For Senior Help, LLC v. Westchester Fire Ins. Co.

515 F.Supp.3d 787

FOR SENIOR HELP, LLC, Plaintiff,

v.WESTCHESTER FIRE INSURANCE COMPANY, Defendant.

Case No. 3:19-cv-00126

United States District Court, M.D. Tennessee, Nashville Division.

Filed January 25, 2021

Gregory H. Oakley, Oakley Law PLLC, Nashville, TN, for Plaintiff.

Lynsie G. Rust, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Louisville, KY, for Defendant.

MEMORANDUM

ALETA A. TRAUGER, United States District Judge

Before the court are: (1) the Motion for Authority of Bankruptcy Trustee to Intervene (Doc. No. 39), filed by John C. McLemore, Trustee, as the proposed intervening party; (2) defendant Westchester Fire Insurance Company's Motion for Partial Summary Judgment (Doc. No. 54); and (3) plaintiff For Senior Help, LLC's Motion for Partial Summary Judgment on its Claim for Bad Faith Failure to Settle (Doc. No. 55). For the reasons set forth herein, the plaintiff's motion will be denied; the defendant's motion will be granted in part and denied in part; and the Motion to Intervene will be granted.

I. FACTS AND PROCEDURAL BACKGROUND¹

A. Events Leading to the Underlying Arbitration

This case, reduced to its essence, is a dispute about insurance coverage, but it has a complicated procedural history. In February 2015, plaintiff For Senior Help, LLC ("FSH") entered into a franchise agreement with non-party Medex Patient Transport, LLC ("Medex").² Medex was a franchisor of businesses that provide non-emergency transportation and related patient-care services. FSH paid Medex a franchise fee, an additional fee in exchange for an Area Development Agreement ("ADA"), and an operations fee in exchange for a variety of support services that were to be provided by Medex as franchisor. Barely a year later, in April 2016, FSH sent Medex a formal notice of breach of contract, to which Medex responded by terminating the franchise agreement and the ADA and asserting that FSH had committed the first material breach of the franchise agreement and misused its trademark. FSH sent its own notice of termination based on Medex's failure to cure the defaults identified in its initial notice of breach.

Following termination of the contracts, FSH initially sued Medex in state court, asserting contract- and fraud-based claims. Because their contracts required arbitration, FSH subsequently filed an arbitration demand with the American Arbitration Association, asserting claims against Medex for (1) fraud in the inducement; (2) breach of the franchise agreement; (3) breach of the ADA; (4) violation of the Tennessee Consumer Protection Act ("TCPA"); (5) slander; and (6) civil conspiracy.³ (See Statement of Claim, Doc. No. 27-2.)

B. The Policy

Defendant Westchester Fire Insurance Company ("Westchester") had issued a Miscellaneous Professional Liability Policy ("Policy") to Medex, effective May 27, 2015 to May 27, 2016 ("Policy"). (Doc. No. 1-1.) The Policy obligated Westchester to "pay on behalf of the Insured [Medex] all sums in excess of the Retention that the Insured shall become legally obligated to pay as Damages and Claims Expenses because of a Claim first made against" Medex while the Policy was in effect "by reason of a Wrongful Act" committed during the Policy period. (Policy ¶ I.A., Doc. No. 1-1, at 3.) The Policy imposed upon Westchester the "right and duty to defend any covered Claim brought against the Insured even if the Claim is groundless, false or fraudulent." (Policy ¶ I.B.1, Doc. No. 1-1, at 3.) It prohibited Medex, as the insured, from "admit[ting] or assum[ing] liability or settl[ing] or negotiate[ing] to settle any Claim or incur[ring] any Claims Expenses" without Westchester's prior written consent and granted Westchester the "right to appoint counsel and to make such investigation and defense of a Claim as it deems necessary." (Id. ) The Policy defined "Wrongful Acts" as "any actual or alleged negligent act, error, omission, misstatement, misleading statement or Personal Injury Offense committed by the Insured" or its employees. (Id. ¶ II.T, Doc. No. 1-1, at 5.)

The Policy contained the following exclusions, among others:

The Company shall not be liable for Damages or Claims Expenses on account of any Claim:

A. alleging, based upon, arising out of, or attributable to any dishonest, fraudulent, criminal or malicious act or omission, or any intentional or knowing violation of the law by an Insured, however, this exclusion shall not apply to Claims Expenses or the Company's duty to defend any such Claim unless and until there is an adverse admission by, finding of fact, or final adjudication against any Insured as to such conduct, at which time the Insured shall reimburse the Company for all Claims Expenses incurred;

....

H. alleging, based upon, arising out of or attributable to ... unfair trade practices or other violation of the Federal Trade Commission Act ... or any similar provision of any federal, state, or local statutory law or common law anywhere in the world;

....

J. alleging, based upon, arising out of, or attributable to the gaining in fact of any profit or advantage to which the Insured it not legally entitled....

(Id. ¶ III, Doc. No. 1-1, at 6.)

The Policy also contained a "Franchisors Endorsement" which stated, in relevant part:

1. Section II, Definitions, subsection T, the definition of Wrongful Act, is amended by adding the following:

Wrongful Act also means any actual or alleged plagiarism, piracy or misappropriation of ideas, neglect or breach of duty by the Insured in their capacity as such ... in the performance or failure to perform Professional Services and which arises out of or involve one or more of the following:

1. any and all marketing or solicitation activities undertaken or engaged in by any of the Insureds in connection with the offer or sale of franchises pursuant to any franchise agreement, area agreement or development agreement (each such agreement is referred to herein as a "Franchise Contract");

....

4. the failure to comply with any federal or state law or regulation, or the terms of the Franchise Contract, affecting the renewal or termination of the relationship of the parties to a Franchise Contract;

5. the failure of the franchisor to provide services, training, advertising, or other support to the franchisees as required under the terms of a Franchise Contract or disclosed to franchisees in an offering circular or other distributed disclosure document ....

(Id. Franchisors Endorsement ¶ 1, Doc. No. 1-1, at 19.)

The Franchisors Endorsement also amended the Policy Exclusions by excluding coverage for claims otherwise within the scope the Franchise Endorsement:

• alleging, based upon, arising out of or attributable to any assurance, promise, warrant or guarantee of potential sales, earnings, profitability or economic value;

• alleging, based upon, arising out of or attributable to unfair competition or unfair business practices including, but not limited to, territorial infringement by either the franchisor or franchisee where such Claim arises out of or is alleged to arise out of, or be connected with, the commission of a fraudulent, dishonest, criminal intentional or malicious act, error or omission;

....

• alleging, based upon, arising out of or attributable to the recovery by a franchisee of actual sums paid to the Insured by a franchisee which constitute any initial fees, service fees, royalties, lease payments, or payments for goods and services;

....

• alleging, based upon, arising out of or attributable to the bankruptcy or insolvency of the Insured ....

(Id. ¶ 2, Doc. No. 1-1, at 20.)

C. Westchester's Reservation of Rights

Pursuant to the Policy, Westchester provided Medex a defense while the dispute was in the Chancery Court and in arbitration, subject to an express reservation of its right to deny indemnity based on various policy exclusions. More specifically, Westchester, through Chubb North American Financial Lines Claims ("Chubb"), which administered claims on behalf of Westchester, sent at least two reservation of rights ("ROR") letters to Medex during the course of the litigation, outlining various coverage issues it believed were raised by FSH's allegations and reserving all rights under the Policy. (See Doc. Nos. 15-6, 15-7 (ROR letters dated June 17, 2016, and Sept. 22, 2016).) The June 17, 2016 ROR letter notified Medex that it would provide a defense to the lawsuit brought by FSH while identifying Policy provisions Westchester believed would "ultimately impact the coverage available," based on the allegations in the Complaint, including that (1) some of the Wrongful Acts identified in the Complaint took place prior to the effective date of the Policy; (2) "fees, commissions, expenses or costs paid to or charged by an Insured" were not covered damages; (3) punitive and exemplary damages would not be covered by the Policy; (4) claims under the Tennessee Consumer Protection Act were not covered; (5) claims based upon unfair trade practices or unfair business practices that allegedly arise out of or are connected with "the commission of a fraudulent, dishonest, criminal, intentional or malicious act, error or omission" fell within the exclusions identified in the Franchisors Endorsement; and (6) claims based on the intentional or knowing violation of law are excluded from coverage. (Doc. No. 15-6, at 2–3.)

The ROR letter concluded by noting that the investigation into the matter continued and that Westchester reserved "all rights with regard to the above referenced provisions, as well as all other rights, remedies and defenses under the Policy." (Id. at 3.) Westchester specifically reserved the right to withdraw its defense and the right to amend the letter to address additional coverage issues, and it advised Medex that nothing in the letter "should be construed as an admission of coverage or a waiver of any available right or defense." (Id. )

The September 2016 ROR letter notified Medex that the insurer had engaged a law firm to defend Medex in the litigation, advised it of the...