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Jury decides insurance coverage dispute

By: Cristina Janda//May 22, 2013//

Jury decides insurance coverage dispute

By: Cristina Janda//May 22, 2013//

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Insurance Verdict: $600,000

Case name: Cousins Submarines Inc. and Cousins Subs Systems Inc. v. Federal Insurance Co.
Case number: 2:12-cv-00387-JPS
Court: U.S. District Court, Eastern District of Wisconsin
Injuries claimed: Wrongful denial of insurance coverage
Date of incident: Feb. 28, 2012
Trial date: March 26, 2013
Disposition date: March 26, 2013
Award type: Verdict
Award amount: $600,000
Special damages: Compensatory damages for breach of contract and bad faith, declaratory judgment declaring the defendant breached its obligations under the insurance policy issued to the plaintiff and that the defendant is liable to the plaintiff in an amount to be determined, attorney fees, costs, interest, and punitive damages
Plaintiffs’ attorneys: Dean Laing and Douglas Dehler of O’Neil Cannon Hollman DeJong & Laing SC, Milwaukee
Defendant’s attorneys: Gary Gassman and Janet Davis of Meckler Bulger Tilson Marick & Pearson LLP, Chicago, and David Westrup of von Briesen & Roper SC, Milwaukee

A dispute concerning insurance coverage was resolved by jury trial in Milwaukee’s U.S. District Court for the Eastern District of Wisconsin.

Cousins Submarines Inc. and Cousins Subs Systems Inc. v. Federal Insurance Co. was originally filed March 19, 2012, in Waukesha County Circuit Court. The original complaint stated that Cousins, with a principal place of business on Leon Road in Menomonee Falls, was the franchisor of the Cousins Subs Shops. Federal Insurance Co. provided insurance coverage to Cousins in Wisconsin.

On March 27, 2009, Cousins filed a complaint for damages against other defendants in a related lawsuit filed in the Eastern District of Wisconsin. The defendants in that lawsuit included Better Subs Development Inc., Better Subs Restaurants LLC, James B. Railing, Karen E. Railing and Shantel E. Vaughn. The defendants in the Railing lawsuit filed an answer, including counterclaims, June 1, 2009.

Cousins claimed it promptly tendered the counterclaims to Federal Insurance Co. for a defense under its insurance policy. The policy reportedly included Directors & Officers Liability Insurance, which Cousins said it supplemented by purchasing Corporate Liability Coverage, an optional coverage that extended coverage to Cousins as an entity. Federal Insurance Co. reportedly sent Cousins a letter Aug. 31, 2009, acknowledging receipt of the counterclaim and agreeing to provide a defense against some of the counterclaimants.

After various summary judgment motions and voluntary dismissals of certain parties, certain counterclaims remained against Cousins. These claims were reportedly mediated with now-retired Judge Michael Skwierawski in an effort to settle the Railing lawsuit. At this time, Federal Insurance Co. allegedly responded that it would contribute no more than $20,000 to any settlement.

During the mediation, though, Cousins’ attorneys apparently called a senior claims examiner with Federal Insurance Co. to advise of the status of the settlement discussions and to request additional settlement authority, but the examiner allegedly refused and maintained that the insurer would not contribute more than $20,000 to any settlement. Cousins asserted that: “Given that the counterclaim plaintiffs were demanding in excess of $2 million from the counterclaim defendants, Federal’s proposal to contribute no more than $20,000 toward settlement was unhelpful.”

The case did not settle at mediation and the parties prepared for trial. Then two weeks before the Railing lawsuit was scheduled to begin trial, Federal allegedly sent a letter to Cousins denying coverage. As the trial approached, Cousins said it continued to participate in settlement negotiations. Cousins’ Chief Financial Officer, Kendall Richmond, reportedly called Federal Insurance Co. on Feb. 23, 2012, and notified the insurer that the parties might settle before the trial began. Again the insurer reportedly confirmed it was denying coverage, and allegedly stated it would not contribute any amount toward a settlement.

Less than three days before the Railings lawsuit was scheduled to begin trial, the parties reached a settlement agreement Feb. 24, 2012, which called for Cousins to pay $750,000 to the counterclaimants in exchange for a full release of liability against all remaining defendants. Cousins’ CFO reportedly called the insurer four days later to advise the insurer of the settlement. According to Cousins, Federal Insurance Co. “took the information and did not ask for anything else” and did not “offer to have Federal contribute to the settlement.”

As a direct result of the Federal Insurance Co. denying coverage in the Railings lawsuit, Cousins brought the lawsuit against Federal Insurance in Waukesha County Circuit Court. The plaintiffs’ claims included breach of contract and bad faith. The plaintiffs also requested a declaratory judgment from the court, declaring that the defendant breached its obligations under the policy and that it was liable to the plaintiffs in an amount to be determined. Counsel for the plaintiffs sought compensatory damages, punitive damages, attorney fees, costs and interest. The defendant removed the case to federal court pursuant to diversity jurisdiction.

The issues were tried before the federal court jury. On the verdict form returned by the jury, jurors determined that the entire amount of the Railings lawsuit settlement was attributable to claims made pursuant to coverage afforded under the terms of the policy of liability insurance issued to the plaintiffs by the defendant, and that the total amount of settlement that the defendant must cover was $600,000.

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