Enterasys v . Clarendon Insurance 04-CV-027-SM 08/29/06 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Enterasys Networks, Inc., Plaintiff

v. Civil N o . 04-cv-27-SM Opinion N o .

Clarendon National Insurance Co., Defendant

O R D E R

After settling a securities class action suit by agreeing to

pay class members a combination of cash and stock, Enterasys

Networks, Inc. brought this suit against various insurance

carriers seeking coverage for the losses associated with the

settlement. The complaint advances four causes of action: one

for declaratory judgment of coverage, pursuant to N.H. Rev. Stat.

Ann. (“RSA”) 491:22 (count o n e ) ; a breach of contract claim

(count t w o ) ; a claim of breach of the implied duty of good faith

and fair dealing (count three); and one for violation of various

provisions of the New Hampshire Consumer Protection Act, RSA ch.

358-A (count four). By prior order, the court granted

defendants’ motion to dismiss Enterasys’ claims under the

Consumer Protection Act. Enterasys Networks, Inc. v . Gulf Ins.

Co.,

(D.N.H. 2005). With the exception of Clarendon National Insurance Co., all

other defendant insurance carriers named in Enterasys’ suit have

settled. Pending before the court is Clarendon’s motion for

summary judgment as to all remaining claims in Enterasys’

complaint. For the reasons set forth below, Clarendon’s motion

is granted.

Standard of Review

When ruling on a party’s motion for summary judgment, the

court must “view the entire record in the light most hospitable

to the party opposing summary judgment, indulging all reasonable

inferences in that party’s favor.” Griggs-Ryan v . Smith,

1 2 , 115 (1st Cir. 1990). Summary judgment is appropriate

when the record reveals “no genuine issue as to any material fact

and . . . the moving party is entitled to a judgment as a matter

of law.” Fed. R. Civ. P. 56(c). In this context, “a fact is

‘material’ if it potentially affects the outcome of the suit and

a dispute over it is ‘genuine’ if the parties’ positions on the

issue are supported by conflicting evidence.” Intern’l Ass’n of

Machinists & Aerospace Workers v . Winship Green Nursing Ctr.,

(1st Cir. 1996) (citations omitted).

2 Nevertheless, if the non-moving party’s “evidence is merely

colorable, or is not significantly probative,” no genuine dispute

as to a material fact has been proved, and “summary judgment may

be granted.” Anderson v . Liberty Lobby, Inc.,

4 2 , 249-

50 (1986) (citations omitted). The key, then, to defeating a

properly supported motion for summary judgment is the non-

movant’s ability to support his or her claims concerning disputed

material facts with evidence that conflicts with that proffered

by the moving party. See generally Fed. R. Civ. P. 56(e). It

naturally follows that while a reviewing court must take into

account all properly documented facts, it may ignore bald

assertions, unsupported conclusions, and mere speculation. See

Serapion v . Martinez,

8 2 , 987 (1st Cir. 1997).

Background

Enterasys purchased several layers of insurance coverage

from various insurance companies. Lloyd’s of London issued the

primary policy, which provided coverage for: (1) “Directors and

Officers Loss resulting from any Claim first made against the

Directors and Officers during the Certificate Period for an

Individual Act,” (2) “Company Loss which the Company is required

or permitted to pay as indemnification to any of the Directors

and Officers resulting from any Claim first made against the

3 Directors and Officers during the Certificate Period for an

Individual Act,” and (3) “Company Loss resulting from any Claim

first made against the Company during the Certificate Period for

a Corporate Act.” A “Claim” is defined in the primary policy to

include “any civil, criminal, administrative or regulatory

proceeding initiated against [Enterasys], including . . . any

formal investigatory proceeding before the Securities and

Exchange Commission.” And, finally, an endorsement to the

primary policy defines “Loss” as “damages, judgments,

settlements, Costs, Charges and Expenses.” The excess policies

provide, with minor exceptions, that they are subject to the same

insuring clauses, definitions, terms, conditions, exclusions and

other provisions as those set forth in the Lloyd’s primary

policy.

The various layers of insurance coverage were provided by

the following entities:

1. Lloyd’s: Primary policy, with coverage up to $15 million (subject to a $500,000 deductible);

2. AIG: $5 million of coverage in excess of first $15 million;

3. Twin City: $10 million of coverage in excess of first $20 million;

4 4. Lloyd’s: $10 million of coverage in excess of first $30 million;

5. Gulf: $10 million of coverage in excess of first $40 million; and

6. Clarendon: $10 million of coverage in excess of first $50 million.

When Enterasys filed this action, none of the insurers had

affirmatively acknowledged its obligation to provide coverage for

the underlying consolidated class action suit. Eventually,

however, Enterasys settled with most of the carriers. Lloyd’s

provided full coverage under the primary policy ($15 million).

AIG also provided coverage to the full limits of its policy ($5

million). Twin City provided $7.5 million on its policy, with

Enterasys agreeing to absorb the balance of the policy limit

(i.e., $2.5 million). As to its second policy, Lloyd’s provided

$7 million in coverage, and Enterasys agreed to absorb the

balance of the policy limit (i.e., $3 million). And, most

recently, Enterasys settled with Gulf for an undisclosed amount.

What remain, then, are Enterasys’ claims against Clarendon -

the insurer providing coverage for up to $10 million in defined

losses in excess of $50 million. Interestingly, however, the

total loss Enterasys claims to have sustained amounts to less

than $45 million. Thus, Clarendon’s obligation to provide

5 coverage has not yet been triggered. And, since the underlying

securities litigation appears to have been resolved, it is

unclear how Enterasys might incur additional covered losses.

Enterasys does, however, hint at the possibility in its

memorandum, noting that the SEC has yet to close its

investigation into the conduct of 12 former Enterasys directors

and officers. Although Enterasys does not elaborate on the

point, it is conceivable that Enterasys might one day incur

covered damages that exceed $50 million, thus implicating

Clarendon’s policy.

Discussion

I. Count One - Declaratory Judgment.

In support of its motion for summary judgment, Clarendon

asserts that Enterasys’ petition for declaratory judgment (count

one) was not timely filed. The governing state statute provides,

in relevant part, that:

No petition shall be maintained under this section to determine coverage of an insurance policy unless it is filed within 6 months after the filing of the writ, complaint, or other pleading initiating the action which gives rise to the question; provided, however, that the foregoing prohibition shall not apply where the facts giving rise to such coverage dispute are not known t o , or reasonably discoverable by, the insurer until after expiration of such 6-month period; and provided, further, that the superior court may permit

6 the filing of such a petition after such period upon a finding that the failure to file such petition was the result of accident, mistake or misfortune and not due to neglect.

RSA ch. 491:22 III. Clarendon points out that the original class

action suits underlying this coverage dispute were filed between

February and April of 2002. 1 And, because Enterasys did not file

this declaratory judgment action until March 1 0 , 2003 (i.e., more

than 13 months after the first class action suit), Clarendon says

it is untimely.

Enterasys responds with two arguments. First, it says the

six original class action suits filed in the spring of 2002 were

simply “placeholder” suits, “set down by various plaintiffs’

class action law firms and that the real complaint setting forth

the true breadth of the action would likely come following

factual developments as a result of the SEC investigation.”

Plaintiff’s memorandum (document n o . 63) at 5 . According to

Enterasys, the amended complaint in the consolidated action

“reflected a new and materially different class action,” id. at

6, which added several new defendants, expanded the class period,

1 Originally, there were six separate class action suits against Enterasys arising out of the same core of operative facts. In September of 2002, those actions were consolidated into Roth v . Enterasys Networks, Inc., N o . 02-cv-71-SM (D.N.H.).

7 and added new allegations of improper accounting practices on the

part of Enterasys. Consequently, says Enterasys, the relevant 6-

month limitations period did not begin to run until the filing of

that amended complaint.

In support of that position, Enterasys relies on the New

Hampshire Supreme Court’s opinion in Binda v . Royal Ins. Co.,

(2000). In that case, the original complaint in the

underlying tort action alleged that the plaintiff had been

injured as a result of the insured’s intentional conduct -

conduct that was, unquestionably, not covered by the insured’s

policy. Only when the plaintiff amended his complaint to allege

that he had been injured by the insured’s negligent conduct, did

it arguably implicate the insured’s policy. Accordingly, the

court concluded that the statutory limitations period applicable

to the insured’s declaratory judgment action against his insurer

did not begin to run until the amended complaint was filed.

(“[A]n amended writ triggers a new six-month limitations

period under RSA 491-22, III when new factual or legal

allegations change the cause of action in a manner that raises a

coverage issue for the first time.”) (emphasis supplied).

8 Here, however, the principle articulated in Binda is not

applicable because the so-called “placeholder” class action suits

plainly alleged wrongful conduct on the part of Enterasys that

implicated coverage under all of the policies, including the one

issued by Clarendon. Each of those complaints alleged that

Enterasys had engaged in an improper accounting scheme,

fraudulent revenue recognition practices, and various “channel

stuffing” activities (facilitated by the company’s practice of

recognizing revenue upon shipment of products to its

distributors). To be sure, the amended complaint added new

defendants, broadened the scope of the class period, and alleged

additional wrongful conduct on the part of Enterasys that was not

mentioned in the original complaints. Nevertheless, the basic

causes of action remained the same and arose from the same common

set of operative facts. In other words, the amended complaint in

the consolidated class action did not “change the cause of action

in a manner that raise[d] a coverage issue for the first time.”

Binda,

. See also Mottolo v . U.S. Fidelity &

Guar. Co.,

(1985) (“This argument [i.e., that

the limitations period began to run from the filing of a

subsequent indemnity action, rather than the underlying tort

action] ignores the common set of operative facts from which both

the indemnity action and the original suit in equity spring:

9 . . . [When the original tort action was filed] all those facts

were in place, from which [the insured] could have deduced that

his insurance coverage was a major issue.”).

Similarly, when the original class action complaints were

filed in the spring of 2002, Enterasys knew (or certainly should

have known) that the allegedly wrongful conduct described in

those complaints implicated coverage under all of its insurance

policies, including Clarendon’s. Accordingly, the six-month

limitations period began to run upon the filing of the original

class action suits (i.e., the so-called “placeholder” suits), not

the subsequently-filed amended complaint in the consolidated

class action suit.

Enterasys’ second argument fares no better. It seems to

claim that, until the amended complaint was filed in the

consolidated class action suit, it had little reason to suspect

that losses might be so substantial as to implicate coverage

under Clarendon’s policy (which provides coverage for losses in

excess of $50 million). See Plaintiff’s memorandum at 8 . That

argument, while having some appeal, lacks any legal basis.

Enterasys has not pointed to any precedent in which the New

Hampshire Supreme Court has held that the six-month statutory

10 limitations period is tolled until the insured reasonably

suspects that damages might be sufficient to implicate insurance

coverage (e.g., large enough to exhaust a deductible or to

implicate overage policies). Rather than focusing on the amount

of potential damages at issue, the court has uniformly focused on

the alleged conduct of the insured and whether such conduct is

arguably covered by his or her policy.

In this case, the original class action lawsuits plainly

alleged conduct on the part of Enterasys and its corporate

officers which implicated coverage under the Clarendon policy.

Accordingly, any suit seeking a declaration of Clarendon’s

obligations under that policy had to be filed within six months.

It was not. Consequently, Clarendon is entitled to judgment as a

matter of law as to count one of Enterasys’ complaint.

It i s , perhaps, appropriate to note that the dismissal of

Enterasys’ claim for declaratory judgment does not adversely

affect Enterasys in any meaningful way. Should its covered

losses accumulate sufficiently to implicate Clarendon’s policy,

and should Clarendon wrongfully deny coverage for those losses,

Enterasys is not barred from pursuing its contract breach or

other legal remedies at that time.

11 While declaratory judgment actions may be an efficient procedure for determining the scope of insurance coverage, such actions are not mandatory. As such, when a declaratory judgment action is dismissed for failure to file timely, the parties are not collaterally estopped from litigating policy coverage issues in another action because, although rulings in declaratory judgment actions are conclusive, this is only true as to any issues actually litigated by the parties and determined in the action.

Craftsbury C o . v . Assurance C o . of Am. ,

1 7 , 721 (2003)

(citation and internal punctuation omitted).

II. Count Two - Breach of Contract

When it originally filed this action, Enterasys claimed

Clarendon breached the terms of the policy by refusing to

acknowledge its duty to provide coverage. In response, Clarendon

raised several defenses, including the assertion that it had no

obligation to provide coverage because Enterasys failed to

demonstrate it had incurred sufficient covered losses to

implicate Clarendon’s policy. As an additional defense,

Clarendon argued that because Enterasys settled some of its

claims against underlying insurers for less than the full policy

limits, it failed to comply with the requirement that it exhaust

all underlying insurance coverage before making a claim against

Clarendon. Although it has not moved to amend its complaint,

12 Enterasys now points to those interposed defenses as further

support for its claim that Clarendon breached its contract (or,

perhaps more accurately, that Clarendon repudiated its coverage

obligations under the contract).

Even assuming Enterasys’ anticipatory repudiation claim were

properly before the court, it would fail as a matter of law.

Merely defending against an insured’s declaratory judgment action

(i.e., by asserting that the insured is not entitled to coverage)

does not constitute an anticipatory repudiation of the insurance

contract. As the United States District Court for the Southern

District of New York has noted:

[A] claim of anticipatory repudiation is proper only where the repudiating party has indicated an unequivocal intent to forego performance in the form of a definite and final communication. The assertion of an affirmative defense does not constitute such a communication. The defendant-insurers have not indicated that they will refuse, should they be found liable to indemnify [the insured] in this action, to provide such coverage once the underlying insurance is exhausted.

Maryland Cas. C o . v . W.R. Grace & Co.,

at *1

(S.D.N.Y. June 7 , 1996) (citations and internal punctuation

omitted). See also LeTarte v . W . Side Dev. Group, LLC,

(2004); Hoyt v . Horst,

(1964).

13 As for Enterasys’ breach of contract claim, it is unclear

what Enterasys believes it is entitled to that Clarendon has

refused to provide. It is undisputed that Enterasys has not yet

incurred (and may never incur) covered losses sufficient to

implicate Clarendon’s policy. And, Enterasys has failed to

articulate how Clarendon could have breached the terms of an

insurance contract when it is plain that, at least to this point,

the contract imposes no obligation on Clarendon to provide

coverage. See, e.g., AT&T Wireless Services, Inc. v . Federal

Ins. Co.,

at *8 (Del. Super. Jan. 3 1 , 2006) (“When

the [primary policy’s] limits are exhausted, the excess policies

will kick in and stand in the footsteps of the primary policy.

Until then, however, there is no obligation under these policies,

nor would the insurers have acted in bad faith for failing to

cover counsel’s fees.”). Moreover, Enterasys is not claiming

that Clarendon breached an obligation to provide a defense in the

underlying class action litigation. In fact, its settlements

with the other insurance carriers covered both its “losses”

associated with settling the underlying cases, as well as the

attorney’s fees it incurred in connection with that litigation.

In short, because the covered losses incurred by Enterasys

have not yet reached the level at which Clarendon would be

14 obligated to provide coverage under its policy (i.e., $50

million), Enterasys cannot maintain a breach of contract claim

against Clarendon. See, e.g., Lister v . Bankers Life & Cas. Co.,

9 , 52 (D.N.H. 2002) (“Logic dictates that if an

insured is not entitled to the coverage in a dispute, then the

insured cannot maintain an action for breach of contract - in bad

faith or otherwise - for failure to provide said coverage).

III. Count Three - Good Faith and Fair Dealing.

Finally, Enterasys alleges that Clarendon breached the duty

of good faith and fair dealing that is implicit in all New

Hampshire contracts. See generally Centronics Corp. v . Genicom

Corp.,

(1989). That claim, too, fails as a matter

of law since Enterasys has not pointed to any evidence suggesting

that Clarendon acted in bad faith by, for example, engaging in

acts of coercion or employing improper claim-handling practices.

See, e.g., Lawton v . Great Southwest Fire Ins. Co.,

(1978). Nor has it responded to Clarendon’s motion for summary

judgment by pointing to circumstances in which Clarendon

exercised contractually-vested discretion in a manner that

exceeded reasonable limits. See Centronics,

.

While there is no doubt that Clarendon has (to date anyway)

refused to provide coverage to Enterasys, there is also no doubt

15 that Enterasys is not yet entitled to such coverage.

Consequently, to the extent Clarendon’s denial of coverage can

properly be viewed as “discretionary,” Clarendon did not exercise

such discretion unreasonably or in bad faith — its policy has not

been triggered, and may never be triggered.

Conclusion

By its own concession, Enterasys has not sustained (and

might never sustain) covered losses sufficient to implicate

Clarendon’s policy. At best, then, its two claims arising out of

Clarendon’s alleged breach of the insurance contract are

premature. With regard to its suit for a declaration of

Clarendon’s obligations under the policy (again, should that

policy ever be implicated), Enterasys failed to file within the

six month period provided by RSA 491:22. For the foregoing

reasons, as well as those set forth in Clarendon’s memoranda,

Clarendon’s motion for summary judgment (document n o . 55) is

granted.

Because Enterasys has settled (and dismissed) its claims

against Gulf, Gulf’s motion for summary judgment (document n o .

54) and Enterasys’ motion to file a sur-reply to that motion

(document n o . 73) are both denied as moot. The motion in limine

16 filed jointly by Gulf and Clarendon (document n o . 85) is also

denied as moot. Finally, Enterasys’ motion to seal (document n o .

74) is granted.

The Clerk of Court shall enter judgment in accordance with

this order and close the case.

SO ORDERED.

Steven J. McAuliffe 'Chief Judge

August 2 9 , 2006

cc: John C . Blessington, Esq. John V . Dwyer, Esq. John M . Edwards, Esq. Steven P. Wright, Esq. Doreen F. Connor, Esq. Janet R. McFadden, Esq. Gabriela Richeimer, Esq. James c. Wheat, Esq. John R. Gerstein, Esq.

17