James River Insurance Co. v. Blue Ox Dance Hall, LLC, 4:16-cv-00151

Background

James River issued a commercial/general liability and liquor liability policy to Blue Ox (10/25/2013–10/25/2014) with standard aggregate limits but an Assault & Battery (A&B) Endorsement capping A&B losses at $25,000 per occurrence / $50,000 aggregate.
The A&B Endorsement contains a clear "defense within limits" clause: claims expenses (including defense costs) are included in and reduce the A&B limits rather than being paid in addition to them.
Blue Ox and three patrons sued in Oklahoma state court for incidents involving physical force; James River filed this federal declaratory action seeking a ruling that the A&B Endorsement applies and that claims expenses may be deducted from limits.
Defendants argued the defense-within-limits clause is unenforceable under Oklahoma Administrative Code §365:15-1-15, which forbids including defense expenses within liability limits for (licensed) property and casualty insurers unless waived by the Insurance Commissioner.
James River countered that the OAC provision and related waivers govern only licensed (admitted) property and casualty insurers and do not apply to surplus lines insurers like James River.
The court previously held the state-court claims fall within the A&B Endorsement and in this opinion resolved that the defense-within-limits clause is enforceable as to James River, a surplus lines insurer.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the A&B endorsement permits deduction of claims expenses from policy limits	A&B language unambiguously includes claims expense within limits; James River may deduct them	Clause is unenforceable under OAC §365:15-1-15 and thus cannot reduce limits	Held for James River — endorsement unambiguously allows deduction of claims expenses
Whether OAC §365:15-1-15 applies to surplus lines insurers	The OAC applies only to licensed/admitted property & casualty insurers, not surplus lines like James River	§1109 makes surplus lines policies enforceable like admitted insurers, so OAC restriction applies	Held that §365:15-1-15 does not apply to surplus lines insurers; waivers and bulletins are directed to licensed insurers only
Whether statutory/regulatory policy or Oklahoma public policy disfavors defense-within-limits clauses	No controlling Oklahoma authority disfavors such clauses; surplus lines insurers are subject to less regulation	Regulatory prohibition or public policy should render clause unenforceable	Held: No Oklahoma appellate authority or policy bar identified; clause enforceable here
Whether any remaining issues require adjudication	James River seeks final determination on deductibility; resolution would narrow remaining issues	Defendants previously sought chance to respond on legal issue raised in reply; court granted opportunity and resolved issue	Held: Summary judgment granted to James River; parties to file joint status whether other issues remain

Key Cases Cited

Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (summary judgment standard and "scintilla" language)
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (genuine issue for trial standard)
Garratt v. Walker, 164 F.3d 1249 (10th Cir. 1998) (summary judgment—view evidence in favor of nonmovant)
Zurich Am. Ins. Co. v. O'Hara Reg'l Ctr. for Rehabilitation, 529 F.3d 916 (choice-of-law/contract interpretation in diversity cases)
First American Kickapoo Operations, L.L.C. v. Multimedia Games, Inc., 412 F.3d 1166 (Oklahoma contract-construction principles applied)
Piermount Iron Works, Inc. v. Evanston Ins. Co., 963 A.2d 818 (N.J. 2009) (characterizing surplus lines regulatory freedom)
Smith v. Underwriters at Lloyd's of London, 606 A.2d 273 (Md. 1992) (surplus lines as last-resort, flexible coverage)