IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

PRECIS, INC., ET AL., §

§

Plaintiffs, §

§

VS. § NO. 4:05-CV-411-A

§

FEDERAL INSURANCE COMPANY, §

ET AL., §

§

Defendants. §

MEMORANDUM OPINION

and

ORDER

Came on for consideration the cross-motions of plaintiffs,

Precis, Inc. ("Precis"), and David May ("May"), defendant Federal

Insurance Company ("Federal") and defendant Zurich American

Insurance Company ("Zurich") for summary judgment. The court,

having considered the motions, the responses, the replies, the

record, the summary judgment evidence, and applicable

authorities, finds that defendants' motions should be granted and

that plaintiffs' motion should be denied.

I.

Plaintiffs' Claims

On July 28, 2004, plaintiffs filed their original petition

in the district court of Oklahoma County, Oklahoma. Plaintiffs

allege that Federal issued Precis an executive protection policy

of insurance whereby it agreed to cover certain losses

attributable to claims asserted by third parties against Precis,

its officers and/or directors, including May, between 12:01 a.m.

on September 1, 2002, and 12:01 a.m. on September 1, 2003; that

 

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Among the papers the undersigned received are the motions for

summary judgment, which had been pending for months without ruling.

2

Zurich issued a similar policy effective between 12:01 a.m. on

September 1, 2003, and 12:01 a.m. on September 1, 2004; that on

August 29, 2003, Robert T. Kirk ("Kirk") and others filed a

lawsuit assigned cause number 236-201468-03 in the 236th Judicial

District Court of Tarrant County, Texas, (the "underlying

lawsuit") asserting a claim of the type covered by the Federal

and Zurich policies; that the petition was served on plaintiffs

on September 10, 2003; that plaintiffs made demand for coverage;

and, that both Federal and Zurich denied plaintiffs' demand. 

Plaintiffs seek a declaratory judgment concerning their rights to

coverage and a judgment for any coverage to which they may be

entitled in accordance with the declaratory ruling.

On September 16, 2004, defendants filed their notice of

removal in the United States District Court for the Western

District of Oklahoma. By order signed February 14, 2005, the

action was transferred to the United States District Court for

the Northern District of Texas, Dallas Division. And, by order

signed June 27, 2005, the action was further transferred to the

Fort Worth Division of the court.1

II.

Grounds of the Motions

Plaintiffs assert two grounds in support of their motion. 

First, they contend that the underlying lawsuit constitutes a

claim and that certain demand letters sent to them in December

 

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2002 do not constitute claims as defined in the insurance

policies, making the Zurich policy applicable. Alternatively,

plaintiffs contend that if the December demand letters are

claims, they are entitled to coverage under the Federal policy. 

Zurich contends that the December letters are claims that

were not made during its policy period and that, even if the

letters do not constitute claims, they are sufficient to invoke

the known-loss doctrine and preclude coverage. 

Federal maintains that, if the underlying lawsuit is the

claim, coverage is precluded, because the claim was not made

during its policy period since plaintiffs were not served with

the underlying lawsuit until after the policy period had expired. 

Alternatively, if the December 2002 demand letters constitute

claims, plaintiffs failed to notify Federal of such claims as

soon as practicable, as required by its policy.

III.

Applicable Summary Judgment Principles

A party is entitled to summary judgment on all or any part

of a claim as to which there is no genuine issue of material fact

and as to which the moving party is entitled to judgment as a

matter of law. Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 247 (1986). The moving party has the initial

burden of showing that there is no genuine issue of material

fact. Anderson, 477 U.S. at 256. The movant may discharge this

burden by pointing out the absence of evidence to support one or

more essential elements of the non-moving party's claim "since a

 

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complete failure of proof concerning an essential element of the

nonmoving party's case necessarily renders all other facts

immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 323-25

(1986). Once the moving party has carried its burden under Rule

56(c), the non-moving party must do more than merely show that

there is some metaphysical doubt as to the material facts. 

Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.

574, 586 (1986). The party opposing the motion may not rest on

mere allegations or denials of pleading, but must set forth

specific facts showing a genuine issue for trial. Anderson, 477

U.S. at 248, 256. To meet this burden, the nonmovant must

"identify specific evidence in the record and articulate the

'precise manner' in which that evidence support[s] [its]

claim[s]." Forsyth v. Barr, 19 F.3d 1527, 1537 (5th Cir. 1994). 

An issue is material only if its resolution could affect the

outcome of the action. Anderson, 477 U.S. at 248. Unsupported

allegations, conclusory in nature, are insufficient to defeat a

proper motion for summary judgment. Simmons v. Lyons, 746 F.2d

265, 269 (5th Cir. 1984).

The standard for granting a summary judgment is the same as

the standard for rendering judgment as a matter of law. Celotex

Corp., 477 U.S. at 323. If the record taken as a whole could not

lead a rational trier of fact to find for the non-moving party,

there is no genuine issue for trial. Matsushita, 475 U.S. at

597. See also Boeing Co. v. Shipman, 411 F.2d 365, 374-75 (5th

Cir. 1969) (en banc) (explaining the standard to be applied in

 

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determining whether the court should enter judgment on motions

for directed verdict or for judgment notwithstanding the

verdict). 

IV.

Undisputed Evidence

The following is an overview of evidence pertinent to the

motions for summary judgment that is undisputed in the summary

judgment record:

Federal issued an executive protection policy to Precis

effective 12:01 a.m. on September 1, 2002, until 12:01 a.m. on

September 1, 2003 (the "Federal policy"). Both the application

and the Federal policy list Precis's address as Grand Prairie,

Texas. Federal App. at 005, 010. The Federal policy states that

it is "WRITTEN ON A CLAIMS MADE BASIS" and that "THESE COVERAGE

SECTIONS COVER ONLY CLAIMS FIRST MADE AGAINST THE INSURED DURING

THE POLICY PERIOD." Id. at 010. The insuring clauses provide:

1. The Company shall pay on behalf of each of the

Insured Persons all Loss for which the Insured

Person is not indemnified by the Insured

Organization and which the Insured Person becomes

legally obligated to pay on account of any Claim

first made against him, individually or otherwise,

during the Policy Period or, if exercised, during

the Extended Reporting Period, for a Wrongful Act

committed, attempted, or allegedly committed or

attempted by such Insured Person before or during

the Policy Period.

2. The Company shall pay on behalf of the Insured

Organization all Loss for which the Insured

Organization grants indemnification to each

Insured Person, as permitted or required by law,

which the Insured Person has become legally

obligated to pay on account of any Claim first

made against him, individually or otherwise,

during the Policy Period or, if exercised, during

 

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the Extended Reporting Period, for a Wrongful Act

committed, attempted, or allegedly committed or

attempted by such Insured Person before or during

the Policy Period.

Id. at 018. Precis is the "insured organization" and May is an

"insured person" under the Federal policy.

The reporting and notice provision states:

10. The Insureds shall, as a condition precedent to

exercising their rights under this coverage

section, give to the Company written notice as

soon as practicable of any Claim made against any

of them for a Wrongful Act. 

If during the Policy Period or Extended Reporting

Period (if exercised) an Insured becomes aware of

circumstances which could give rise to a Claim and

gives written notice of such circumstance(s) to

the Company, then any Claims subsequently arising

from such circumstances shall be considered to

have been made during the Policy Period or the

Extended Reporting Period in which the

circumstances were first reported to the Company.

The Insureds shall, as a condition precedent to

exercising their rights under this coverage

section, give to the Company such information and

cooperation as it may reasonably require,

including but not limited to a description of the

Claim or circumstances, the nature of the alleged

Wrongful Act, the nature of the alleged or

potential damage, the names of actual or potential

claimants, and the manner in which the Insured

first became aware of the Claim or circumstances.

Id. at 022. The Federal policy defines the term "claim" to

include "a written demand for monetary damages or non-monetary

relief." Id. at 031. 

Zurich issued a directors and officers liability and

reimbursement policy to Precis effective 12:01 a.m. on September

1, 2003, until 12:01 a.m. on September 1, 2004 (the "Zurich

policy"). The Zurich policy likewise provides that "THIS POLICY

 

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IS WRITTEN ON A CLAIMS MADE BASIS AND COVERS ONLY CLAIMS FIRST

MADE AGAINST THE INSURED PERSONS DURING THE POLICY PERIOD OR THE

EXTENDED REPORTING PERIOD . . . ." Pls.' App. in Resp. to

Zurich's Mot. (hereinafter "Pls.' Zurich App.") at 004. The

insuring clauses provide:

A. DIRECTORS AND OFFICERS LIABILITY COVERAGE

The Underwriter shall pay on behalf of the Insured

Persons all Loss for which the Insured Persons are

not indemnified by the Company and which the

Insured Persons become legally obligated to pay on

account of any Claim first made against them,

individually or otherwise, during the Policy

Period or, if exercised, during the Extended

Reporting Period, for a Wrongful Act taking place

before or during the Policy Period.

B. COMPANY REIMBURSEMENT COVERAGE

The Underwriter shall pay on behalf of the Company

all Loss for which the Company grants

indemnification to the Insured Persons, as

permitted or required by law, and which the

Insured Persons have become legally obligated to

pay on account of any Claim first made against

them, individually or otherwise, during the Policy

Period or, if exercised, during the Extended

Reporting Period, for a Wrongful Act taking place

before or during the Policy Period.

Id. at 006. Precis is the "company" and May is an "insured

person" under the Zurich policy.

The reporting and notice provision states in pertinent part:

The Company or Insured Persons shall, as a

condition precedent to their rights under this

policy, give to the Underwriter written notice of

any Claim made against the Insured Persons as soon

as practicable but in no event later than ninety

(90) days after expiration of the Policy Period

or, if exercised, the Extended Reporting Period.

If during the Policy Period or Extended Reporting

Period (if exercised) the Company or the Insured

Persons become aware of circumstances which could

 

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give rise to a Claim against the Insured Persons

and give written notice of such circumstances to

the Underwriter during the Policy Period or

Extended Reporting Period (if exercised), then any

Claims subsequently arising from such

circumstances shall be considered to have been

made during the Policy Period or the Extended

Reporting Period in which the circumstances were

first reported to the Underwriter.

The Company or the Insured Persons shall, as a

condition precedent to exercising their rights

under this policy:

(1) include within any notice of Claim or

circumstance a description of the Claim or

circumstances, the nature of the alleged

Wrongful Act, the nature of the alleged or

potential damage, the names of actual or

potential claimants, and the manner in which

the Company or the Insured Persons first

became aware of the Claim or circumstances,

and

(2) give to the Underwriter such information and

cooperation as it may reasonably require.

Id. at 011. The term "claim" includes "a written demand for

monetary damages." Id. at 007.

By letter dated December 2, 2002, Eugene Michael Kennedy

("Kennedy") sent a letter to May summarizing in writing a

conversation he had had with May several weeks earlier. The

letter recounts that plaintiffs refused to grant Kennedy consent

for the cashless exercise of 15,000 common stock purchase

warrants owned by him, causing him to lose more than $120,000. 

Pls.' Zurich App. at 001-002. The letter states: 

I want consideration and adjustment in the

circumstances. I would suggest payment to me by the

Company in the amount of $5 per Warrant in exchange for

surrender of my Common Stock Purchase Warrants. I

would be happy to consider an alternate proposal by the

Company at this point.

 

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. . . .

I want an adjustment.

. . . .

Please don't take this discussion lightly. I have

no intention of quietly walking away from my injury.

Id. at 002. 

By letter dated December 9, 2002, Kirk wrote to the chief

executive officer of Precis stating:

I am among a group of holders of in excess of

200,000 Precis warrants. Recently, I attempted

unsuccessfully to contact you via phone to express our

outrage and discuss the reparation of this matter.

Our group of warrant holders was denied the

ability to cash in our warrants by the Deliberate

actions and stalling of David May, who is under your

direct command. We were precluded from exercising and

selling the shares of précis, while employees, other

warrant holders, insiders and Associates of précis sold

in multiple transactions and large quantity in the same

time frame in which we were denied the same

opportunity. Our damages, pre-interest, exceed $1.5

Million and are growing. We view you, as CEO, David

May and Precis to be responsible, sharing liability for

this damage.

We are willing to entertain settlement of this

matter but not by being subject to offensive and

abusive stalling and schmoozing by David May. Absent

your prompt attention to this situation, we will

commence litigation to seek a proper resolution.

Id. at 003.

On August 29, 2003, Kirk and others filed the underlying

lawsuit. The petition in the underlying lawsuit was served on

plaintiffs on September 10, 2003. On September 16, 2003,

plaintiffs sent a copy of the petition in the underlying lawsuit

to Federal via facsimile. On September 18, 2003, plaintiffs

 

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provided a copy of the petition in the underlying lawsuit to

Zurich via facsimile. Each denied coverage under its policy.

V.

Applicable Law

The court applies the choice of law rules of the transferor

court. Ferens v. John Deere Co., 494 U.S. 516, 519 (1990). That

court, the United States District Court for the Western District

of Oklahoma, would apply the choice of law rules of Oklahoma. 

Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). 

According to Oklahoma law, "a contract is to be interpreted

according to the law and usage of the place where it is to be

performed, or, if it does not indicate a place of performance,

according to the law and usage of the place where it is made." 

Okla. Stat. Ann. tit. 15, § 162 (West 2004). 

Plaintiffs do not dispute that the Zurich policy was formed

in Texas and is to be performed in Texas. Accordingly, Texas law

governs the interpretation of the Zurich policy.

Plaintiffs argue that Oklahoma law should apply to the

Federal policy, because Precis was headquartered in Oklahoma at

the time Federal originally issued a policy to Precis. 

Plaintiffs do not cite any authority to support the proposition

that the Federal policy, as a renewal policy, should likewise be

governed by Oklahoma law. A basic tenet of insurance law holds

that each time an insurance contract is renewed, a separate and

distinct policy comes into existence. Government Employees Ins.

Co. v. United States, 400 F.2d 172, 174-75 (10th Cir. 1968); Wynn

 

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v. Avemco Ins. Co., 963 P.2d 572, 574 (Okla. 1998); Howard v. INA

County Mut. Ins. Co., 933 S.W.2d 212, 220 (Tex. App.--Dallas

1996, writ denied); Berry v. Texas Farm Bureau Mut. Ins. Co., 782

S.W.2d 246, 248 (Tex. App.--Waco 1989, writ denied). Based on

the undisputed facts, Texas law applies to the Federal policy.

VI.

Whether There is Coverage Under the Zurich Policy

The Zurich policy clearly states that it covers only claims

first made against the insured persons during the policy period. 

Thus, the policy cannot apply to claims made against plaintiffs

prior to September 1, 2003. The policy defines a "claim" as

follows:

A. Claim means:

1. a written demand for monetary damages,

2. a civil proceeding commenced by the service

of a complaint or similar pleading,

3. a criminal proceeding commenced by a return

of an indictment, or

4. a formal administrative or regulatory

proceeding commenced by the filing of a

notice of charges, formal investigative order

or similar document, 

against any Insured Person for a Wrongful Act,

including any appeal therefrom.

Pls.' Zurich App. at 007. The language of the policy is to be

given its plain meaning. Puckett v. U.S. Fire Ins. Co., 678

S.W.2d 936, 938 (Tex. 1984). 

The issue is whether either of the December 2002 letters

from Kennedy and Kirk constitutes a claim under the Zurich

 

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policy. As a matter of law, each of the letters constitutes such

a claim. Edinburg Consol. ISD v. INA, 806 S.W.2d 910, 913 (Tex.

App.--Corpus Christi 1991, no writ). See also Bevers v. Soule,

909 S.W.2d 599, 603 (Tex. App.--Fort Worth 1995, no writ);

Robinson v. Brice, 894 S.W.2d 525 (Tex. App.--Austin 1995, writ

denied). 

Zurich alternatively argues that, even if the December

letters do not constitute claims, they preclude coverage under

the policy under the known loss doctrine: insurance coverage is

precluded where the insured is, or should be, aware of an ongoing

loss or known loss at the time the policy was purchased. 

Franklin v. Fugro-McClelland (Southwest), Inc., 16 F. Supp. 2d

732, 734-35 (S.D. Tex. 1997). The purpose of insurance is to

protect against unknown risks and an insured cannot insure

against something that has already begun and which is known to

have begun. Summers v. Harris, 573 F.2d 869, 872 (5th Cir.

1978); Two Pecos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495, 502

(Tex. App.--Houston [14th Dist.] 1995, no writ). Clearly,

plaintiffs knew before they purchased the Zurich policy that they

faced a lawsuit if they were unable to resolve the claims of the

warrant holders.

VII.

Whether There is Coverage Under the Federal Policy

The Federal policy, like the Zurich policy, clearly states

that it covers only claims first made against the insured during

the policy period. The effective period is 12:01 a.m. on

 

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The court need not decide whether the underlying lawsuit itself

constituted a claim inasmuch as the claim was first made through the

December 2002 letters. 

13

September 1, 2002, until 12:01 a.m. on September 1, 2003. The

policy defines "claim" in pertinent part to mean: "a written

demand for monetary damages or non-monetary relief" or "a civil

proceeding commenced by the service of a complaint or similar

pleading." Federal's App. at 031. 

Again, an issue is whether either of the December 2002

letters from Kennedy and Kirk constitutes a claim. The issue

under the Federal policy is even more clear-cut, since the term

"claim" includes a demand for non-monetary relief. Each of the

letters constitutes a claim. Edinburg Consol. ISD, 806 S.W.2d at

913. And, since the letters constituted claims, plaintiffs had

an obligation "as a condition precedent to exercising their

rights" to give Federal written notice as soon as practicable of

such claims. Because the Federal policy is a claims-made policy,

the notice provision requirement is strictly construed. Matador

Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653,

659 (5th Cir. 1999). Failure to provide proper notice precludes

coverage under the Federal policy, whether Federal was prejudiced

by the late notice or not. Id. Here, as a matter of law, the

delay of over nine months from receipt of the December 2002

letters until plaintiffs notified Federal that a claim was being

made was not "as soon as practicable" and did not trigger

coverage under the Federal policy.2

VIII.

 

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Order

For the reasons discussed herein,

The court ORDERS that defendants' motions for summary

judgment be, and are hereby, granted; that plaintiffs' motion for

summary judgment be, and is hereby, denied; that plaintiffs take

nothing on their claims against defendants; and, that plaintiffs'

claims be, and are hereby, dismissed with prejudice.

SIGNED July 12 , 2005.

 /s/ John McBryde 

JOHN McBRYDE

United States District Judge

 

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