W. Am. Ins. Co. v. Atyani

366 F.Supp.3d 1270

WEST AMERICAN INSURANCE COMPANY and Peerless Indemnity Insurance Company, Plaintiffs,

v.Hailey ATYANI, et al., Defendants,andDennis Bonfantine, Janice Bonfantine, D.B. Kelly, Inc., d/b/a Kelly's Brew Pub and Restaurant and DB Brewery LLC, Defendants/Counter-Claimants,

v.West American Insurance Company and Peerless Indemnity Insurance Company, Counter-Defendants.

No: 1:17-cv-01047-RB-LF

United States District Court, D. New Mexico.

Filed February 14, 2019

Meena H. Allen, Allen Law Firm, LLC, Albuquerque, NM, for Plaintiffs/Counter-Defendants.

Geoffrey D. Rieder, Keleher & McLeod, P.A., Matthew Eric Jackson, Robert E. Hanson, Peifer, Hanson, & Mullins P.A., Albuquerque, NM, for Defendants/Counter-Claimants.

James A. Montalbano, Shane C. Youtz, Stephen Curtice, Youtz & Valdez, PC, Albuquerque, NM, for Defendants/Counter-Claimants.

MEMORANDUM OPINION AND ORDER

ROBERT C. BRACK, SENIOR UNITED STATES DISTRICT JUDGE

This matter is before the Court on Defendants Dennis Bonfantine, Janice Bonfantine, D.B. Kelly, Inc., d/b/a Kelly's Brew Pub and Restaurant and DB Brewery LLC's (collectively, "the Kelly's Defendants") Motion for Partial Summary Judgment (Doc. 53), and Plaintiffs West American Insurance Company and Peerless Indemnity Insurance Company's (collectively, "the Insurers") Motion for Summary Judgment (Doc. 74). Together, the motions seek summary judgment for all claims contained in the Insurers' Complaint for Declaratory Judgment (Doc. 1) and the Kelly's Defendants' Counterclaim (Doc. 50).¹ The parties dispute whether several insurance policies require the Insurers to defend and indemnify the Kelly's Defendants in state court actions where it is alleged that they improperly withheld tips, underpaid servers at Kelly's Brew Pub, and violated the City of Albuquerque Minimum Wage Ordinance (MWO). The Insurers seek a declaratory judgment that they are not obligated to defend nor indemnify the Kelly's Defendants in the underlying lawsuits. The Kelly's Defendants argue that the Insurers have a duty to defend the underlying actions and thus have breached their contract, acted in bad faith, and violated the New Mexico Unfair Insurance Practices Act (UIPA) by refusing to defend the claims.

I. Background

A. The Underlying State Lawsuits

In April 2016, former employees of Kelly's Brew Pub brought suit in state court, alleging that the Kelly's Defendants had been violating the MWO by withholding or requiring servers to pay back their earned tips, not paying servers the correct minimum wage, and failing to keep required payroll records. (See Doc. 1 ¶¶ 37, 39–45.) That case—Atyani v. Bonfantine —is currently pending in the Second Judicial District Court, Bernalillo County, New Mexico. See D-202-CV-2016-02775. In February 2017, a different former employee filed suit against the Kelly's Defendants alleging similar violations of the MWO. See Frank v. Bonfantine , D-202-CV-2017-00852. In November 2017, the Frank case was resolved through settlement and the state court dismissed Frank with prejudice. Id. , Stipulated Order Gr. Dismissal with Prejudice (2nd Jud. Dist., Bernalillo Cty., N.M. Nov. 13, 2017). (See also Docs. 1 ¶¶ 47–49; 53 at 7.)

The Insurers issued various insurance policies to DB Brewery LLC d/b/a Kelly's Brew Pub, and the policies were in effect during the period when the alleged MWO violations occurred. (See Doc. 1 ¶¶ 32–34.) The relevant portions of both the Peerless and West policies include identical language covering property damage if the damage "is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’ " (Id. ¶ 36.) The policies specifically exclude property damage that is "expected or intended from the standpoint of the insured." (Id. ) The policies define an "occurrence" as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id. ) "Property damage" is defined to include "[l]oss of use of tangible property that is not physically injured." (Id. ; Doc. 53 at 4–5.)

The Kelly's Defendants informed the Insurers of the suits and sought defense on the theory that the claims in Frank and Atyani allege "property damage" covered by the policies. (Doc. 1 ¶ 51; Docs. 50 ¶ 51; 50-1, Ex. A.) The Insurers twice declined to defend the underlying actions on the basis that allegations of wage withholding and other MWO violations do not involve property damage resulting from an occurrence and, even if they did, would be further excluded from policy coverage as intended or expected harms. (See Docs. 1 ¶ 52; 53 at 8–10.) In July 2017, the Kelly's Defendants again demanded that the Insurers defend them in the Atyani suit. (Doc. 50-1 at 1–17.)

B. The Insurers' Complaint for Declaratory Relief

On October 18, 2017, the Insurers filed a Complaint for Declaratory Judgment Relief seeking a ruling from this Court declaring the parties' rights and obligations under the policies. (Doc. 1.) The Complaint specifically urges the Court to find that the Insurers have no duty to defend nor indemnify the Kelly's Defendants in the underlying suits because the relevant insurance policies do not cover the claims asserted in Frank and Atyani.² (Id. at 13– 14.) The Kelly's Defendants moved to dismiss the declaratory action, arguing that the Court should decline to issue a declaratory judgment on coverage until the ongoing state case has more fully developed the facts in dispute—e.g., whether the alleged tip withholding occurred at all or occurred intentionally. (See Doc. 15 at 4–5.) The Court disagreed, holding that "federal declaratory relief is the most efficient and logical way to settle the present coverage dispute and will not conflict with any subsequent fact development in the underlying Atyani case." (Doc. 73 at 9.)

C. The Kelly's Defendants' Counterclaim

In answering the Insurers' complaint for declaratory judgment, the Kelly's Defendants also filed a counterclaim alleging that the Insurers: (1) breached their contract by declining to defend and indemnify the Kelly's Defendants in the underlying suits; (2) acted in bad faith by failing to adequately investigate the underlying suits and ultimately declining to defend them; and (3) violated the UIPA by, among other things, failing to promptly respond to communications and provide a reasonable explanation for refusing to defend the claims. (Doc. 50 at 17–21.)

D. Cross-Motions for Summary Judgment

Both parties have moved for summary judgment on the question of whether the Insurers have a duty to defend the Kelly's Defendants in the underlying suits. (Docs. 53; 74.) The Kelly's Defendants also moved for partial summary judgment on Count I of their Counterclaim, urging the Court to find as a matter of law that the Insurers breached their contract by refusing to defend the underlying suits.³ (Doc. 53 at 2, 20.) However, the Kelly's Defendants assert that the issue of indemnity should not be decided until the underlying actions have resolved. (Id. at 20–22.) The Insurers seek summary judgment in their favor as to all counts of the Counterclaim, on the theory that they have no duty to defend and thus could not have breached their contractual duty, acted in bad faith, or violated the UIPA in declining to do so. (Doc. 74 at 21–25.)

Summary judgment is appropriate when the Court, viewing the record in the light most favorable to the nonmoving party, determines "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) ; see also Garrison v. Gambro, Inc. , 428 F.3d 933, 935 (10th Cir. 2005). A fact is "material" if it could influence the determination of the suit. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party bears the initial responsibility of showing "an absence of evidence to support the nonmoving party's case." Bacchus Indus., Inc. v. Arvin Indus., Inc. , 939 F.2d 887, 891 (10th Cir. 1991) (quoting Celotex Corp. v. Catrett , 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). Once the moving party meets this burden, Rule 56"requires the nonmoving party to go beyond the pleadings and by affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial." Celotex , 477 U.S. at 324, 106 S.Ct. 2548 (internal quotations omitted).

II. The Duty to Defend

The question at the heart of these motions is whether the Insurers had a duty to defend the Kelly's Defendants in the underlying lawsuits. In New Mexico, the duty to defend is distinct from the duty to indemnify. See Found. Reserve Ins. Co. v. Mullenix , 97 N.M. 618, 642 P.2d 604, 605 (1982) ("[t]his jurisdiction recognizes the distinction between an insurer's duty to defend under the terms of an insurance policy and the duty to pay under the terms of the same policy") (citing Am. Emp'rs' Ins. Co. v. Cont'l Cas. Co. , 85 N.M. 346, 512 P.2d 674 (1973) ). The duty to defend is broader than the duty to indemnify and may exist "even if [an insurer] can show in [a] collateral proceeding that it has no duty to pay under the terms of the policy." Id.

An insurer's duty to defend "is a matter of contract law and must be determined by the terms of the insurance policy[,]" Miller v. Triad Adoption & Counseling Servs., Inc. , 133 N.M. 544, 65 P.3d 1099, 1102 (N.M. Ct. App. 2003), by "comparing the factual allegations in the complaint with the insurance policy." Lopez v. N.M. Pub. Sch. Ins. Auth. , 117 N.M. 207, 870 P.2d 745, 747 (1994). "In New Mexico, a court considering a collateral action will hold that the insurer has a duty to defend unless the insurer shows as a matter of law that all claims arise from the injury excluded by the insurance policy." Union Ins. Co. v. Bandido Hideout, Inc. , No. 11-CV-351 MCA/LFG, 2012 WL 13076230, at *5 (D.N.M. Sept. 28, 2012) (citing Lopez , 870 P.2d at 748–49 ). Thus, the insurer bears the burden of proving that...