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Navigators Insurance Co. v. The University of Louisville Foundation, Inc.

United States District Court, W.D. Kentucky, Louisville Division

January 18, 2019

NAVIGATORS INSURANCE COMPANY PLAINTIFF
v.
UNIVERSITY OF LOUISVILLE FOUNDATION, INC., et al. DEFENDANTS

          MEMORANDUM OPINION AND ORDER

         Defendant University of Louisville Foundation, Inc. filed a Third-Party Complaint against R.H. Clarkson Insurance Group on August 27, 2018, in this declaratory judgment action. (DN 13). Plaintiff Navigators Insurance Company has now filed a Motion to Strike Defendant's Third-Party Complaint. (DN 23). Defendant has responded in opposition (DN 28), and Plaintiff has replied (DN 35). This matter is ripe for adjudication.

         Background

         A. The Policy

         In late August of 2016, Plaintiff Navigators Insurance Company (“Navigators”) negotiated and issued a Not-For-Profit InNAVation Policy, which included Directors and Officers coverage, to Defendant University of Louisville Foundation, Inc. (“the Foundation”). (DN 1, at ¶¶ 11-12). The Policy was to provide coverage from September 1, 2016 to September 1, 2017. (Id.). While underwriting the Policy, Navigators required the Foundation to complete and sign an “Application for Not-For-Profit Directors and Officers Liability Insurance and Fiduciary Liability Insurance.” (Id. at ¶ 13). Jason Tomlinson (“Tomlinson”), the Assistant Treasurer of the Foundation, signed and submitted the Application on behalf of the Foundation and other Insureds on August 29, 2016. (Id. at ¶ 14). Question 7.c. of the Application asked whether any director or officer had any knowledge of “any act, error, omission, fact, incident, situation, unresolved dispute or any other circumstance that is or could be the basis for a claim under the proposed insurance policy?” (Id. At ¶ 15). This Question further cautioned applicants to:

REPORT KNOWLEDGE OF SUCH INCIDENTS TO YOUR CURRENT INSURER PRIOR TO YOUR CURRENT POLICY EXPIRATION. IT IS UNDERSTOOD AND AGREED THAT ANY CLAIM ARISING OUT OF ANY SITUATION THAT IS OR SHOULD HAVE BEEN REPORTED IN [7.c.] ABOVE IS EXCLUDED FROM THE PROPOSED INSURANCE [(the “Knowledge Exclusion”)].

(Id.). Tomlinson answered “no” to this question. (Id. at ¶ 15).

         B. The State Court Lawsuit

         In April of 2018, the Foundation and the University of Louisville filed a lawsuit against: (1) Tomlinson, former Assistant Treasurer of the Foundation; (2) James Ramsey, former President of the University and of the Foundation; (3) Kathleen Smith, former Assistant Secretary of the Foundation and Chief of Staff for the University President; (4) Burt Deutsch, former member of the Foundation's Board of Directors; (5) Michael Curtin, former Assistant Treasurer of the Foundation; and (6) Stites & Harbison, PLLC, former counsel for the University and the Foundation.[1] (Id. at ¶¶ 17-18). The lawsuit alleges that the Individual Defendants knowingly caused the Foundation to spend endowment funds at “an excessive and unsustainable rate, while simultaneously authorizing the payment of excessive compensation to Ramsey, Smith, and others associated with the Foundation.” (Id. at ¶ 19).

         Navigators offered to represent Defendants Tomlinson, Ramsey, Smith, Deutsch, and Curtin in the lawsuit, while reserving both the right to deny coverage for the claims in the lawsuit and to seek rescission of the Policy. (Id. at ¶ 27). The Individual Defendants are seeking advancement of indemnification for their costs, expenses, and damages in that lawsuit from the Foundation. (Id. at ¶ 28). If the Foundation pays advancement or indemnification for any or all of these Individual Defendants, it will seek reimbursement from Navigators under the Policy. (Id. at ¶ 29).

         C. This Action

         As a result of the underlying lawsuit, Navigators initiated this action on July 6, 2018, against the Foundation, Tomlinson, Ramsey, Smith, Deutsch, and Curtin, seeking a declaratory judgment that its Policy with the Foundation is void and rescinded or, alternatively, that it has no duty to defend the Individual Defendants under the Policy. (See Id. at ¶¶ 33-87). If the Court determines Navigators had no duty to defend then Navigators seeks reimbursement for costs already incurred in defending the Individual Defendants in the underlying lawsuit. (Id. at ¶¶ 88-92). Navigators does not assert any claim for monetary damages against the Foundation.

         Navigators bases its claims on alleged “material misrepresentations” made in the Application for Insurance submitted by Tomlinson on August 29, 2016. (Id.at ¶¶ 35-36, 59). Navigators alleges that the Foundation and its Officers, at the time the Application was signed, had knowledge of facts and circumstances that could form the basis of a claim under the Policy, violating the “Knowledge Exclusion” from Question 7.c. (Id. at ¶¶ 50-52). Alternatively, Navigators argues that no duty to defend or indemnify the Individual Defendants exists in the underlying lawsuit based on various exclusions from the Policy. (Id. at ¶¶ 70-75).

         The Foundation timely filed its Answer (DN 9) and shortly thereafter filed a Third-Party Complaint against its insurance broker, R.H. Clarkson Insurance Group (“Clarkson”). (DN 13). The Foundation's Third-Party Complaint alleges that Clarkson, an insurance brokerage firm, is an agent for Navigators and that Richard P. Lewis (“Lewis”), an insurance agent for Clarkson, worked with Defendant Tomlinson on the Foundation's Application for the policy issued on behalf of Navigators. (Id. at ¶¶ 4-6). The Third-Party Complaint states that from August 15 to August 29, 2016, Lewis “guided Tomlinson through the application process for Navigators” and drafted two warranty and representation statements for the Foundation to execute as part of the Application. (Id. at ¶ 7).

         The Foundation further claims that in September of 2016, Tomlinson became concerned that “an Auditor's Report and the potential implications associated with it” might threaten claims under its Policy with Navigators and asked Lewis how the Auditor's Report would affect coverage under the Policy. (Id. at ¶¶ 14-15). Lewis allegedly responded to Tomlinson that such threatened claims from the Auditor's Report were made public after the date of the Foundation's warranty and representations letter and that no updated or revised letter would be necessary. (Id. at ¶ 17). The Third-Party Complaint alleges that Tomlinson relied on Lewis' response and representations in not revising the letter and in not providing Navigators with additional notice of potential claims related to the Auditor's Report. (Id. at ΒΆ 13). Since the Foundation believes Navigators' allegations in this ...


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