Free Brief in Support of Motion - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 01-CV-0275-JLK DOMINICK PAOLONI, et al., Plaintiffs, vs. DONALD I. GOLDSTEIN, et al., Defendants, and NBSA, LLC, et al., Relief Defendants. ______________________________________________________________________________ Civil Action No. 03-CV-0807-JLK-CBS VIATICAL LIQUIDITY, LLC, a California limited liability corporation, Plaintiff, v. MARK WOLOK, et al., Defendants. _____________________________________________________________________________ MEMORANDUM IN SUPPORT OF MOTION TO ENFORCE SETTLEMENT AGREEMENT _____________________________________________________________________________ This Memorandum is filed in support of the Plaintiffs' Motion to Enforce Settlement Agreement pursuant to which Plaintiffs seek an order that Chicago Insurance Company pay, pursuant to the terms of the September 16, 2005 court-ordered Settlement Agreement the sum of

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$829,137.92, representing the remaining limits of liability under the 2001-2002 Policy (as defined in the court-ordered Settlement Agreement attached to the Motion to Enforce Settlement Agreement as Exhibit A). FACTUAL BACKGROUND As the result of claims brought against the Birmingham, Michigan law firm of Hyman Lippitt, P.C. and certain of its law partners by Plaintiffs in the above-captioned consolidated actions, the Plaintiffs, Hyman Lippitt, P.C., those law partners who had been named as Defendants in the above-captioned consolidated actions, and Chicago Insurance Company entered into a Settlement Agreement as of September 16, 2005. (The Settlement Agreement is attached to the Motion to Enforce Settlement Agreement as Exhibit A.) During the course of litigation, and as is reflected in the Settlement Agreement, the Plaintiffs contended that there were two insurance policies issued by Chicago Insurance Company applicable to the Plaintiffs' claims. These are defined in the Settlement Agreement as the 2001-2002 Policy (see first Whereas clause on page 3 of the Settlement Agreement) and the 2002-2003 Policy (see second Whereas clause on page 3 of the Settlement Agreement). During the course of litigation and pursuant to Fed.R.Civ.P. 26(a)(1)(D), Defendant Hyman Lippitt, P.C. disclosed both the 20012002 Policy and 2002-2003 Policy to the Plaintiffs. The policies, as issued, are identical, except Chicago Insurance Company charged Hyman Lippitt, P.C. a significantly larger premium for the 2002-2003 Policy. A copy of the 2001-2002 Policy at issue with respect to the pending motion is attached to the Motion to Enforce Settlement Agreement as Exhibit B. The Declaration page of the 2001-2002 Policy, as disclosed to the Plaintiffs, shows a limit of liability of $5,000,000 for each claim and an aggregate $5,000,000 limit of liability. Furthermore, pursuant to the Declarations page of the 2001-2002 Policy, claim expenses are

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included within the limits of liability. Accordingly, pursuant to this provision, claim expenses, such as attorneys' fees and costs of defense of claims are deducted and, therefore, reduce the amount of insurance available for actual payment of claims. Based upon the Fed.R.Civ.P. 26(a)(1)(D) disclosures made by Defendants, as well as representations of representatives of Chicago Insurance Company and Hyman Lippitt, P.C.'s attorneys, the Plaintiffs accepted as true and relied upon the accuracy of the terms of the 20012002 Policy according to Exhibit B attached to the Motion to Enforce Settlement Agreement.1 The parties entered into settlement negotiations which culminated with entry into the Settlement Agreement of September 16, 2005. As mentioned above, Plaintiffs contended the applicability of two insurance policies to the combined claims, while Chicago Insurance Company contended, (as is reflected in the Settlement Agreement) coverage only under the 2001-2002 Policy. Section II.A. of the Settlement Agreement reflects the agreement between the parties that Chicago Insurance Company pay the full limit of liability under the 2001-2002 Policy, the policy which Chicago Insurance Company did not assert was inapplicable to the Plaintiffs' claims. In entering into paragraph II.A., Plaintiffs relied upon the disclosures made concerning the limits of liability and the handling of claim expenses, agreeing to accept the $5,000,000 aggregate limit of liability less claim expenses. This resulted in a payment to the Plaintiffs of $4,170,862.08. Section VIII. of the Settlement Agreement represents the parties' agreement concerning the applicability of the 2002-2003 Policy to the Plaintiffs' claims and, if applicable, the amount which Chicago Insurance Company must pay to the Plaintiffs. Pursuant to discovery under Section VIII. of the Settlement Agreement, on or about January 17, 2006, Plaintiffs received a
Plaintiffs at this time have no evidence that any attorneys for Hyman Lippitt, P.C. or any representatives of Chicago Insurance Company intentionally misrepresented or omitted to disclose a broadening of coverage as opposed to an inadvertent failure to disclose the broadening of coverage. Whether intentional or inadvertent, however, Plaintiffs are entitled to enforcement of the Settlement Agreement.
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copy of a letter dated July 18, 2002, from Michael G. Ostler, a Senior General Adjuster assigned by Interstate Insurance Group, a part of Chicago Insurance Company, addressed to Hyman Lippitt, P.C. regarding a claim made under the 2001-2002 Policy. The July 18, 2002 letter is attached to the Motion to Enforce Settlement Agreement as Exhibit C. The fourth paragraph on page 2 of the July 18, 2002 letter provides the following: As background, let me remind you that Chicago Insurance issued a lawyer's professional liability insurance policy to Hyman Lippitt, P.C. The certificate number is LWB-2016725. This is a claims-made and reported policy with a policy period from October 16, 2001 to October 16, 2002. Limits of liability are $5,000,000 per claim and $5,000,000 in the aggregate for each policy period. There is a $25,000 deductible for each claim. Claim expenses (including attorneys' fees) will not reduce the available per claim limit of liability. The deductible applies only to damages. (Emphasis added.) The above underlined statement amends and broadens Item 4 of the

Declaration page which, as provided to the Plaintiffs, represented that claim expenses are within the limits of liability, not in addition to the limits of liability as stated in the July 18, 2002 letter. The 2001-2002 policy issued effective October 16, 2001 contains a liberalization clause which is found in Section IX.Q. The liberalization clause provides: If the company [Chicago Insurance Company] adopts any revision that would broaden the coverage under the policy without additional premium at any time during the policy period, the broadened coverage will immediately apply to this policy. (Brackets added.) The July 18, 2002 letter broadened the coverage available by amending the Declaration page such that claim expenses do not reduce the available per-claim limit of liability as was provided on the issue date of October 16, 2001 of the 2001-2002 Policy. The coverage was broadened in that pursuant to the July 18, 2002 letter, claim expenses were to be treated as an

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addition to the claim limit of liability, thus making more coverage available to the insured to resolve outstanding claims. The July 18, 2002 letter broadened the coverage such that the limits of liability for settlement of claims under the 2001-2002 Policy was not the sum of $4,170,862.08 as represented and paid to the Plaintiffs, but the sum of $5,000,000. Thus, under Section II.A. of the Settlement Agreement, the Plaintiffs are entitled to an additional sum of $829,137.92. ARGUMENTS THIS COURT HAS AUTHORITY TO ENFORCE THE TERMS OF THE SETTLEMENT AGREEMENT Paragraph 5 of the Order Approving Settlement Agreement provides: "This Court retains jurisdiction over the Settlement Agreement for administration and enforcement of its terms and conditions." Furthermore, the courts have inherent authority to enforce their orders. Young v. United States, 481 U.S. 787, 796, 107 S.Ct. 2124, 2131-32, 95 L.Ed.2d 740 (1987). In the Motion to Enforce Settlement Agreement, Plaintiffs seek enforcement of the court-ordered Settlement Agreement that Chicago Insurance Company pay the limits of liability under the 2001-2002 Policy. This Court has authority to order Chicago Insurance Company to pay, under the court-approved Settlement Agreement, all limits of liability under the 2001-2002 Policy. MICHIGAN LAW APPLIES TO INTERPRETATION OF THE 2001-2002 POLICY The insurer, Chicago Insurance Company, is located at 55 East Monroe Street, Chicago, Illinois. (See Declaration page of 2001-2002 Policy containing the address of Chicago Insurance Company.) Hyman Lippitt, P.C. is a Michigan law firm maintaining its offices in Birmingham, Michigan. Chicago Insurance Company does business in the State of Michigan through the issuance of professional liability insurance policies to Michigan law firms. Hyman Lippitt, P.C.

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is located in Birmingham, Michigan. The professional liability insurance policy contains no choice of law provision. Federal courts sitting in diversity jurisdiction apply the law of the state where the claim was brought. Sellers v. Allstate Ins. Co., 82 F.3d 350, 352 (10th Cir. 1996). In Dominick Paoloni, et al. v. Donald I. Goldstein, et al., jurisdiction is pursuant to 28 U.S.C. § 1331 as an action arising under the laws of the United States. Jurisdiction for the state law claims in the Paoloni v. Goldstein action is based upon 28 U.S.C. § 1367(a) supplemental jurisdiction. Claims over which the court exercises jurisdiction pursuant to 28 U.S.C. § 1367(a) apply the law of the state where the claim was brought, as does a court sitting in diversity jurisdiction. The Viatical Liquidity, LLC v. Mark Wolok action is based upon diversity jurisdiction. Colorado follows the "most significant relationship" approach of the Restatement (Second) of the Conflict of Laws for resolving conflict of laws questions in contract cases. Vitkus v. Beatrice Co., 127 F.3d 936, 941 (10th Cir. 1997). The most significant relationship test requires the court to consider five factors: place of contracting, place of negotiation, place of performance, location of the subject matter of the contract, and domicile, residence or place of business of the parties. Id.; Restatement (Second) of Conflict of Laws § 188. The cases of Vitkus v. Beatrice Co., supra, and Nicholls v. Zurich American Ins. Group, 244 F. Supp.2d 1144 (D. Colo. 2003) both involved directors and officers liability insurance policies, which are similar to professional liability insurance policies such as is at issue in the present motion. Both courts applied the principles of Restatement (Second) of Conflict of Laws § 188 to resolve the applicable law for interpretation of certain provisions of the D&O liability policies at issue. In Nicholls, the district court stated the following in determining the law of the place of the insured, Colorado, applied stating:

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Although the producer of the D&O liability policy and several contracting parties were from California, Colorado contract law applies because the alleged coverage under the D&O liability policy arose out of conduct of the directors and officers of the Juice Stop entities, who had their principal places of business in Colorado. Additionally, Plaintiff-Trustee and the Directors and Officers of the Juice Stop entities are residents of Colorado. Nicholls v. Zurich American Ins. Group, 244 F. Supp.2d at 1152. In Vitkus the Tenth Circuit,

affirming the district court, found the law of the principal place of business of the insured, Illinois, to be the applicable law to apply for interpretation of the insurance contract, applying the most significant relationship test. In the present case, the insured, Hyman Lippitt, P.C., is located in Michigan. Negotiation of the insurance contract, or at least a portion of the negotiation, occurred in the State of Michigan. The location of the subject matter of the insurance contract, i.e., the conduct of Hyman Lippitt, P.C., is located in the State of Michigan. The domicile and residence of the insured, Hyman Lippitt, P.C., is in Michigan while the insurer is domiciled in Illinois. An analysis of the factors of the Restatement (Second) of Conflict of Laws § 188 yields the conclusion that Michigan has the most significant contacts and is the law to be applied. A review of Restatement (Second) of Conflict of Laws §§ 192 and 193 further support application of Michigan law. Section 192 of the Restatement (Second) of Conflict of Laws specifically addresses life insurance contracts while § 193 of the Restatement (Second) of Conflicts of Laws addresses contracts of fire, surety or casualty insurance, including liability insurance. Under both §§ 192 and 193, the location of the insured risk during the term of the policy is of principal importance in determining which state law is to be applied. In the present case, the risk being insured was the conduct of Hyman Lippitt, P.C. The location of the risk being insured is thus the State of Michigan. For the foregoing reasons, in interpreting the 2001-

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2002 Policy as to whether the July 18, 2002 letter broadened coverage, the Court should look to the laws of the State of Michigan. PURSUANT TO THE PROVISIONS OF THE LIBERALIZATION CLAUSE OF THE 2001-2002 POLICY, THE JULY 18, 2002 LETTER BROADENED COVERAGE UNDER THE 2001-2002 POLICY Under Michigan law, if an insurance contract is unambiguous, it should be interpreted according to its plain meaning. Clevenger v. All State Insurance Co., 443 Mich. 646, 654, 505 N.W.2d 553, 557 (1993). Any ambiguity in an insurance policy should be interpreted against the insurer (drafter) and in favor of the insured. DeLand v. Fidelity Health & Acc. Mutual Ins. Co., 325 Mich. 9, 19, 37 N.W.2d 693, 697 (1949). An insurance contract is ambiguous if, after

reading the entire contract, its language can be reasonably understood in different ways. Farm Bureau Mutual Ins. Co. v. Nikkel, 460 Mich. 558, 556-557, 596 N.W.2d 519 (1999).2 The Michigan Insurance Code was enacted for the benefit of the public and the insurance laws should be liberally construed in favor of policyholders, creditors and the public. Dearborn National Ins. Co. v. Comm'r of Ins., 329 Mich. 107, 118, 44 N.W. 2d 892 (1950). Certainly, if the Michigan Insurance Code is to be liberally construed in favor of policyholders, creditors and the public, insurance policies are entitled to such liberal construction. As set forth above, the liberalization clause, found in Section IX.Q. of the 2001-2002 Policy provides: If the company [Chicago Insurance Company] adopts any revision that would broaden the coverage under the policy without additional premium at any time during the policy period, the broadened coverage will immediately apply to this policy.

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The foregoing rules of construction are in accordance with Colorado law. See Fight Against Coercive Tactics Network, Inc. v. Coregis Ins. Co., 926 F. Supp. 1426, 1430 (D. Colo. 1996) ("policy language is ambiguous where it is reasonably susceptible to more than one meaning. . . . In this case, the policy must be construed against the drafter and in favor of providing coverage to the insured, i.e., the court must accept and apply the reasonable interpretation offered by the insured.")

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The July 18, 2002 letter, when considered within the context of the liberalization clause and other policy provisions as discussed below, is ambiguous. The phrase "any revision" found in the liberalization clause is undefined. Clearly, the fourth paragraph on page 2 of the July 18, 2002 letter is inconsistent with the Declaration page of the 2001-2002 Policy. The July 18, 2002 letter broadens coverage under the 2001-2002 Policy, and, therefore, constitutes a revision within the scope of the liberalization clause. As "a revision" the clause falls within the meaning of "any revision" found in the liberalization clause. The insurer, Chicago Insurance Company, contends otherwise. The language of the liberalization clause as to what constitutes any revision and thus falls within the scope of the clause is ambiguous and, therefore, is construed against the insurer and in favor of the insured. The liberalization clause must be read in favor of the insured, broadening coverage. Applying such rule of construction, the July 18, 2002 letter does broaden the coverage under the policy. The liberalization clause, when considered along with Section IX.I. entitled "Changes" further evidences the ambiguity in the 2001-2002 Policy as to what may constitute a revision to the 2001-2002 Policy broadening coverage. Section IX.I. provides: "The terms of this policy shall not be waived or changed except by endorsement issued to form a part of this policy." The term "endorsement" is not defined in the policy nor does there appear to be a clear definition of the term under Michigan law. Furthermore, it is unclear and, thus, ambiguous whether "any revision" is a "change" or "endorsement" to the 2001-2002 Policy. It is thus unclear whether the July 18, 2002 letter, which can be read as being included in the phrase "any revision," constitutes an "endorsement" which formed a part of the 2001-2002 Policy. Sections IX.I. and IX.Q. are together ambiguous. Section IX.I. requires that the policy be changed only by endorsement. Section IX.Q. permits any revision to the policy if the effect is to

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broaden coverage. Considered together, Sections IX.I. and IX.Q. are ambiguous on their face and thus should be construed against the insurer. The ambiguity that exists between Sections IX.I. and IX.Q. is a patent ambiguity, i.e., one that clearly appears on the face of the document arising from the language itself. Black's Law Dictionary (7th Ed.), City of Grosse Pointe, Michigan v. Michigan Municipal Liability & Property Pool, 702 N.W.2d 106, 113 (Mich. 2005). Thus, the Court does not need to resort to extrinsic evidence to determine the ambiguity, as it is apparent on the face of the document. When the patent ambiguity of the 2001-2002 Policy is considered together with the July 18, 2002, letter revising Section 4 of the Declaration page of the 2001-2002 Policy, it is patently ambiguous as to whether the July 18, 2002, letter changed and/or revised the policy to broaden coverage. In such a case, Michigan law requires that the ambiguity be construed against the insurer in favor of the insured. The effect of such construction is to revise the 2001-2002 Policy such that claim expenses are in addition to the claim limit of liability of $5,000,000. Pursuant to such construction, and under the terms of the Settlement Agreement, Chicago Insurance Company owes to the Plaintiffs the additional sum of $829,137.92. CONCLUSION Chicago Insurance Company knows or should know how to write clear language as to what is necessary to change or revise an insurance policy. In this instance, Chicago Insurance Company failed to do so. Sections IX.I. and IX.Q. are ambiguous as it is unclear as to what is required to change the 2001-2002 Policy or what is required to constitute "any revision that would broaden coverage under the policy." The law is clear not only in Michigan but in virtually every other jurisdiction that under such circumstances, the provisions must be construed against the insurer and interpreted as offered by the insured. The result of such construction in this case

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is that under the terms of the court-approved Settlement Agreement, the Plaintiffs are entitled to payment of the full limits of liability. Giving effect to the revision contained within the July 18, 2002 letter which broadened coverage under the policy, the Plaintiffs are entitled to the remaining limits of liability under the 2001-2002 Policy in the amount of $829,137.92. Respectfully submitted, DILL DILL CARR STONBRAKER & HUTCHINGS, P.C.

/s/ John A. Hutchings John A. Hutchings Robert A. Dill 455 Sherman Street, Suite 300 Denver, Colorado 80203 Telephone: (303) 777-3737 Facsimile: (303) 777-3823 E-mail: [email protected] [email protected] ATTORNEYS FOR PLAINTIFFS CERTIFICATE OF SERVICE I hereby certify that on April 13, 2006 I electronically filed the foregoing MEMEORANDUM IN SUPPORT OF MOTION TO ENFORCE SETTLEMENT AGREEMENT with the Clerk of Court using CM/ECF System, which will send notification of such filing to the following e-mail addresses: [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

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and I hereby certify that I have mailed the MEMEORANDUM IN SUPPORT OF MOTION TO ENFORCE SETTLEMENT AGREEMENT to the following non-CM/ECF participants by depositing same in the United States mail, postage prepaid, addressed to the following on April 13, 2006: Thomas B. Quinn, Esq. White & Steele 950 17th Street, 21st Floor Denver, Colorado 80202-2804 Akerman Senterfitt 350 East Las Olas Boulevard Suite 1600 Ft. Lauderdale, Florida 33301 Robert S. Harrison, Esq. Matthew D. Klakulak, Esq. Robert Harrison & Associates, PLC 240 East Merrill Street Birmingham, Michigan 48009 Gary Hoskie Professional Consultants & Managers, Inc. 1706 Surfside Drive Hutchinson Island, Florida 34949

Mr. Isadore Cohen 1920 East Hallandale Boulevard Suite 626 Hallandale, Florida 33009
Michael P. Tone, Esq. Ross, Dixon & Bell, LLP 55 West Monroe Street Suite 3000 Chicago, Illinois 60603-5758

/s/ Charlene Huffman

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