Osprey Consulting I, Inc. v. Westport Ins. Corp.

466 F.Supp.3d 532

OSPREY CONSULTING I, INC. d/b/a Centennial Surety Associates, Inc., et al., Plaintiffs,

v.WESTPORT INSURANCE CORP., Defendant.

Civil Case No. SAG-19-03092

United States District Court, D. Maryland.

Signed June 10, 2020

Jason C. Brino, Matthew G. Hjortsberg, Stephanie Meighan, Bowie and Jensen LLC, Towson, MD, for Plaintiffs.

Joyce Noyes, Pro Hac Vice, Robert P. Conlon, Pro Hac Vice, Walker Wilcox Matousek LLP, Chicago, IL, Padraic Kevin Keane, Jordan Coyne LLP, Fairfax, VA, for Defendant.

MEMORANDUM OPINION

Stephanie A. Gallagher, United States District Judge

Plaintiffs Osprey Consulting I, Inc. d/b/a Centennial Surety Associates, Inc. ("Centennial") and Michael Schendel ("Schendel") (collectively, "Plaintiffs") filed an Amended Complaint against Westport Insurance Corporation ("Westport"), alleging claims for declaratory judgment, breach of contract, and bad faith.¹ ECF 29. Plaintiffs filed a Motion for Partial Summary Judgment, ECF 21, and Westport countered with a Cross-Motion for Summary Judgment, ECF 23. I have reviewed those motions, along with the relevant oppositions and replies. ECF 24, 26. A telephonic hearing on the motions occurred on May 14, 2020. For the reasons that follow, Plaintiffs’ Motion for Summary Judgment will be granted in part as to Count Two, and the remaining portions of the parties’ cross-motions will be denied, without prejudice. Westport will be afforded thirty days to file a counterclaim seeking a declaratory judgment as to its continuing duty to defend, if it wishes to do so.

I. FACTUAL BACKGROUND

Plaintiff Centennial, a bonding agency located in Anne Arundel County, Maryland, issues construction bonds for contractors in the Mid-Atlantic region. ECF 21-2, ¶ 2 (Schendel Aff.). Plaintiff Schendel serves as Centennial's President. Id. During the time relevant to this case, Centennial maintained an Insurance Industry Professional Liability Coverage for Insurance Agencies policy ("the Policy"), policy number WED4MD005369009, with Westport. Id. ¶ 4; ECF 21-3. The Policy provided coverage in the amount of $2,000,000 per claim and $4,000,000 for the policy period. ECF 21-3 at 5, ¶ C. Specifically, the Policy provided that Westport:

will pay on behalf of the INSURED all sums in excess of the DEDUCTIBLE that the INSURED becomes legally obligated to pay as DAMAGES caused by WRONGFUL ACTS resulting in any CLAIM first made against the INSURED during the POLICY PERIOD and reported in writing to [Westport] or the producing agent as soon as practicable.

Id. at 7 (§ I.A). Both Centennial and Schendel are deemed to be "INSUREDs" under the Policy. Id. at 11-12 (§§ IV.I.4–5).

In addition to claim coverage, the Policy also provided that Westport would "have the right and duty to defend, investigate, and conduct any settlement negotiations arising from any CLAIM first made against the INSURED during the POLICY PERIOD based upon alleged WRONGFUL ACTS of an INSURED." Id. at 9 (§ II.A). The Policy thereafter specified two conditions under which Westport would not be obligated to pay defense costs:

[Westport] shall not be obligated to pay any DAMAGES or defend or continue to defend any CLAIM after the Per CLAIM Limit of Liability or Aggregate Limit of Liability under this POLICY has been exhausted by payment of DAMAGES or after the deposit in a court having jurisdiction of sums exhausting the Per CLAIM Limit of Liability or Aggregate Limit of Liability.

Id. (§ II).

As relevant here, the Policy defines "WRONGFUL ACT" as "any negligent act, error, or omission of an INSURED in rendering PROFESSIONAL SERVICES or OTHER RELATED SERVICES for others." Id. at 14 (§ V.1). "PROFESSIONAL SERVICES" is defined to include, inter alia :

1. [S]ervices rendered as a managing general insurance agent, general insurance agent, insurance agent or insurance broker;

2. [S]ervices rendered as an insurance consultant, including, but not limited to, insurance consulting connected with employee benefit plans;

3. [P]remium financing services provided by the NAMED INSURED to the NAMED INSURED's clients for insurance products placed through the NAMED INSURED's agency; [and]

4. [L]oss control, risk management, or anti-fraud services rendered in connection with insurance placed through the NAMED INSURED

Id. at 13-14 (§ IV.R).

Finally, the Policy contains a "FRAUDULENT ENTITY" exclusion, which provides:

This POLICY shall not apply to any CLAIM based upon, arising out of, attributable to, or directly or indirectly resulting from ... [o]r in connection with any FRAUDULENT ENTITY or any entity that the Insured knew or, if industry standard due diligence had been performed, reasonably should have known is a legally formed entity that is used as a device to commit fraud or other unlawful acts.

Id. at 15 (§ V.E); id. at 29 (Fraudulent Entity Policy Endorsement).

On August 6, 2014, plaintiff-relator Andrew Scollick ("Relator") filed a qui tam suit in the United States District Court for the District of Columbia (the "Scollick Litigation"), naming eighteen defendants, including Centennial and Schendel. See Complaint, United States ex rel. Scollick v. Narula , Civil No. 1:14-cv-01339-RCL (D.D.C. filed Aug. 6, 2014), ECF 1 (attached to Westport's Cross-Motion as ECF 23-2) [hereinafter "the Scollick Complaint"]. The Scollick Complaint essentially alleged that Neil Parekh, Ajay K. Madan, and Vijay Narula, who serve as the officers of one construction company (OST), falsely certified two other companies (CSG and Citibuilders) as service-disabled veteran-owned small businesses ("SDVOSBs") for the purposes of obtaining preferred treatment in government contracting that OST could not obtain. See, e.g. , id. ¶¶ 42-50; 107-28. In particular, those defendants identified service disabled veterans as the "owners" of CSG and Citibuilders, knowing that those veterans did not actually exercise ownership or control over those entities. Id.

CSG and Citibuilders had to obtain bid bonds and performance bonds to perform under their government contracts. Id. ¶¶ 148-51. According to the Scollick Complaint, Schendel had a longstanding relationship with Parekh, and knew that OST, CSG, and Citibuilders shared common ownership. Id. ¶¶ 154-55. Nevertheless, Schendel and Centennial arranged for bonds to be issued to CSG and Citibuilders, allowing those entities to submit claims to the government as SDVOSBs, when in fact they should not have qualified because the involvement of the service-disabled veterans was fraudulent. Id. ¶¶ 156-58, 162-63. Scollick, acting as a whistleblower, reported the alleged fraud to the government via his qui tam lawsuit.

Centennial and Schendel were served with the summons and complaint in the Scollick Litigation on July 16, 2015, and promptly provided a copy to Westport. ECF 21-2, ¶¶ 6, 8. On July 27, 2015, Westport Claims Representative John Nesbit advised Plaintiffs’ counsel that Westport was in the process of reviewing the Complaint, to determine whether the claim would be covered by the Policy. Id. ¶ 9; ECF 21-5 (July, 2015 email chain between Schendel, Nesbit, and Mr. Jason Brino). Two days later, a new Westport claims representative, Ellen McCarthy, emailed Plaintiffs, "I wanted to let you know that I have been reassigned the handling of this matter. I am physically located in Anne Arundel County and have some experience with Qui Tam matters, both of which should be beneficial." ECF 21-2, ¶ 10; ECF 21-6 at 2. Then, on August 5, 2015, McCarthy emailed Westport's coverage position letter to Plaintiffs. ECF 21-7 at 1; see ECF 21-8 (the August 5 Letter). The email attaching the letter stated, "As we discussed on Friday, Westport will provide a defense for the complaint subject to a reservation of rights. Let's discuss what you wish to do with respect to counsel." Id. ; ECF 21-2, ¶ 11. Westport sent an amended coverage letter to Plaintiffs on August 18, 2015, in which it detailed the limits for Insurance Agents Professional Liability Miscellaneous Coverage under a second policy held by Plaintiffs, "the Excess Policy."² ECF 21-10. For ease of reference herein, the August 5 and August 18 letters are referred to collectively as the "Coverage Letter." Following approximately six pages detailing various reasons Westport believes the Policy and the Excess Policy might not cover the claims in the Scollick Litigation, the Coverage Letter included the following "Reservation of Rights":

As noted above, Westport reserves rights in this matter. While we will agree to participate in your defense, we are doing so under a full reservation of rights, without admitting coverage or agreeing to indemnify you for any judgment involving a finding of act, error or omission which is not covered by your policy. Westport Insurance Corporation also reserves the right to file a declaratory relief action for the determination of its duty to defend and/or indemnify, including the right to request reimbursement for any defense costs or indemnity paid for uncovered claims. Westport expressly reserves and does not waive its right to later seek reimbursement of all amounts paid by it with respect to claims for expenses, including attorney's fees, settlement, or judgment, in the event coverage under the Policy is found to be inapplicable or excluded.

ECF 21-10 at 7.

Westport provided a list of approved attorneys and firms to Plaintiffs, who selected Eccleston & Wolf, P.C. ("Eccleston") to represent them in the Scollick Litigation. ECF 21-10 at 6; ECF 21-1, ¶ 13. Eccleston filed a motion to dismiss the complaint in the Scollick Litigation as to Plaintiffs, and the motion was granted, because the Court found that the Relator (Scollick) had not adequately alleged facts establishing Plaintiffs’ involvement in a scheme or conspiracy to violate the FCA. ECF 21-2, ¶ 14.

However, Scollick filed a Motion for Leave to Amend on January 30, 2017. ECF 21-2, ¶ 15. On February 3, 2017, McCarthy emailed Schendel and an attorney for Plaintiffs, attaching the Motion for Leave to Amend and the...