Brand v. National Union Fire Insurance Co. of Pittsburgh

          Submitted: March 14, 2019

          Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before SHEPHERD, ERICKSON, and KOBES, Circuit Judges.

          ERICKSON, Circuit Judge.

         John Brand, Daniel Juhl, John Mitola, and Jeff Bendel (collectively, "Insured Directors"), plaintiffs in this declaratory judgment action seeking to allocate defense costs among insured and uninsured parties, appeal the district court's^[1] adverse grant of summary judgment in favor of defendant-appellee National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("National Union"). The Insured Directors contend that the district court erred in two particulars: first, in holding that they failed to meet their burden to show that National Union's allocation was improper, and, second, in failing to conform the pleadings to the facts. We affirm.

         I. Background

         The Insured Directors are executives of Juhl Energy, Inc., a Minnesota-based energy company. National Union wrote a Directors and Officers ("D & O") insurance policy covering Juhl Energy's directors and officers for the coverage period of June 24, 2013, to July 1, 2014. The policy provides personal liability coverage for the directors and officers of Juhl Energy and its subsidiaries for up to $3 million, with a $100, 000 deductible.

         Juhl Energy's subsidiary, Juhl Energy Development, Inc. ("JEDI"), contracted with Unison Co. Ltd. ("Unison"), a South Korean wind turbine manufacturer, to purchase two wind turbine generators for a community wind farm developed and owned by Winona County Wind, LLC ("WCW"). JEDI secured a financing loan from Unison for this purchase in the amount of $2, 574, 900. At the time the turbines were purchased, WCW was a subsidiary of the Winona County Economic Development Authority, however, JEDI purchased WCW after executing the contract with Unison. Following this purchase, Unison sued JEDI in the District of Minnesota, claiming that JEDI's acquisition of WCW was in breach of the financing agreement. An amended complaint was filed in December 2013, alleging 17 separate causes of action. The Insured Directors were named as defendants in three of these claims; the remaining 14 counts were asserted against various non-insured entities, many of which included Juhl Energy and its subsidiary companies.

         In January 2014, the Insured Directors filed a motion seeking to compel arbitration. The district court denied their motion, and the Insured Directors appealed. While the appeal was pending in this court, non-insureds JEDI and WCW commenced arbitration against Unison, alleging breach of contractual warranties by selling JEDI defective turbines. JEDI claimed that the turbines worked only sporadically, and design defects (caused by Unison's failure to account for Minnesota's cold climate) rendered the turbines useless during winter months. In May 2015, this court reversed the district court's denial of the Insured Directors' motion to compel arbitration. Unison Co. v. Juhl Energy Dev., Inc., 789 F.3d 816 (8th Cir. 2015). On remand, the district court stayed Unison's suit until arbitration was completed. On October 23, 2015, Unison asserted the 17 claims as counterclaims in the arbitration, plus one additional claim against JEDI for legal fees and expenses.

         Upon notice of the Unison lawsuit, National Union (via claims analyst, AIG Claims, Inc.) sent a letter to Brand stating that potential coverage was available but only for the Insured Directors. National Union subsequently sent Brand an email proposing the coverage allocation to be 20%, basing its estimate on the percentage of covered claims in the suit. National Union also informed Brand that there was no coverage for JEDI/WCW's arbitration claims against Unison and requested that the law firm representing these parties bill separately for them. In a separate email, National Union notified Stuart Turner, broker for the insured parties, that JEDI/WCW's prosecution of affirmative claims against Unison were not defense costs under the policy and therefore would not be covered. Turner responded that the Insured Directors strongly disagreed with AIG's 20% allocation, asserting that the affirmative arbitration claims were "inextricably intertwined" with the federal lawsuit against the directors and "necessary to the defense of the litigation as a strategic matter" because JEDI's breach of warranty claims constituted its principal defense to Unison's claims in the federal lawsuit. JEDI claimed that under these facts the arbitration was defensive in nature.

         National Union disagreed with this analysis and took the position that 40% of the expenses and costs of the federal lawsuit was an appropriate allocation, because the Insured Directors constituted four out of the ten defendants. National Union declined to reimburse any fees associated with the arbitration prior to October 23, 2015, when Unison filed its counterclaim. National Union offered to allocate 10% of the arbitration fees and costs incurred after that date because the arbitration primarily involved JEDI/WCW's product defect/warranty claims against Unison, and only three of the 18 claims involved the Insured Directors. The Insured Directors rejected this proposal.

         When the parties were unable to reach agreement, the Insured Directors sued National Union in Minnesota district court, seeking a declaratory judgment declaring that the Insured Directors were entitled to an allocation of 100% of the fees, costs, disbursements, and expenses incurred by the Insured Directors in both the district court action and the arbitration. Additionally, the Insured Directors requested that National Union reimburse the costs of JEDI/WCW's arbitration against Unison, asserting that it was defensive in nature. Both parties moved for summary judgment, and the district court granted summary judgment for National Union. The Insured Directors filed this appeal.

         II. Discussion

         A. Sum ...