the defendant to intend for the plaintiff to rely on the deceptive act, this intended act would exclude the ICFA claim from coverage. Since the court in the underlying case entered judgment against the Custom Entities for Count III (Violation of the ICFA), the Court finds that, as of matter of law, the ICFA claim in the underlying case did not trigger a duty for plaintiffs to defend the underlying case.

IV. Conclusion

Accordingly, for the reasons set forth above, the Court GRANTS Plaintiffs' Motion for Summary Judgment and Brief in Support [docket no. 107] and DENIES Defendant's Motion and Brief in Support of Summary Judgment [docket 108].