Tenth Circuit Finds No Duty to Indemnify Exists without Duty to Defend Under Utah Law; Settlement Agreement Cannot Retroactively Create Duty to Defend
Contact: Richard A. Vazquez
The Tenth Circuit recently addressed the scope of insurer duties to defend and indemnify under Utah law in Banner Bank v. First American Title Insurance Company, 916 F.3d 1323 (10th Cir. 2019).
As stated by the Tenth Circuit, Wendell Jacobson was an insider of MSI, Inc., through which he controlled two related LLCs. To secure loans from the Bank for his businesses, Mr. Jacobson conveyed deeds of trust to the Bank as collateral. The Bank then purchased a title insurance policy from First American to cover those deeds of trust. Unfortunately for the Bank, Mr. Jacobson was apparently using his businesses to operate a Ponzi scheme. When the Securities and Exchange Commission filed an enforcement action against Mr. Jacobson, a Receiver was appointed to represent his creditors. The Receiver then filed an action against the Bank challenging the conveyances. Relying on the title policy, the Bank requested that First American defend it in the Receiver’s action. First American refused and explained that the Receiver’s action fell outside the coverage of the policy The Bank responded to First American’s denial and disputed First American’s basis for refusing to defend. First American reaffirmed its conclusion that it owed no duty to defend. The Bank and the Receiver eventually entered a settlement for $675,000. The Bank then sued First American for breach of the duty to defend, breach of the duty to indemnify, and bad faith. The district court granted summary judgment in favor of the insured bank and awarded damages.
The Tenth Circuit unanimously reversed.
The Tenth Circuit found that “the complaint has to be read as a whole, and the clear import, indeed the essence of the Receiver’s complaint, is that Mr. Jacobson engaged in a fraudulent conveyance in order to defraud creditors as part of his Ponzi scheme. That is an event explicitly excluded from coverage by the policy.” While the Bank recited Utah case law with the adage “[w]hen in doubt, defend,” the Court found that there was little room for doubt about the scope of the exclusion from coverage. And since the “language found within the collective ‘eight corners’ of the complaint and the policy clearly and unambiguously indicates that a duty to defend … does not exist” the analysis was complete.
The Tenth Circuit also reaffirmed that under Utah law, the duty to indemnify is narrower than the duty to defend, and clarified that “[i]f there was no duty to defend, there cannot be a duty to indemnify.” The Bank nonetheless argued that the post-complaint settlement agreement served to “clarify” the initial ambiguous complaint, and showed that in retrospect, the Receiver’s action was based upon a covered event under the policy. According to the Bank, the settlement agreement showed that, even if the original complaint was ambiguous, the actual claim in the Receiver’s action was that Mr. Jacobson was unauthorized to transfer the deeds of trust to the Bank on behalf of the LLCs, a covered cause of action.
The Tenth Circuit rejected the Bank’s arguments, finding them inconsistent with Utah law: “The duty to defend is broader than the duty to indemnify, but the duty to defend is determined from the face of the Receiver’s complaint. If the Receiver’s complaint was not enough to establish a duty to defend, how could the settlement agreement later create liability for indemnification? The Bank’s position reverses the normal timeline, and it would effectively allow the duty to defend to attach retroactively….we are hesitant to look to the settlement agreement for guidance because the parties certainly have an incentive to negotiate a settlement agreement that will create liability for the insurer, regardless of the true nature of the action.”
The Tenth Circuit also rejected the Bank’s bad faith claim: “First American owed no duty to defend or indemnify the Bank in the Receiver action. Therefore, First American did not violate the duty of good faith and fair dealing by denying coverage in response to both of the Bank’s requests for coverage. First American reached the correct legal conclusion that it did not owe a duty to defend or indemnify; it reached this conclusion after complying with its duty to diligently investigate the facts to enable it to determine whether a claim is valid, fairly evaluate the claim, and act promptly and reasonably in rejecting or settling the claim. After its first denial and in response to the second request from the Bank, First American assigned the case to a second claims counsel who found that First American was not obligated to defend or indemnify the Bank, implicitly rejecting the Bank’s argument that there remained alternative bases for coverage under the policy regardless of the exclusion for fraudulent transfers. First American’s legal duty of good faith and fair dealing did not require anything more.”