Members Heritage Credit Union v. N.Y. Marine & Gen. Ins. Co.

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MEMBERS HERITAGE CREDIT UNION, Plaintiff, v. NEW YORK MARINE & GENERAL INSURANCE COMPANY, et al., Defendants.

Civil Action No. 5:21-CV-207-CHB

United States District Court, E.D. Kentucky, Central Division

July 31, 2023

MEMORANDUM OPNIION AND ORDER

CLARIA HORN BOOM, UNITED STATES DISTRICT COURT JUDGE

This matter is before the Court on the Motion for Summary Judgment filed by Plaintiff Members Heritage Credit Union (“Members Heritage”), [R. 31]; the Motion for Summary Judgment filed by Defendants New York Marine &amp General Insurance Company (“New York Marine”) and ProSight Specialty Management Co., Inc. (“ProSight”),^[1] [R. 32]; and the parties' responses to the Court's October 17, 2022 order. [R. 40]. In that order, the Court directed the parties to file simultaneous briefs on the issue of whether the Court should exercise its discretionary jurisdiction under the Declaratory Judgment Act. Id. Members Heritage filed its brief asking that the Court decline jurisdiction over the entire suit. [R 41]. The defendants filed their brief arguing that the Court should accept jurisdiction. [R. 42]. The parties also filed response briefs. [R. 44; R. 45]. The jurisdictional matter and the pending motions are therefore fully briefed and ripe for review. See [R. 38; R. 37; R. 39]. For the reasons set forth below, the Court will retain jurisdiction over this action, deny Members Heritage's Motion for Summary Judgment, [R. 31], and grant Defendants' Motion for Summary Judgment, [R. 32].

I. BACKGROUND

A. The Policy

At issue in this case is the Management and Security Liability Policy (“the Policy”) issued by New York Marine to Members Heritage, a credit union. See [R. 31-3 (the Policy)]. The Policy begins with the following disclaimer: “Some provisions restrict coverage. Do not rely on the titles or captions used in this Policy. Read this entire Policy carefully to determine rights, duties and what is or is not covered.” Id. at 8 (emphasis in original).

The Policy goes on to list the various insuring agreements available to an insured, including Management Liability Insuring Agreement C. Id. at 8-9. Under Insuring Agreement C,

the insurance organization shall pay on behalf of any insured organization, loss for which the insured person is legally obligated to pay and that the insured person is indemnified by the insured organization, as a result of any claim first made during the policy period against the insured person, individually or otherwise, or, if exercised, during the Extended Reporting Period, for a wrongful management liability act.

Id. at 8. In other words, absent any exclusions, the insurance company will indemnify Members Heritage for losses resulting from claims for wrongful management liability acts. The Policy defines many of these terms. For example, a “claim” includes “[a] written demand to any insured for monetary damages or legal or equitable non-monetary relief,” as well as “[a] civil proceeding brought against any insured commended by the service of a complaint or similar pleading.” Id. at 43. A “wrongful management liability act” is defined as “any actual or alleged[] [e]rror, misstatement, misleading statement, act, omission, neglect or breach of duty actually or allegedly committed or attempted by any insured in their capacity as such” or “[m]atter claimed against an insured person solely by reason of his or her serving in such capacity.” Id. at 49.

The Policy's declarations page indicates that Members Heritage purchased coverage under Insuring Agreement C, among other insuring agreements. Id. at 3. That page also explains that Insuring Agreement C allows for a $6,000,000 annual liability limit. Id. It further indicates that a $75,000 “per claim deductible” applies to Insuring Agreement C. Id.

The Policy later explains that all claims “arising out of the same wrongful act or interrelated wrongful acts of the insureds shall be deemed one claim.” Id. at 38. Interrelated wrongful acts include “all wrongful acts that have a common fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions or causes.” Id. at 45.

The Policy also includes various exclusions. See, e.g., Id. at 10-11, 35-36. At issue in the present case are two exclusions: the Lending and Leasing Activities Exclusion and the Lien Holder Exclusion. Under the former, the insurance company “shall not be liable to make any payment . . . [f]or loss related to any claim based upon, arising out of, attributable to, or resulting directly or indirectly from” certain lending and leasing activities, which are discussed in more detail below. Id. at 53. The Lien Holder Exclusion similarly provides that the insurance company is not liable “[f]or loss related to any claim based upon, arising out of, attributable to, or resulting directly or indirectly from the status or activities of the insured organization as a lien holder or secured party.” Id.

B. The Claims Against Members Heritage

From approximately 2010 through October 2016, Members Heritage operated a branch in Zebulon, North Carolina. [R. 1-1, pp. 1, 94, 96]. When Members Heritage took over that branch in 2010, Johnny Harrell served as the branch manager, and he remained in that position under Members Heritage. Id. at 96. In October 2016, Members Heritage sold the Zebulon branch to Welcome Federal Credit Union (“Welcome”) and transferred the branch's accounts and liabilities to Welcome. Id. at 7. Welcome continued to employ Harrell as the manager of the Zebulon branch. Id. at 96.

In August 2019, approximately three years after the sale of the Zebulon branch, Welcome discovered information indicating that Harrell was engaging in potentially fraudulent activity. Id. at 101. Apparently, between 2008 and 2019, Harrell repeatedly accepted money from credit union members with directions to invest those funds, but he instead misappropriated the funds. See, e.g., Id. at 97, 101. In April 2020, the United States filed a criminal action against Harrell in the Eastern District of North Carolina, accusing him of embezzlement. Id. at 102. Harrell pleaded guilty in June 2020. Id.

Meanwhile, Ted Brown, a credit union member at the Zebulon branch, sent a demand letter to Welcome and Members Heritage. [R. 34-1, pp. 76-78 (May 28, 2020 Letter)]. In that letter, dated May 28, 2020, Brown alleged that he deposited money at the Zebulon branch in September 2015 and, after being approached by Harrell, he authorized Harrell to invest part of that deposit in an annuity. Id. at 76. In October 2015, Harrell removed $100,000 from Brown's account but did not invest them as directed and instead misappropriated those funds. Id. at 7677. Brown ultimately demanded that Welcome and Members Heritage repay the $100,000. Id.

Members Heritage informed its insurer, New York Marine, of Brown's claim. See id. at 79-84 (June 15, 2020 Letter). ProSight, acting as New York Marine's adjuster, handled the claim on the insurance company's behalf. See id. In a coverage position letter dated June 15, 2020, ProSight advised that New York Marine “has determined that the Demand Letter [from Brown] potentially implicates” coverage under the Policy. Id. at 84. New York Marine therefore agreed to defend Members Heritage, subject to a reservation of rights, the Policy's $75,000 per-claim deductible, and the Policy's liability limits. Id.

Welcome then advised Members Heritage of its own claim. In a demand letter dated June 16, 2020, Welcome demanded that Members Heritage “accept responsibility” for Harrell's misconduct that occurred during his employment with Members Heritage. [R. 34-1, p. 86 (June 16, 2020 Letter)]. Welcome discussed Brown's claim, as well as alleged fraud committed against other credit union members. Id. For example, Harrell allegedly misused a line of credit belonging to Alvin Worner, a member of the Zebulon branch, by converting the line of credit to his own use after Worner had paid it off. Id. at 85. At the time Welcome acquired the Zebulon branch, the line of credit had an unauthorized balance of $297,721, which Welcome then had to write off after discovering Harrell's misconduct. Id. at 85-86. Welcome alleged that Members Heritage both knew about and actively concealed Harrell's misconduct. Id. Welcome ultimately demanded that Members Heritage compensate Welcome for the $297,721 loss. Id. at 86.

On July 16, 2020, after Members Heritage notified ProSight of Welcome's demand, ProSight sent an email to counsel for Members Heritage briefly discussing the interrelatedness of Welcome and Brown's claims, and further discussing the settlement negotiations with Brown. [R. 31-11 (July 16, 2020 Email)]. ProSight consented to Members Heritage “contributing up to $50,000 toward a settlement with Brown,” under certain conditions. Id. ProSight also stated that it would apply the $50,000 settlement payment toward the Policy's $75,000 per-claim deductible. Id.

On July 17, 2020, ProSight provided to Members Heritage a letter supplementing its coverage position with respect to Brown's claim and Welcome's demand. [R. 34-1, pp. 88-96].

Through its agent Judy Edwards, ProSight advised that “New York Marine has determined that the Welcome Demand Letter potentially implicates” coverage under the Policy. Id. at 91. ProSight also acknowledged that Welcome's demand letter and Brown's demand letter involved “interrelated wrongful acts,” and they would therefore be “deemed one ‘claim' under” the Policy. Id. at 90. As a result, “only one $75,000 deductible applie[d] to this single ‘claim.'” Id. at 94. New York Marine ultimately agreed that it would defend Members Heritage subject to, among other things, a reservation of rights. Id. at 95.

In August 2020, Members Heritage...