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Erik Scott Media, LLC v. Auto-Owners Insurance Co.

United States District Court, D. Utah, Central Division

August 29, 2018

ERIK SCOTT MEDIA, LLC, a Utah limited liability company, Plaintiff,
v.
OWNERS INSURANCE COMPANY, a Michigan corporation, Defendant.

          MEMORANDUM DECISION AND ORDER

          Dee Benson, United States District Judge

         Before the Court are the parties cross-motions for summary judgment. [Dkt. 27, 32]. A hearing was held on the motions on May 15, 2018 at which Plaintiff was represented by Brennan Moss and Defendant was represented by Peter Barlow. The Court took the motions under advisement. Shortly after the hearing, the parties notified the Court that they were engaging in mediation to resolve their disputes. Having now been informed by the parties that their mediation efforts were not successful, the Court issues this Memorandum Decision and Order.

         BACKGROUND

         Plaintiff Erik Scott Media, LLC (“ESM”) operates a third-party logistics business that stores and ships products for their manufacturers. Dkt. 27 ¶1. ESM is insured by Owners Insurance Company (“Owners”) under a policy of insurance entitled Tailored Protection Policy (“the Policy”), policy number 064643-57050255-13. Id. at Ex. 2. The Policy includes commercial property coverage and commercial general liability coverage. Id. Between November 14, 2014 and the end of 2014, ESM made errors in the shipments of products. Id. at Exs. 3 & 4. One instance occurred when ESM's operations manager downloaded a batch of orders from one of its clients, Wise Company, that contained approximately 10, 000 orders. Id. at Ex. 4. She accidentally downloaded the same 500 orders twice and those orders were then shipped by ESM. Id. Another instance occurred when an ESM employee unintentionally sent the wrong products to customers. Id. After ESM discovered the errors, it cancelled and retrieved some of the shipments. Some customers voluntarily returned the erroneously shipped products. Id. at Ex. 3. ESM was able to retrieve about 60% of the mis-shipped orders. Id. Wise Company directed ESM to discontinue contacting its customers to whom the double shipments were sent because the contact by ESM was “too intrusive.” Id. Wise Company requested a credit from ESM in an amount equal to the products which were shipped erroneously and not retrieved. Id. ESM provided the credit to Wise Company.

         In February, 2015, ESM filed a claim under its insurance policy with Owners for recovery of damages in the amount of $302, 496.85. Id. at Exs. 3. Included in this figure is the amount of the unretrieved mis-shipped products equaling $92, 759.36. ESM also claims shipping costs of $51, 580.88 and additional labor costs of $106, 770.90 incurred in retrieving the products. Id. at Ex. 3.

         Owners assigned a senior claims representative specialist as the adjuster for ESM's claims. He investigated the claim and conducted interviews of ESM's owners and managers. Id. The adjuster issued a coverage position letter on behalf of Owners, denying ESM's claim. Id. at Exs. 8. The letter states that ESM's claim did not fall within the coverage provisions which require: “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” Id. The coverage position letter states that coverage for ESM's claim is additionally barred by the exclusionary provision prohibiting coverage for voluntarily sending property as a result of unauthorized instructions. This lawsuit followed.

         ESM moves for summary judgment claiming that it is entitled to coverage under the commercial general liability (“CGL”) provision for the credits it gave its customers for the mis-shipped products ESM was not able to recover. ESM also argues it is entitled to coverage under the commercial property coverage (“CPC”) provision because it incurred a direct physical loss of the property at its premises when the product was wrongly shipped. ESM also seeks a finding by the Court of bad faith on Owners' part for failing to adequately investigate its claim before denying it.

         Owners moves for summary judgment claiming that ESM is not entitled to coverage under the CPC provision because the facts do not fall within a covered loss under the policy and it did not engage in bad faith in denying ESM's claim.

         DISCUSSION

         I. The Commercial General Liability Provision Does Not Apply Here

         Plaintiff argues that it is entitled to coverage under the commercial general liability (“CGL”) provision of the Policy. The CGL provision applies where third-parties bring claims against ESM. Under the CGL provision Owners then has the right and duty to defend and indemnify against those claims. Where the CGL provision applies, Owners is obligated to pay the amounts ESM is liable to pay the third-parties as damages. Under the CGL provision, ESM is not entitled to settle third-party claims without Owners' involvement.

         There is no dispute that Owners was never involved in the communications between ESM and the third-parties. It is undisputed that no third-party brought a liability claim against ESM for the losses alleged in this action. The issue therefore is whether Owners is liable to ESM for the credits ESM gave its customers to compensate for the unrecovered erroneously-shipped product where no formal legal claim was made by the customers against ESM and no judicial finding of liability was made for the credits.

         Because the CGL policy is only applicable in cases where third-parties bring legal claims against ESM which Owners then has the right and duty to defend and indemnify, the Court finds that the CGL provision does not apply to these facts. ESM is not entitled to coverage under the CGL provision for the credits it gave its customers.

         II.There is Insufficient Evidence to Support a Finding of Bad Faith on the Part of ...


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