Opinion ID: 3050845
Heading Depth: 2
Heading Rank: 2

Heading: Specific Allegations of Misconduct9

Text: Counsel appointed by an insurer to defend an insured often face a conflict of interest. Even the most optimistic view of human nature requires us to realize that an attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interests of his real client[,] the one who is paying his fee and from whom he hopes to receive future business[:] the insurance company. U.S. Fid. & Guar. Co. v. Louis A. Rosser Co., 585 F.2d 932, 938 n.5 (8th Cir. 1978). The gravamen of PNC's bad faith and negligence arguments is Hortica exploited this conflict by manipulating the defense it provided to PNC to escape its obligations under the policies. PNC cites six instances of such manipulation. We review each instance individually.
PNC argues Hortica assigned Cross Gunter to represent PNC, despite PNC's absolute right to choose its own counsel. Appellant/Cross-Appellee's Br. 35. Hortica counters it had no prior relationship with Cross Gunter and the firm was well qualified to represent PNC. Arkansas law does not directly address this question, but 9 Hortica argues Arkansas law allows an insured to pursue bad faith or negligence claims against a third-party insurer only if the insurer fails to settle a claim within the policy limits. See, e.g., Emp'rs Equitable Life Ins. Co. v. Williams, 665 S.W.2d 873, 874 (Ark. 1984). Because Muniz and Hunter were settled within the policy limits—Muniz for $600,000 and Hunter for $8,000, see Tr. 510-11—and Aydani was dismissed without any settlement payment, Hortica argues it cannot be subject to a bad faith claim. PNC responds Arkansas law allows bad faith and negligence claims even if the underlying claim was settled at or below the policy limit. See Switzer v. Shelter Mut. Life Ins. Co., 208 S.W.3d 792, 800-02 (Ark. 2005) (analyzing the merits of a bad faith claim against a third-party insurer who settled the underlying claim at the policy limit). Because we conclude PNC's negligence and bad faith allegations fail on their merits, we do not address this matter. -11- two federal courts have held the insured has a right to select its own counsel in cases where an insurer-appointed counsel would face a conflict of interest. Union Ins. Co. v. The Knife Co., 902 F. Supp. 877, 881 (W.D. Ark. 1995); Northland Ins. Co. v. Heck's Serv. Co., 620 F. Supp. 107, 108 (E.D. Ark. 1985). But even assuming Arkansas law provides PNC the right to choose its own counsel, PNC presents no evidence Hortica chose Cross Gunter out of malice or dishonesty. Nor does PNC explain how its inability to choose proximately caused its harm. We are not anxious to infer bad faith or negligence in such speculative circumstances. See Wheeler v. Bennett, 849 S.W.2d 952, 958 (Ark. 1993) (declining to award recovery where cause of damages was conjectural).
PNC next claims Hortica instructed Cross Gunter to steer its defense of PNC away from the $2 million, non-eroding CGL policy and towards the $100,000, eroding EPL policy. PNC cites several record documents which it claims establish this finesse. See Appellant/Cross-Appellee's App. 13:3242-43 (case log entry by Hortica employee); id. 17:4428 (line on attorney's bill referencing conference with Hortica Vice President); id. 18:4791 (letter from Hortica Vice President stating the EPL policy is of primary interest to PNC). They do not. The documents contain no smoking gun—indeed, barely a hint—of Hortica's alleged ostrich-like blindness regarding the CGL policy. The documents to which PNC points simply do not provide strong support for its claim.
Next, PNC claims Hortica agreed with Cross Gunter not to disclose the CGL policy to counsel for the Muniz plaintiffs, despite [PNC's] desire for an early settlement. Appellant/Cross-Appellee's Br. 36. It is not altogether clear why this matters. In Arkansas, an insurer is not required to accept a demand from the insured -12- that the case be settled simply because the insured prefers to settle. Willett's Plumbing Co. v. Nw. Nat. Cas. Co., 548 S.W.2d 830, 831 (Ark. 1977). Hortica did not need to accommodate PNC's druthers. And further, just two months elapsed between the agreement not to voluntarily disclose the CGL policy and the complaint in the declaratory judgment action, to which a copy of the CGL policy was attached and therefore accessible to the Muniz plaintiffs. Compare Appellant/CrossAppellee's App. 13:3242 (case entry recording agreement on October 24, 2007), with Compl., R. Doc. 1 (original complaint filed on December 26, 2007). PNC does not explain the significance of this two-month gap, and we see none. 4. Negligent Supervision Pleading Amendment in Muniz and the CGL Policy On November 19, 2008, counsel for the Muniz class announced his intention to amend his complaint to add a claim for negligent supervision for PNC's failure to adequately supervise Aydani. See Appellant/Cross-Appellee's Add. L. Arkansas law requires an insurer to provide coverage and a legal defense when a complaint alleges the insured negligently hired or supervised an employee who subsequently committed an intentional tort. Silverball Amusement, Inc. v. Utah Home Fire Ins. Co., 842 F. Supp. 1151, 1165 (W.D. Ark. 1994), aff'd, 33 F.3d 1476 (8th Cir. 1994) (per curiam). The attorney sought PNC's consent to amend the complaint. See Fed. R. Civ. P. 15(a)(2). It reasoned although the claim would provide another basis for liability against PNC, it would trigger Hortica's duty to defend and indemnify PNC. Jess Sweere, attorney for PNC, refused the request.10 PNC now contends Sweere's refusal to consent to the amendment constitutes further steering the case to ensure any recovery by the Muniz class would be grounded on a theory not covered by the CGL policy. 10 The district court eventually granted the motion to amend. See Order Granting Mot. to Am. Compl., No. 1:07-cv-01073-RTD, R. Doc. 42. -13- We disagree. In a file memorandum, Sweere states he objected to the request because the exclusion prohibiting coverage for intentional acts in Silverball referred to acts by the insured (i.e., the company-policyholder). Appellant/Cross-Appellee's App. 12:3024. The insurer in Silverball relied on a case with nearly the exact same facts, except the applicable exclusion said any insured. 842 F. Supp. at 1158 (citing All Am. Ins. Co. v. Burns, 971 F.2d 438, 440 (10th Cir. 1992)). The court stated had the insurance policy language in Silverball said any insured, the employee would have been considered an insured, the exclusion would have been triggered, and there would have been no duty on behalf of the insurance company. The CGL policy contains an exclusion denying coverage for loss caused by dishonest, fraudulent, criminal, or malicious acts committed by any insured, Appellant/Cross-Appellee's App. 11:2693, thereby bringing Aydani within the exclusion. Put differently, Sweere resisted the amendment because it would not provide any additional insurance coverage, but would instead add an additional claim for liability against only PNC for negligent supervision of Aydani. This is a reasonable tack to take. We see no basis for a negligence or bad faith claim. 5. Cross Gunter's Position Regarding CGL Coverage PNC claims Cross Gunter ultimately took the formal, written position that 'augur[ed] for no [CGL] coverage.' Appellant/Cross-Appellee's Br. 36 (quoting Roser, 585 F.2d at 938). It points to several emails and Cross Gunter's draft memo opposing the amended complaint in Muniz. We have reviewed these documents and are not persuaded. Nowhere does Cross Gunter state there was no CGL coverage. Moreover, an insurer's refusal to pay a claim cannot constitute wanton or malicious conduct when an actual controversy exists with respect to liability under the policy. Watkins, 370 S.W.3d at 857 (citing Farm Bureau Ins. Co. of Ark. v. Running M Farms, Inc., 237 S.W.3d 32, 42 (Ark. 2006)). The CGL policy protected against property damage and bodily injury. Appellant/Cross-Appellee's App. 10:2583. The policy defined property damage as, inter alia, [l]oss of use of tangible -14- property that is not physically injured. Id. 10:2595. Because no Arkansas court had yet ruled on the issue whether money constitutes tangible property for insurance purposes, there existed an actual controversy with respect to this issue. The district court concluded money is tangible property, but as the court itself observed, simply because [PNC] prevailed in the declaratory judgment action brought by Hortica does not mean that the action was meritless. Mem. Op. & Order of Jan. 12, 2012, R. Doc. 257, at 12. Because a legitimate controversy existed as to whether money was tangible property, and therefore the migrant workers suffered property damage within the meaning of the CGL policy, Hortica's refusal to pay a claim under the CGL policy cannot constitute affirmative misconduct under Arkansas law. Nor was it negligent. PNC's argument is without merit. 6. Hortica's Position Regarding Settlement Negotiations PNC argues Hortica refused reasonable settlement negotiations until its duty to defend was decided. See Luke v. Am. Family Mut. Ins. Co., 476 F.2d 1015, 1023 (8th Cir. 1973) (en banc) ([N]otwithstanding an honest belief by the insurer that the policy is not in effect, the company must in good faith consider offers for settlement within the limits of the insurance policy.). Hortica, according to PNC, had a duty to negotiate, yet no evidence shows Hortica gave any consideration to PNC's offers to settle. As explained above, in Arkansas, an insurer is not required to capitulate simply because a policyholder prefers it. Willett's Plumbing Co., 548 S.W.2d at 831. Moreover, the Muniz plaintiffs' settlement offer was $1.95 million, just below the policy maximum. Ultimately, however, only twenty-five plaintiffs came forward with evidence of extortion in Muniz. The case settled for $600,000,11 well below the 11 Of this sum, less than $50,000 constituted damages distributed to the class. The remaining $550,000 went directly to the Muniz plaintiffs' attorneys. Tr. 510-11. -15- plaintiffs' demand. It appears, then, Hortica was prudent not to cede to the initial offer. Once again, PNC's argument falls flat. 7. Summary We have canvassed the record and found smoke but no fire. PNC may be able to show only that it was denied the right to choose its own independent counsel. On that matter, PNC provides no persuasive evidence indicating affirmative misconduct by Hortica, which would be necessary to establish bad faith, or proximate cause and damages, which would be necessary to establish negligence. As for its other alleged misconduct, the evidence simply does not substantiate PNC's claims. The district court did not err when it granted Hortica's post-verdict motion for JAML on PNC's bad faith and negligence counter-claims.12 IV. Breach of Contract, Breach of Fiduciary Duty, and Punitive Damages Claims PNC claims the district court erred when it granted pre-verdict JAML with respect to its claims for (1) breach of contract; (2) breach of fiduciary duty; (3) punitive damages. Again, our review is de novo. Phillips v. Union Pac. R.R. Co., 216 F.3d 703, 705-06 (8th Cir. 2000). 12 To the extent PNC makes additional allegations of error in the district court's grant of JAML, we conclude PNC has failed to adequately develop these arguments in its brief, and as such, they are deemed abandoned. See Rotskoff v. Cooley, 438 F.3d 852, 855 (8th Cir. 2006) (citing Fed. R. App. P. 28(a)(9)(A) (stating appellant's contentions must be supported by citations to authorities and parts of the record on which appellant relies)). -16- A. Breach of Contract13 PNC alleges Hortica breached the parties' contract by failing to provide a defense in Hunter. Not so. The district court excluded the only damages evidence PNC attempted to present, and PNC does not challenge the court's evidentiary ruling. We further observe PNC did not argue to the district court, as it appears to do here, that it can still prevail on its breach of contract claim and recover nominal damages. Its new argument is not properly before us. See First Union Nat'l Bank ex rel. Se. Timber Leasing Statutory Trust v. Pictet Overseas Trust Corp., 351 F.3d 810, 816 (8th Cir. 2003) ([W]e do not normally consider issues which the district court did not rule upon . . . .). B. Breach of Fiduciary Duty When the terms of an insurance policy give the insurer the right 'to determine whether an offer of compromise of a claim shall be accepted or rejected, it creates a fiduciary relationship between it and the insured with the resulting duties that grow out of such a relationship.' Parker, 341 S.W.2d at 41 (quoting Am. Fid. & Cas. Co. v. G.A. Nichols Co., 173 F.2d 830, 832 (10th Cir. 1949)). The terms of the CGL and EPL policies contain such a right to settle clause. Appellant/Cross-Appellee's App. 10:2583 (CGL policy); id. 11:2704 (EPL policy). Although at least one court has questioned whether a fiduciary duty exists in cases where the insurance company assumes a monetary risk and the resulting competing interests between the policyholder and its own bottom line, see Emp'rs Ins. of Wausau v. Didion Mid-South Corp., 987 S.W.2d 745, 748 (Ark. Ct. App. 1999), the holding in Parker remains good law. It therefore appears Hortica owed PNC a duty to act as a fiduciary. 13 PNC appeals only the district court's grant of pre-verdict JAML in Hunter. Its remaining claims were tried to a jury, which returned a verdict in favor of Hortica. See Jury Interrogs., R. Doc. 245. PNC does not appeal the jury verdict on this claim. -17- In Arkansas, regardless of the express terms of an agreement, a fiduciary may be held liable for conduct that does not meet the requisite standards of fair dealing, good faith, honesty, and loyalty. The guiding principle of the fiduciary relationship is that self-dealing, absent the consent of the other party to the relationship, is strictly proscribed. Sexton Law Firm, P.A. v. Milligan, 948 S.W.2d 388, 395 (Ark. 1997) (citations omitted). PNC pleads no specific facts as to breach. Instead, it points only to [t]he evidence discussed above regarding bad faith, particularly with respect to conflicts of interest. Appellant/Cross-Appellee's Br. 47. But as aforesaid, the evidence does not reveal the conflict PNC alleges, and as such, PNC's fiduciary duty argument meets the same fate without any further inquiry. Although Hortica owed PNC a fiduciary duty, PNC cannot demonstrate Hortica engaged in the self-dealing necessary to sustain a claim for breach.