T h e H on or abl e Amul R. T h apa r , U n i t ed St at es D i s t r i ct Ju dg e f or t h e Eas t er n D i s t r i ct of K en t u ck y , s i t t i n g by * d esi gnat i o n. NO T R EC OM M EN DE D F OR F UL L- TEX T P UB LIC AT ION F ile Nam e: 09a0228n.06 F iled: Marc h 24, 2009 Case No. 08- 5046 UN ITED STA TES C OU RT OF AP P EA LS F OR THE SI XT H C IR CU IT WEST P ORT INSURANCE CORP ., et al., P lai nt iffs- App e lla nt s,
v. ENERGY F INANCIAL SERVICES, LL C, et al., De fend ant s- App e lle e s.

_______________________________________ ) ) ) ) ) ) ) ) ) ) ON AP P EA L F RO M THE WEST ERN D ISTRIC T OF KENT UCKY

BEFORE: K

ENNEDY an d BATCHEL DER, Circuit Ju dges; an d THAPA R, Distric t Judge. * ALICE M. B ATCHELDER, Circuit Judge. The plaintiff insura nce c ompanies appe al the district court’s orde r g rantingsummary judgme nt to the d ef

en d ant insureds, in which the district
c ourt de te rm ine d th at un de r t

he te rm s o f t

he po lic ie s is su ed by pl aintif fs , p la int if

fs ha d a duty to de fe nd the ins ur e ds a g a ins t th ir d- pa rt y ne g lig e nc e c la ims . We a ff ir m. Energ y I nsurance Ag ency

(“Ene rg y ”) is, amongother thing s, a consultant in the insuranc e field, and often ref

ers insurance business to othe r insurance ag encie s. As a consul t an t , E n er gy purc ha se d a

n e rr or s- and -o mis sio ns po lic y fr om We stp or

t Ins u r a n c e C o rp . a

nd a pr of e ssi on a l li a

bil ity ins ur anc e po lic y

fr om Em plo y e rs Re ins ur anc e Cor

p. Ea c h o f t

he se po lic ie s c on ta ine d e xclu sio ns , such that cove rag e would not be provided for insolvency or commingling
. For example, the policies2

state: This policy

does not apply

to . . . claims for . . . the c ommingling or use of client’s fu nd s. This policy

does not apply

to . . . any

claim ar ising out of or

in connec tion with the financ ial inability to pay , insolvency , rec eiver ship, bankruptcy or liquidation of any insurance company , any reinsure r, any p o ol, sy ndicate, a ssociation or other combination formed f

or the purpose of providinginsurance or re insurance
. There are two policies at issue her e, but this lang uag e is repr esentative of both. I n 2003, L if

el i n e He alth Group (“ L ifeline” ) hired E nerg y to find a compa

ny to administer health insuranc e to i ts employ ees. Ene rg y rec ommended Consumer He alth Soluti ons (“CHS”) a nd L ifeline acc epted this rec ommendation, paying CHS over $1.8 milli on in premiums. But CHS failed to pay the L ifeline e mploy ees’ claims bec ause, as was late r discover ed, a CHS principa l had commingle d the funds and ultimately taken the money for his own us e. This m isconduct re ndere d CH S in so lve nt. Certain L ifeline e mploy ees s u ed L ifeline, a nd L ifeline brought a Third Party Complaint aga i n s tE n er gy , c l a i m i n g t h at L i fe l i n e h adch o s en C HS b ec au s e o f E n er gy ’s n egl i gen ce . E n er gy submitt ed a claim to its i nsurer s (Westport and Employ ers) , seekingleg al def ense. The insurers provided the leg al defe nse under rese rvation of rig hts a nd filed this sepa

rate action s ee k i n g a decla ratory judgme nt that their policies did not cover E nerg y beca use the unde rlying c laim involved
com mi nglin g and

ins olv e nc y . E ne rg y

c ounte re d th a t, whil e its po lic ie s e xclu de d c ov e ra g e fo r i ts
o wn commi ng ling or

its own insolvency , it was not Energ y that had comming led any funds and become insolvent — L ifeline ha d sued Ener g y for its neg lige nce, a claim that the insura nce policie s
cer tainly cover ed. Th e dis tr ic t c ourt

c on sid e re d th e po lic y

langua g e and the pa

rt ie s argume nts and

a g re e d w ith Energ y . The policies, the district c ourt found, excluded c o v er age f or cla ims ag ainst the insured’s3

insolvency

or comming ling, but did not exclude claims for the i nsured’ s neg lige nce in whic h the harm ha ppened to be cause d by

a third-pa

rty ’s insolvency

or comming ling. More ver, the dist ri ct court found that, even if this re ading wer e incor rec t, i t wa s s u re l y

a plausible re adingand policy langua g e su sc e pti ble to t

wo or mor e pla us ibl e re a din g s is a mbi guo us and is to b e c on str ue d a g a ins t the dra fters ( Westport and Employ ers) and in favor of the insure d (Ene rgy), that is, in favor of
cover ag e. Westport and Employ ers a ppeale d. We conduct a de novo revie w of the district c ourt’s g rant of summar y judgme nt. W

alton v. Ford Motor Co. , 4 24 F .3 d 481, 48 5 ( 6th Cir . 2 00 5) . Summa

ry jud g me nt i s a

pp ro pr iate if

the re is no g enuine issue as to any materia l fac t and the moving party is entitled to judgment as a matter of law. F e d. R. C iv. P. 5 6( c ); Ce lote x Cor p. v . Ca tre tt , 477 U.S. 317, 325 (1986). This ca se involves no g enuine issues of materia l fac t and, “where the facts are undisputed and the only issue is whether the fa cts meet the p o l i cy

definition, only

a question of law

for the c ourt is presente d.” Se e Sta te Auto. Mut. Ins. Co. v. Sec urity Taxicab, Inc. , 4 4 F. Ap p ’x 5 1 3 , 5 1 7 (6 t hC i r. 2 0 0 5 ) ( ci t i n g MG A I ns . Co. , I nc . v . G las s , 131 S.W .3d 775, 777 (Ky
. Ct. App. 2004)). And, be cause this a diversity case , we a pply the substantive law of

the state of K entucky
. Se e id
. I n St. Paul Fire & Marine Insurance Co. v. Powell- W alton- Milward, Inc. , 870 S.W .2d 223, 225 (Ky . 1994), an insuranc e broke r (PWM) rec ommended a pa rticular he alth-insuranc e provide r (NAB T) to seve ral of its clients. When NAB T bec ame insolvent and stopped pa ying cl ai m s , the clients sued PWM, claiming neg lige nce. Id . PWM fi le d an ins ur anc e c la im w ithits ow n in sure r ( St. P au l ), b as edo ni t s erro rs -a n d -o m i s s i o n s p o l i cy , wh i ch i n cl u d ed t wo p er t i n en t cl au s es : t h e C o v er age Cla us e (“ [St. Pa

ul w ill ] pay

amou nts [PWM is] le g a lly

re qu ir e d to pa

y to c omp e ns a te oth e rs fo r l os s that re s u l t s fr o m an er

ror, omission or neg lige nt act committed . . . [during the] place ment of4

ins ur anc e ” ); and

the Exc lus ion

Cla us e (“ [St. Pa

ul] w on ’t c ov e r c la ims that r e su lt f

ro m th e ina

bil ity of an insura

nce c ompany , joint u nderwriting a ssociation, or any simil ar e ntity

to pay all or par t of insured cla ims.”). Id . St . Pa ul r e lie d o n th e e xclu sio n to de ny c ov e ra g e of

PWM’ s c la im. St. P aul soug ht clarific ation in fede ral c ourt and we cer tified the ques t i on to the Kentucky Supreme Court. Id
. at 224-25. The Kentucky Supreme Court deter mined that a li tera l rea ding put t h e two clause s into “patent conf lict,” wher ein “[t] he cove rag e af forde d by St. P aul’s policy

loses all eff ect when i t become s subservient to the exclusion.” Id
. a t 22 6. Thus , th e Ke ntu c ky Sup re me Court fo un d a n a lte rn a tiv e re a ding bo th nece ssa ry and re a so na ble — f ind ingthat c ov e ra g e wo uld be excluded only if the rec ommending third party (i.e., St. Paul’s insured, PW M) did some thing that
cause d or contributed to the rec ommended-insure r’s inability to pa y . Id . at 226 -2 7 (“ I t w ou ld s e e m, obviously , a re latively

simple matter for St. Paul to have written its limitation ex pressly to exclude inability to pay , irrespe ctive of a wrong ful act [ by the i nsured] or not .”). Thus, the cour t concluded that th e po lic y wa s “su sc e pti ble to two re a so na ble me anin g s, ” and , the re fo re , mu st “ be re so lve d to aff ord maxim um cover ag e.” Id . at 226. The c ourt deter mined that PW M was cove red. I f w e are to f

oll owthe Ke ntu c ky

Sup re me Court ’s St. Paul rea soning — a s we a

re oblig ed to do in this diversity

case — then we must re ad the e x clusion cl au s es i n the Westport and Em plo y e rs po lic ie s a s e xclu din g c ov e ra g e on ly if the re c omm e nd ingpa

rt y (i .e ., En e rgy

) d id something to c ause or

contribut e to the re commended insure r’s (i.e ., CHS’s) insolvency
. Se e St. Paul , 870 S.W .2d at 226-27. And it is undisputed that Energy did nothing of the sort. Moreove r, it would seem a relatively simple matter for Westport a nd Employ ers to ha

ve wr itten their limit ations expressly to exclude CHS’s inabilit y to pay , irrespe ctive of a

wrong ful ac t by

Energy . Se e id
. at 226. But, they did not. The policies at issue her e ar e no more specific than the policy in St. Paul
.5

Finally , Kentucky , like the m ajority of jurisdictions, has adopted the rule that “ if there is any alleg ation in the complaint which potentially , possibly or mig ht come within t h e cover ag es of the policy , then the insuranc e compa ny has a d u t y t o d ef

end.” Simpsonville W

reck er Serv ice, I

nc. v. Empire Fire &Marine Ins. Co. , 7 93 S.W. 2d 82 5, 83 0 ( Ky . 1 98 9) ; se e als o Aetna Cas. & Sur. Co. v. Com. , 179 S.W .3d 830, 841 (Ky . 2005). And “ [t ]he duty to defe nd continues to the point of establishing that liability upon which plainti ff was rely ing was i n fac t not covere d by the policy

and not merely

that it might not be.” Jame s Graham Brown Foundation, I nc. v. St. Paul Fire & Marine Ins. Co. , 8 14 S.W. 2d 27 3, 27 9 ( Ky . 1 99 1) . H e re , th e c omp la int a lle g e s th a t E ne rgy

wa s n e g lig e nt,
a c l a i m t h a t—

a tt h e v e r y l e a s t— p o t e n t i a l l y w o u l d

c o m e w i t h i nt h e c o v e r a g e o f t h e p o l i c y. Ba sed on the for eg oing, w e AF F IRM the jud g me nt o f t he dis tr ic t c ourt
.