Cascades Dev. Of Minn. v. Nat'l Specialty Ins.

Cascades Development of Minnesota, LLC d/b/a Anytime Fitness, Inc., Associated Insurance Agents, Inc., Nicholas Newton, and Westport Insurance Corporation, Plaintiffs,

v.National Specialty Insurance, Jade Janina Benson, and West Bend Insurance Company, Defendants.

Civ. No. 09-2812 (RHK/SER)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

Date: January 25, 2011

MEMORANDUM OPINION AND ORDER

Rolf E. Sonnesyn, Tomsche Sonneyson & Tomsche, Minneapolis, Minnesota, for Plaintiffs.

Peter G. Van Bergen, Cousineau McGuire Chartered, Minneapolis, Minnesota, for Defendants.

INTRODUCTION

This action arises out of a dispute over insurance coverage. Plaintiff Cascades Development of Minnesota, LLC ("Cascades") obtained a workers' compensation insurance policy ("the Policy") from Defendant West Bend Insurance Company ("West Bend") to cover employees of its new Anytime Fitness health club. Cascades obtained the Policy through Nicholas Newton ("Nicholas")¹, an insurance agent with Associated Insurance Agents, Inc. ("Associated"), who was authorized to sell West Bend's products. Shortly before the workers' compensation coverage became effective, Jade Benson, a Cascades employee, was seriously injured in a work-related car accident. West Bend denied coverage and Associated's errors-and-omissions ("E&O") insurer, Plaintiff Westport Insurance Corporation ("Westport"), assumed responsibility for her workers' compensation claim. Westport, Cascades, Associated, and Nicholas, as co-Plaintiffs, then commenced this action in Dakota County state court. They seek reformation of the Policy and indemnity from West Bend for workers' compensation benefits paid (and payable) on Benson's behalf. West Bend removed the action to this Court, asserting diversity jurisdiction, and has now moved for summary judgment.

After hearing argument on the summary-judgment Motion, the Court sua sponte raised a concern about whether diversity jurisdiction existed over this action and ordered Defendants (as the parties invoking the Court's jurisdiction) to demonstrate why subject-matter jurisdiction was present. (See Doc. No. 41.) Defendants complied, satisfying the Court's initial jurisdictional concern.² However, they raised another jurisdictional problem—Plaintiff Nicholas was a citizen of the same state (Wisconsin) as Defendant West Bend at the time the action was filed. Defendants argue that this does not destroy diversity, however, because Nicholas is merely a nominal party and can be disregarded for purposes of determining whether jurisdiction exists; Plaintiffs (not surprisingly) disagree. Having now heard from both sides, the jurisdictional issue and the Motion areripe for disposition. For the reasons set forth below, the Court concludes that it has jurisdiction over the action and will grant West Bend's Motion for Summary Judgment.

BACKGROUND

The relevant facts are not in dispute. West Bend has a National Specialty Insurance ("NSI") division that writes insurance coverage for certain high-risk business classes, including fitness clubs.³ Insurance policies for fitness clubs are written through NSI, but they are West Bend policies.

Nicholas is an insurance agent and the Executive Vice President of Associated. In April 2006, Associated entered into an agreement with West Bend authorizing it to sell West Bend's insurance products, including high-risk coverages available through NSI. The terms of the agreement provide:

Subject to the requirements imposed by law, the terms of this Agreement and the underwriting rules and regulations of [West Bend] as stated in the Agent's Manual, the Agent is authorized to solicit, receive, buy and execute insurance contracts in the following lines of insurance....

All Lines Offered by [West Bend] Only.

(Reisbord Aff. Ex. A at 1.) It also provides that West Bend "will not defend [Associated] against liabilities claimed to be caused by acts or omissions of [Associated], or employees or staff members of [Associated], " and instead requires Associated to maintain its own E&O insurance coverage. (Id. at 2.) There is no dispute that Westport provided E&O coverage to Associated and Nicholas at all relevant times.

As the agreement alludes to, West Bend also has an Agent's Manual applicable to all agents authorized to write business for NSI. The Agent's Manual was available on West Bend's website, and Associated (and Nicholas) had access to it. The first section of the Manual, titled "General Information, " gives agents the following directions regarding their ability to bind coverage:

A. General Information Agency Guide

* * *

2. Binding

a. Agents may rate and bind Hole-In-One coverage, special events, some child care and personal appearance. See West Bend Connect for the latest authority limits.

b. For all other types of coverage:

Agents DO NOT have rates or rating authority. Agents DO NOT have binding authority unless they have received a quote and approval from NSI.

(Id. Ex. B at 1 (emphasis in original).)

Nicholas's brother, Wayne Newton ("Wayne"), was one of the principals of Cascades. Cascades planned to establish an Anytime Fitness franchise in Inver Grove Heights, Minnesota, which was projected to open in late September 2006. In late August, Wayne contacted Nicholas to set up a meeting regarding the club's insurance, and the two met on August 30, 2006. Wayne had already hired one employee—Jade Benson—to manage the new Anytime Fitness, and she was to begin work on September 1. According to Wayne, Nicholas knew Benson would be starting work on September 1 and that was why the two met about Cascades's insurance when they did.

At their meeting, Nicholas helped his brother complete an application for insurance known as an ACORD application. They also partially completed an NSI Health Club Questionnaire and, because Cascades would be employing Benson, Nicholas filled out an application for workers' compensation coverage with Wayne.

The brothers' recollections of when they agreed the policies needed to be effective have been inconsistent. In an October 11, 2006, e-mail outlining his meeting with Wayne, Nicholas stated "I concluded by asking [Wayne] when he would like coverage to be put into place. He said the club was to open officially on 9/28/06, and wanted the insurance in place by 9/21/06." (Reisbord Aff. Ex. M.) Nicholas also testified in his deposition that he asked Wayne at the end of their meeting when the policies needed to be effective, and they agreed on an effective date of September 21. (Nicholas Dep. 79.) Elsewhere in the deposition, however, Nicholas recalled the following exchange during the meeting: "[Wayne] said, we've hired somebody, she starts on the 1st, I need work comp, and I said no problem." (Id. at 69.) In fact, Nicholas also testified that:

I told [Wayne] he had work comp coverage on the 1st. Not in those exact words. My exact words were, don't worry. When he asked about, is there time to get this in place because we're hiring her tomorrow, will we have work comp, and I said, yes, you will.

(Id. at 80-81.) Nicholas explained this inconsistency by testifying that on the morning of March 19, 2007, while replaying the August 30th meeting in his head on his drive to work, he suddenly realized that "[Wayne] told me the 1st. I didn't properly document it and I've got to man up to this." (Id. at 207-08.) For his part, Wayne "[does]n't specifically remember [Nicholas] saying 'I will have workers' compensation coverage on [Benson] September 1st, '" but he "left that meeting with the understanding that he would have the coverage in effect by the time she was employed, which was the 1st of September." (Wayne Dep. 145.)

In any event, Nicholas left the meeting with partially completed applications, which he later completed in Associated's computer system after receiving the final information required for the NSI Health Club Questionnaire on September 6. Both the applications and Questionnaire had to be sent to an NSI underwriter before Nicholas could obtain a rate quote for the policies. The applications were sent to an NSI underwriter on September 7, at which time Associated requested a quote but did not yet request that coverage be bound. All of the policies (including the workers' compensation policy) listed a proposed effective date of September 21, 2006. On September 11, NSI contacted Associated asking for the Health Club Questionnaire, which had not been sent with the applications, and Nicholas e-mailed the questionnaire that same day. NSI faxed an insurance quote to Nicholas on September 19, which was approved by Wayne the following day. On September 21, Nicholas's associate e-mailed NSI and requested that the policies be issued at the quoted rate with an effective date of September 20, 2006.

Meanwhile, and unbeknownst to anyone at West Bend, Benson was involved in a car accident on September 18, 2006. She sustained a serious brain injury that left her totally disabled and unable to work in any capacity. The parties have stipulated that the accident was work-related. Nicholas and Associated notified Westport of a potential E&O claim arising from Benson's accident on October 16, 2006. Ultimately, Westport agreed to resolve Cascades's claim against Associated and to assume any potentialobligations to defend and indemnify Cascades against Benson's claims, essentially standing in the place of the workers' compensation insurer. Westport also assumed any indemnification rights against West Bend.

Westport then commenced this action against West Bend. The crux of the instant action is Westport's position that the Policy was effective at the time of the accident because Nicholas orally bound West Bend to coverage beginning on September 1 — before the date when the Policy actually became effective. It seeks: (1) a declaration that West Bend insured Cascades against workers' compensation liability as of September 1, 2006, and thus is obligated to indemnify Wesport for any workers' compensation benefits arising out of...