Sauter v. Hous. Cas. Co.

168 Wash.App. 348

276 P.3d 358

Carol SAUTER, as Personal Representative of the Estate of Michael J. SAUTER, Appellant,

v.HOUSTON CASUALTY COMPANY, a foreign, non-admitted insurer doing business in Washington, Respondent.

No. 66809–9–I.

Court of Appeals of Washington, Division 1.

May 14, 2012.

As Corrected May 21, 2012.

Marco Joseph Magnano, Bradley William Hoff, Jason R. Donovan, Foster Pepper PLLC, Seattle, WA, for Appellant.

Patrick Michael Paulich, Thorsrud Cane & Paulich, Seattle, WA, Aidan McCormack, Sarah Kutner, DLA Piper LLP, New York, NY, for Respondent.

DWYER, J.

[168 Wash.App. 349]¶ 1 Where an insurance policy explicitly provides coverage for the personal liability of a corporate officer incurred for acts performed in his or her official capacity as such, the policy does not insure against losses incurred where the officer acts in his or her personal capacity. Moreover, a guaranty executed by a corporate officer that secures the indebtedness of the corporation is not executed in the officer's official capacity. Such a circumstance would result in the corporation itself guaranteeing its own indebtedness, thus negating the very purpose of the guaranty.

¶ 2 Here, Michael Sauter, the chief executive officer (CEO) and manager of S–J Management, LLC, contends that he executed such a guaranty in his official capacity and, hence, that the purported loss that he incurred related thereto was insured by a directors' and officers' liability policy issued to S–J Management by Houston Casualty Company. However, because Sauter executed the guaranty in his personal capacity, the policy provides no such coverage. Thus, the trial court did not err by ruling that the Houston Casualty policy does not provide coverage for Sauter's personal obligation pursuant to the guaranty. Accordingly, we affirm the trial court's summary judgment dismissal of Sauter's declaratory judgment action against Houston Casualty.

I

¶ 3 In March 2008, S–J Management, LLC (SJM), a limited liability corporation engaged in rental property management, entered into a business loan agreement with The Commerce Bank of Washington, N.A. (Commerce Bank). Pursuant to that agreement, Commerce Bank extended a $3.5 million nonrevolving line of credit to SJM. Michael Sauter, SJM's CEO and manager, signed the loan agreement and promissory note in his official capacity on behalf of SJM.

¶ 4 The loan agreement required SJM, prior to the disbursement of the loan proceeds, to furnish to Commerce Bank a guaranty of the loan executed by Sauter in favor of the lender. Accordingly, Sauter executed an agreement whereby he “guarantee[d] full and punctual payment and satisfaction” of SJM's indebtedness to Commerce Bank (the guaranty). Sauter signed the guaranty as “Michael J. Sauter.” Seven deeds of trust on real property owned by Sauter and his wife, Carol Sauter, secured the guaranty.

¶ 5 SJM's line of credit matured on May 31, 2009, and SJM failed to pay its indebtedness to Commerce Bank. Commerce Bank thereafter demanded payment in full on Sauter's “personal guaranty of the Indebtedness” of SJM, totaling over $2.8 million.

¶ 6 Subsequently, Sauter demanded indemnification from SJM for the amount that he was obligated to pay to Commerce Bank pursuant to the guaranty. Sauter asserted that he had “entered into the [guaranty] in [his] role as [SJM's] CEO and did so to ensure that [SJM] could obtain the line of credit with Commerce Bank.” He further asserted that he had “acted in good faith and placed [his] personal properties at risk to ensure that [SJM] would have funds available for operations from the line of credit.” SJM's members, of whom Sauter was one, unanimously agreed that SJM “shall indemnify Michael Sauter for the personal liability incurred by him in connection with [SJM's line of credit] with Commerce [Bank].” Unsurprisingly, however, SJM was unable to indemnify Sauter for the same reason that it had been unable to pay its indebtedness to Commerce Bank—it was insolvent.

¶ 7 Sauter failed to fulfill his obligation pursuant to the guaranty. Accordingly, Commerce Bank sent multiple notices of default to the Sauters, informing them that failure to cure the default of the guaranty obligation could result in the sale of six encumbered real properties.

¶ 8 Counsel for SJM thereafter tendered to Houston Casualty Company the demand on Sauter's guaranty obligation from Commerce Bank, Sauter's letter demanding indemnification from SJM, and the notices of default on the Sauters' personally-owned properties. On September 24, 2009, Houston Casualty informed SJM that coverage was unavailable for “the Commerce Bank matter” pursuant to the Diversified Business Organization Policy—a directors' and officers' (D & O) liability policy—under which Houston Casualty insured SJM and its members and officers.

II

¶ 9 The Houston Casualty policy pursuant to which Sauter sought coverage contains multiple insuring agreements, one of which provides coverage for personal liability incurred by SJM's managers and members when acting in their official capacity on behalf of the company. This insuringagreement, entitled “Coverage A,” provides: “The Insurer shall pay on behalf of the Insured Persons Loss resulting from any Claim first made against the Insured Persons during the Policy Period for a Wrongful Act.”

¶ 10 The policy provides the following definitions for the terms employed in the insuring agreement:

¶ 11 An “Insured Person” is any “natural person who was, is, or shall become a duly appointed or elected director, officer, general partner, manager, or equivalent executive of an Insured Organization.”

¶ 12 “Loss means damages, settlements and Costs, Charges and Expenses [[¹ incurred by any of the Insured Persons under Insuring Agreement Coverage A ... but shall not include ... matters deemed uninsurable under the law pursuant to which this Policy shall be construed.”

¶ 13 A “Claim” includes “any written demand for monetary damages or non-monetary relief against an Insured commenced by Insured's receipt of such demand.”

¶ 14 “Wrongful Act,” as relevant here, “means, as alleged in any Claim, any actual or alleged act, misstatement, error, omission, misleading statement, neglect, breach of duty or act by ... any of the Insured Persons, while acting in their capacity as ... such on behalf of the Insured Organization.”

III

¶ 15 Following Houston Casualty's denial of coverage, Sauter filed a complaint for declaratory relief and damages, asserting that the Houston Casualty policy “is properly construed as covering the claim asserted by Commerce Bank in its written demand upon Sauter.” Sauter sought

[a] judgment declaring that the Houston Insurance is properly interpreted as providing full coverage for the cost of defending, settling, and/or paying any loss incurred by and/or judgment entered against Sauter as a result of the subject claim or resulting litigation, and that accordingly Houston is obligated to pay monetary damages equal to the full cost of defending, settling, and/or paying any loss incurred by and/or judgment entered against Sauter with respect to such claim or litigation.

¶ 16 On August 27, 2010, Sauter filed a motion for summary judgment, asserting that “Commerce's claim against Sauter is covered under Coverage A of the Houston Casualty Insurance.” Houston Casualty thereafter filed a cross motion for summary judgment, seeking a determination that it “does not owe a coverage obligation to Michael Sauter under the Houston Casualty insurance contract.” Houston Casualty contendedthat no coverage obligation existed because (1) no act by Sauter constituted a “Wrongful Act” pursuant to the policy and (2) Sauter suffered no “Loss” as defined by the policy.

¶ 17 On September 24, 2010, the trial court denied Sauter's motion for summary judgment and granted Houston Casualty's motion for summary judgment, concluding “that Houston Casualty does not owe a coverage obligation or a duty to indemnify Michael Sauter under Coverage A of the Houston Casualty policy at issue for the Commerce Bank claim against Sauter.” The parties thereafter stipulated that the trial court's September 24 order resolved the only coverage issues in dispute in the action. Accordingly, on February 11, 2011, the trial court entered final judgment.

¶ 18 Sauter appeals.²

IV

¶ 19 Sauter contends that he was acting in his capacity as CEO and manager on behalf of SJM when he executed the guaranty and thereafter failed to fulfill his obligations pursuant to that guaranty. Thus, he asserts, his conduct meets the capacity requirement of a “Wrongful Act” pursuant to the Houston Casualty policy.³ We disagree.

¶ 20 We review a summary judgment order de novo, performing the same inquiry as does the trial court. Johnson v. Recreational Equip., Inc., 159 Wash.App. 939, 954, 247 P.3d 18,review denied,172 Wash.2d 1007, 259 P.3d 1108 (2011). Similarly, the interpretation of an insurance contract is a question of law reviewed de novo. Bushnell v. Medico Ins. Co., 159 Wash.App. 874, 881, 246 P.3d 856 (2011).

¶ 21 “Insurance policies are construed as a whole and ‘given a fair, reasonable, and sensible construction.’ ” Polygon Nw. Co. v. Am. Nat. Fire Ins. Co., 143 Wash.App. 753, 766, 189 P.3d 777 (2008) (quoting Kitsap County v. Allstate Ins. Co., 136 Wash.2d 567, 575, 964 P.2d 1173 (1998)). “Courts determine coverage under the plain meaning of the policy.” Bushnell, 159 Wash.App. at 881, 246 P.3d 856. Where a term is defined in the policy, we interpret the term in accordance with that policy definition. Polygon Nw. Co., 143 Wash.App. at 767, 189 P.3d 777. “Undefined terms in an insurance contract must be given their ‘plain, ordinary, and popular’ meaning.” Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wash.2d 869, 877, 784 P.2d 507 (1990) (quoting Farmers Ins. Co. of Wash. v. Miller, 87 Wash.2d 70, 73, 549 P.2d 9 (1976)). This is because “[t]he language of insurance policies is to be interpreted in accordance with the way...