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West v. Carolina Casualty Insurance Co.

United States District Court, D. Vermont

July 16, 2018

LINDA WEST, Plaintiff,
v.
CAROLINA CASUALTY INSURANCE COMPANY, Defendant.

          DECISION ON MOTIONS FOR SUMMARY JUDGMENT (DOCS. 17, 20)

          Geoffrey W. Crawford, Chief Judge.

         Both parties move for summary judgment in this coverage case filed by Plaintiff Linda West against Defendant Carolina Casualty Insurance Company ("Carolina") pursuant to Vermont's direct-action statute, 8 V.S.A. § 4203(3). The facts are undisputed.

         FACTS

         Prior to September 2015, Seldon Technologies, Inc. ("Seldon") was a manufacturer of water filters located in Windsor, Vermont. Seldon obtained liability insurance, including employment practices coverage, from Carolina in January 2013. The policy was a claims-made and reported policy. The initial policy period ran from January 28, 2013 to January 28, 2014. (Doc. 20-7.)

         In March 2013, Seldon terminated the employment of Linda West, whom it had employed as an accountant. In May 2013, West filed suit against Seldon in state court on grounds of age discrimination. On June 13, 2013, Seldon's Vice President of Finance, George Hillman, reported the lawsuit to Carolina. (Doc. 20-11.)

         Between June 18 and July 8, 2013, Mr. Hillman and Carolina's representative Jacqueline Noster discussed legal representation for Seldon in the pending lawsuit. Mr. Hillman sought continued representation by Seldon's attorneys at Nixon Peabody LLP. Ms. Noster stated that Carolina controlled the choice of defense counsel and wished to have attorney Gary Franklin of Primmer Piper Eggleston & Cramer PC handle the defense. The impasse was broken at the end of July 2013 when Mr. Hillman executed a release discharging Carolina from any obligation to defend or indemnify Seldon in connection with West's lawsuit. (Doc. 20-10.)

         While West's lawsuit against Seldon was pending, Seldon experienced serious financial difficulties. On September 26, 2015, Seldon's board authorized liquidation of its assets. (Doc. 20-3 at ¶ 8.)

         On December 28, 2015, Seldon's counsel from Nixon Peabody moved to withdraw in the state court case, stating that Seldon was no longer an operating entity, had auctioned its assets, and had no remaining funds. See West v. Seldon Techs., Inc., No. 325-5-13 Wrcv (Vt. Super. Dec. 28, 2015) (motion for leave to withdraw as counsel). That motion was granted on February 5, 2016. See West v. Seldon Techs., Inc., No. 325-5-13 Wrcv (Vt. Super. Feb. 5, 2016) (entry regarding motion for leave to withdraw as counsel). On May 19, 2016, the state court granted West's motion for default judgment as to liability and ordered further proceedings to determine the amount of damages. See West v. Seldon Techs., Inc., 325-5-13 Wrcv (Vt. Super. May 19, 2016) (entry regarding motion for default judgment). On June 30, 2016, a jury returned a damages verdict in the amount of $400, 000, and the state court issued a judgment in favor of West against Seldon in the amount of $400, 000 plus interest and costs. (Doc. 17-15 at 2-3.)

         Plaintiff filed this action on March 20, 2017, seeking payment of the judgment with interest under Vermont's direct-action statute.

         ANALYSIS

         In this diversity case, the court applies the law of Vermont, which governs both the construction of a policy issued to a Vermont corporation and the execution of a release cancelling coverage by that company. The questions presented by the case have not been resolved by Vermont legislation or the decisions of the Vermont Supreme Court. "To the extent that state law is uncertain or ambiguous, [the court] must 'carefully . . . predict' how the state's highest court would resolve the uncertainty or ambiguity." Maska U.S., Inc. v. Kansa General Ins. Co., 198 F.3d 74, 78 (2d Cir. 1999) (citation omitted). Here, the parties have not cited and the court has not found any squarely controlling Vermont precedent.

         American courts have long recognized a restriction on the right of an insured to cancel coverage after a loss has occurred. Both case law and the leading insurance treatises identify circumstances in which the release of rights under a liability policy violate public policy because it defeats the settled expectation of the injured party that insurance will respond to the claim. This principle can be traced back to fire insurance cases of the nineteenth century and forward to third-party cases in the modern era.

         The recognition of restrictions on the right of an insured to cancel coverage after a loss has its origins in the recognition that in the first-party setting, multiple parties may have interests in the same insurance proceeds. See Home Ins. Co. v. Baltimore Warehouse Co., 93 U.S. 527 (1876) (fire insurance obtained by a warehouse owner protected both the interest of the named insured and the interest of the owners of the goods). Although the owner of the goods was not a named insured or otherwise a party to the insurance contract, courts devised legal theories to protect the owner from a cancellation after the loss.

         Courts held that when warehouse operators insured goods stored on their premises, they were agents or trustees acting on behalf of the owners of those goods. As principals in this relationship, the owners of goods had the right to ratify or adopt insurance contracts after a loss. Edwards v. Cleveland Mill & Power Co.,193 N.C. 780, 138 S.E. 131 (1927). From these cases, it was a short step to recognizing that ...


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