459 B.R. 94
Bankr. D. Idaho2011Background
- PIIC insured PayrollAmerica, Inc. under an accountants professional liability policy (May 1, 2008–May 1, 2009) obligating defense and indemnity for professional-services claims.
- Debtor's clients sued for failure to pay payroll taxes; Debtor filed chapter 7; PIIC sought declaratory relief on duties to defend/indemnify.
- Debtor used Data Processing Service of Georgia (DPS) for ACH processing; DPS later cleared funds through a DPS-owned reserve account, reducing Debtor’s oversight of funds.
- A reserve fund of approximately $2.2 million (later increased) was funded with Debtor’s clients’ funds and commingled in DPS clearing accounts, contributing to unpaid taxes ($4–4.8 million) and client penalties.
- Nine client complaints were provided to support the cross-motion; PIIC supplied some judgments in a later filing; the court analyzed the insurer’s duties based on the pleaded claims and evidence under the policy.
- Court granted Debtor/Trustee partial summary judgment finding PIIC had a duty to defend in five cases and denied/left undecided in others, with rulings on motions to strike affidavits to control evidentiary support.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to defend based on complaints | PIIC argues no duty to defend because DPS—not insured—caused the harm | Debtor/Trustee contend complaints show potential negligence and aggregation supports broader coverage | PIIC has duty to defend in Viking Bank, HATC, Radix, Filson, At Home Care; no duty to defend in Arrow Rock, BluWater, Resources Online, Orca Bay |
| Duty to indemnify based on judgments | Indemnity should be denied absent a duty to defend or a covered basis in judgments | Indemnity hinges on judgment bases; need review of each case’s damages and theory | Indemnity not established for cases lacking adequate basis; unresolved for several cases due to evidentiary gaps |
| Effect of policy exclusions | Exclusions preclude coverage for Debtor’s actions | Exclusions must be proven against each complaint with specifics | Exclusions analysis deferred due to lack of supplied complaints; no blanket noncoverage established |
| Effect of affidavits and timing | Brown's first affidavit should be admissible; second affidavit timely | Paragraph 3 of first affidavit is conclusory; second affidavit untimely under LBR 7056.1 | Struck paragraph 3 of Brown's first affidavit; second affidavit permitted for merits despite timing issue |
| Aggregation vs. per-complaint duty to defend | Policy's aggregate 'same CLAIM' language requires reviewing all related claims for coverage | Duty to defend is per-complaint, not across all actions; cannot infer coverage from other cases | Court reviewed complaints individually; duty found where pleaded negligence present; aggregation not controlling here |
Key Cases Cited
- Hoyle v. Utica Mut. Ins. Co., 137 Idaho 367, 48 P.3d 1256 (Idaho 2002) (duty to defend evaluated per complaint; look to allegations, not extrinsic facts)
- Intermountain Gas Co. v. Industrial Indemnity Co. of Idaho, 868 P.2d 510 (Idaho 1994) (duty to defend governed by complaint’s potential coverage; facts behind the complaint irrelevant)
- Exterovich v. City of Kellogg, 80 P.3d 1042 (Idaho 2003) (insurer evaluates coverage based on pleadings and policy terms; potential coverage triggers defense)
- Millers Mutual Fire Insurance Co. of Texas v. Ed Bailey, Inc., 103 Idaho 377, 647 P.2d 1249 (Idaho 1982) (duty to defend determined by potential liability within policy terms; doubt resolved in insured’s favor)
- McMinn v. Peterson, 777 P.2d 1214 (Idaho 1989) (strictly construe exclusions; determine potential liability per complaint)
- Bunker Hill Co., 647 F. Supp. 1068 (D. Idaho 1986) (federal court guidance on insurer obligations when evaluating exclusions)