Houston Cas. Co. v. Sprint Nextel Corp.

HOUSTON CASUALTY COMPANY, Plaintiff,

v.SPRINT NEXTEL CORPORATION, Defendant.

Civil Action No.01:09-cv-1387

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA

Dated: November 23, 2010

Alexandria Division

MEMORANDUM OPINION

This matter comes before the Court on Plaintiff Houston Casualty Company's ("HCC") Motion for Summary Judgment and Defendant Sprint Nextel Corporation's Motion for Summary Judgment ("Sprint"). For the reasons stated herein, Plaintiff's Motion for Summary Judgment is denied and Defendant's Motion for Summary Judgment is granted.

In 1998, Sprint's shareholders approved a reclassification of then-existing common stock to create two separate stocks that tracked Sprint's traditional wireline service ("FON") and its wireless business ("PCS"). At that time, Sprint shareholders gave the company's board of directors full authority, at any time after 2002, to recombine the tracking stocks in a manner that was fair to both classes of shareholders.

In February 2004, the board unanimously voted to recombine the FON and PCS tracking stocks, with each share of PCS stock being converted into one-half share of FON stock. On February 29, 2004, Sprint notified its shareholders that, effective April 23, 2004, the tracking stocks would be recombined by the issuance of additional FON shares to PCS shareholders, thereby leaving FON stock as the sole surviving equity ownership instrument.

As a result, in early March 2004, certain Sprint shareholders filed various class action lawsuits against Sprint and fourteen of its directors and officers ("D&O") in Kansas state court. Collectively known as the Garco litigation, the Garco plaintiffs filed a Consolidated Amended Class Action Petition. They claimed that Sprint's directors "breached their... fiduciary duties in setting the Conversion Ratio," which they alleged "greatly under-valued PCS shares." They sought "money damages to compensate them for the loss of value to their PCS shares."

At the time, Sprint maintained a D&O insurance program providing $100 million in policy limits in several policy layers, with a $25 million deductible. The primary policy was issued by Zurich American Insurance Company ("Zurich") and provided $15 million in coverage. American Casualty Company ("CAN") and HCC issued policies in sequential excess layers, each providing $15 million of coverage. The CAN and HCC policies "follow form" and thus generally incorporate by reference the terms of the 2003-04 Zurich policy.

The Zurich policy covered, among other things, "all Loss" that "Insured Persons" (i.e., the D&OS) became "legally obligated to pay on account of any Claim first made against them... during the Policy Period... for a Wrongful Act." The term "Loss" is broadly defined as the "total amount" that insureds "become legally obligated to pay..., including, but not limited to, damages, judgments, settlements, and Defense Costs." The definition of "Loss" contains a further sentence expressly carving out, among other things, "matters uninsurable under the law pursuant to which this policy is construed"—in this case, Kansas law.

Other policy provisions pertinent to this case include the Zurich policy's condition that insurer "advance[s] of Defense Costs shall be repaid... to the extent it is determined that such Defense Costs are not insured by this policy." By contrast, none of the policies contains a provision permitting insurers to seek repayment of settlement advances. The HCC, CAN, and Zurich policies all vest the insurers with the right to participate in the defense of covered claims and provide that Sprint shall not settle a claim absent insurer consent. Finally, the policies provide that their terms will not be "changed or modified other than by written policy endorsement."

In March 2004, Sprint provided notice of the Garco litigation to HCC and the other insurers in its 2 003-04 D&O insurance program. In September 2004, Zurich's coverage counsel sent Sprint a letter reserving its rights. The letter, however, did not assert that the Garco claims might be "uninsurable." Over a year later, Zurich supplemented its initial letter and asserted for the first time that part of the Garco claim might be "uninsurable under the law." In September 2006, CNA wrote to Sprint, incorporated by reference the two Zurich letters. HCC subsequently incorporated by reference the CNA letter.

In late January 2007, Sprint advised HCC and the other carriers that it wished to engage in settlement negotiations in the Garco case. Coverage counsel for Sprint, Zurich, and CAN-but not HCC-exchanged letters regarding the parties' coverage positions. Indeed, between January 5 and July 26, 2007, HCC provided no response to Sprint's various letters. By February 2007, however, HCC internally classified Garco as a "high-severity" claim, recognized that Sprint would "vigorously contest" any no-coverage position, and even said that the likely resolution of the coverage issue was "unclear." By May 2007, HCC had a $15 million reserve and "contemplated coverage litigation," while acknowledging it would face "substantial risk" in such litigation.

Meanwhile, in March 2007, the trial court in Garco had granted the plaintiffs' motion for a jury trial, indicating that this was a "damages case." By mid-May 2007, the Garco parties agreed to participate in mediation along with its insurers. After the first two sessions ended in stalemate, retired Judge Nicholas Politan, the mediator, concluded the third session with a "mediator's proposal" that the Garco action settle for $57.5 million. The Garco defendants indicated that they would accept this proposal subject to the insurers consenting to the settlement and agreeing to fund all but the $10 million balance remaining on the deductible. The Garco plaintiffs indicated that their commitment to the mediator's proposal was valid for one week.

The next day, Sprint's counsel wrote to the insurers, including HCC, requesting that by mid-day on July 25, 2007, they confirm their consent to the $57.5 million settlement and agree to provide funding subject to their policy limits. HCC then requested and received an extension of that deadline. On July 26, 2007, HCC's claims handler received from HCC's outside counsel a draft litigation complaint concerning insurance coverage for the Garco action. Late that day, however, HCC sent Sprint a letter agreeing to pay its $15 million policy limit.

In its letter, HCC purported to "reserve [e] its right to deny coverage and to seek repayment of the Policy's limit of liability." HCC's letter did not recite any contractual or other basis for its newly asserted right to seek repayment. The day after receiving HCC's funding commitment, Sprint acknowledged HCC's letter, but expressly noted that "Sprint reserves all rights and remedies," including in connection with any asserted right to seek repayment.

On September 5, 2007, the parties to the Garco action entered into their Settlement Agreement, a document that HCC reviewed and commented on in draft. That settlement, which disclaimed any suggestion of wrongdoing, included a broad release in favor of Sprint, its D&OS, and the funding insurers, including HCC, in exchange for a $57.5 million settlement payment. On October 1, 2007, HCC made its $15 million settlement funding payment directly into the escrow account maintained by counsel for the Garco plaintiffs. Zurich and CAN likewise each paid $15 million, while Sprint paid the $10 million remaining in the deductible and the fourth-layer insurer paid the balance. In advance of making its payment, HCC billed its insurers for their shares of the $15 million payment, and by November 1, 2007, HCC had received payments totaling $7,995, 500 from them. On December 12, 2007, judgment was entered approving the Garco settlement.

Between July 26, 2007 and December 18, 2 009, HCC failed to communicate with Sprint regarding any potential reimbursement claim. By the end of 2008, HCC had decided not to sue Sprint for recoupment of its settlement contribution and closed its Garco claim files. Later, HCC learned of a recent opinion in Massachusetts federal court, Genzyme Corp. v. Fed. Ins. Co., 657 F. Supp. 2d 282 (D. Mass. 2009), rev'd in part and remanded, 2010 U.S. App. LEXIS 21079, Case No. 09-2485 (1st Cir. Oct. 13, 2010), and consequently reopened its claim file. On December 18, 2009, HCC filed its Complaint in this case.

This Court will grant a motion for summary judgment if "there is no genuine issue as to any material fact and [ ] the movant is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (quoting Fed. R. Civ. P. 56(c)(2)). There is no issue of material fact, and both parties have extensively briefed their positions. This case is ripe for summary j udgment.

As this dispute arises from the insurance contract, this Court must first examine the language of the agreement between Sprint and HCC. No party disputes that Kansas law applies to this action. Under Kansas's law of insurance contracts, this Court must "consider the instrument as a whole and endeavor to ascertain the intention of the parties from the language used, taking into account the situation of the parties, the nature of the subject matter and the purpose to be accomplished. Policies must be construed according to the sense and meaning of the terms used, and if the language is clear and unambiguous, it must be taken in its plain, ordinary and popular sense." Bramlett v. State Farm Mut. Auto. Ins. Co., 468 P.2d 157, 159 (Kan. 1970) (citing Continental Casualty Co. v. Employers Mut. Casualty Co., 422 P.2d 560 (Kan. 1967); Saul v. Saint Paul-Mercury Indemnity Co., 250 P.2d 819 (Kan. 1952)).

Both parties agree that the HCC policy follows form and thus generally incorporates by reference the terms of the Zurich Policy. It is therein that "loss" under the terms of the HCC policy is defined:

Lossmeans the total amount which the Insured Personsbecome legally...