UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF IOWA

CEDAR RAPIDS DIVISION

CINCINNATI INSURANCE COMPANY, )

an Ohio corporation, )

)

Plaintiff, )

)

vs. )

)

SOURCE DATA SYSTEMS, INC., )

an Iowa corporation, and PINEVILLE )

COMMUNITY HOSPITAL ASSOCIATION, INC. )

a Kentucky non-profit corporation )

d/b/a Pineville Community Hospital, )

)

Defendants. )

Plaintiff, Cincinnati Insurance Company ("Cincinnati"), by and through its attorneys, James K. Horstman of Williams & Montgomery, Ltd., and J. Richard Johnson of White and Johnson, P.C. states the following as its Complaint for Declaratory Judgment:

JURISDICTION AND VENUE

1. This is a declaratory judgment action brought pursuant to F.R.C.P. Rule 57 and 28 USC §2201 for a declaration of rights of the parties under policies of insurance issued by Cincinnati.

2. Cincinnati is an Ohio corporation with its principal place of business in Fairfield, Ohio and is a citizen of the State of Ohio for purposes of diversity jurisdiction.

3. Source Data Systems, Inc. ("SDS"), on information and belief, is an Iowa corporation with its principal place of business in Cedar Rapids, Iowa and is a citizen of the State of Iowa for purposes of diversity jurisdiction.

4. Pineville Community Hospital Association, Inc, ("Pineville"), on information and belief, is a Kentucky non-profit corporation with its principal place of business in Pineville, Kentucky and is a citizen of the State of Kentucky for purposes of diversity jurisdiction. On information and belief, Pineville was physically present in the State of Iowa in connection with the underlying transaction, was thus doing business in the State of Iowa, and is subject to personal jurisdiction in the Iowa courts in this matter.

5. Pineville is named as a nominal party herein solely to the extent that it may claim a contingent interest in the proceeds of the insurance possessed by SDS.

6. Subject matter jurisdiction is based upon 28 USC §2201 and diversity of citizenship under 28 USC §1332. The amount in controversy exceeds the sum of $75,000.

7. Venue is proper under 28 USC §1391(a) and (c), as the defendants reside or are deemed to reside in this District.

8. An actual controversy exists between the parties regarding their respective rights and obligations under the Cincinnati policies of insurance.

FACTUAL BACKGROUND

9. On July 31, 1998, Pineville filed a nine-count First Amended Complaint against SDS; Keane, Inc.; and Gary S. Ford, including causes of action for fraud and deception, fraudulent inducement, breach of contract and punitive damages. (Pineville First Amended Complaint attached hereto as Exhibit A).

10. The Pineville First Amended Complaint alleged, inter alia, that on or about July 31, 1995, Pineville entered into a contract with SDS whereby Pineville agreed to purchase, and SDS agreed to provide, computer equipment, software and support services, including specific applications of SDS' MEDNET Hospital Information System.

11. The Pineville First Amended Complaint alleged, inter alia, that SDS made various warranties concerning MEDNET, including representations that the system would remain operable beyond 1999. Pineville allegedly began using MEDNET on March 1, 1996. On July 31, 1996, Pineville allegedly learned that MEDNET was not in conformance with certain representations and warranties assertedly made by SDS.

12. In its action against SDS, Pineville seeks judgment in the amount of $750,000 to $1,250,000, which amount allegedly represents the replacement cost of the system sold by SDS.

13. SDS tendered defense of the Pineville action to Cincinnati and seeks indemnity coverage from Cincinnati. Cincinnati has accepted the tender of defense under a full reservation of its rights and brings the instant action to establish that it owes no coverage.

THE POLICIES

14. Cincinnati issued policy No. CCP 044 46 91 and policy No. CCC 436 79 10 to SCI Financial Group. (Cincinnati policies attached hereto as Exhibits B and C, respectively). These policies were in effect for the period 9/30/91 to 9/30/94, and recognized SDS as an additional insured.

15. Both policies were renewed for a three-year term commencing on September 30, 1994. However, SDS was removed from the policies as an additional insured effective November 7, 1995.

16. The insuring agreement of Cincinnati policy No. CCP 044 46 91 states:

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. But:

(1) The amount we will pay for damages is limited as described in LIMITS OF INSURANCE (SECTION III); and

(2) Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.

b. This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the coverage territory, and

(2) The "bodily injury" or "property damage" occurs during the policy period.

 

17. Cincinnati policy No. CCP 044 46 91 contains, inter alia, the following exclusions:

This insurance does not apply to:

a. "Bodily injury" or "property damage" expected or intended from the standpoint of the insured. This exclusion does not apply to "bodily injury" resulting from the use of reasonable force to protect persons or property.

 

b. "Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:

(1) Assumed in a contract or agreement that is an "insured contract" provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement or

(2) That the insured would have in the absence of the contract or agreement.

* * *

j. "Property damage" to:

(1) Property you own, rent or occupy;

 

k. "Property damage" to "your product" arising out of it or any part of it.

 

l. "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

 

m. "Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or

dangerous condition in "your product" or "your work;" or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

 

n. Damages claimed for any loss, cost or expense incurred by you or others for loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) "Your product;"

(2) "Your work;" or

(3) "Impaired property;"

if such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

* * *

This insurance does not apply to "bodily injury". "property damage" or "personal injury" arising out of:

The rendering or failure to render professional services if such injury or damage arises out of any claim for Professional Liability or Malpractice made against an Insured caused by any negligent act, error, or omission of an Insured or any other person for whose acts you are legally responsible in the conduct of any business, trade, or profession.

 

18. The insuring agreement of Cincinnati policy No. CCC 436 79 10 states:

We will pay on behalf of the insured the "ultimate net loss" for occurrences during the policy period in excess of the underlying insurance or for occurrences covered by this policy which are either excluded or not covered by underlying insurance because of Personal Injury, Property Damage or Advertising Liability anywhere in the world.

 

 

19. Cincinnati policy No. CCC 436 79 10 contains, inter alia, the following exclusions:

This policy does not apply:

* * *

(b) to property owned by any Insured:

 

(c) to property damage to (1) the Insured’s products arising out of such products or any part of such products; (2) work performed by or on behalf of the Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith, except, if insurance is provided by a policy listed in the schedule of underlying insurance for Property Damage to work performed on behalf of the Insured, this exclusion does not apply but only to the extent insurance is provided by the underlying insurance and subject to all its limitations other than limits of liability;

 

(d) To loss of use of tangible property which has not been physically injured or destroyed resulting from

(1) a delay in or lack of performance by or on behalf of the Insured of any contract or agreement, or

(2) the failure of the Insured’s products or work performed by or on behalf of the Insured to meet the level of performance, quality, fitness or durability warranted or represented by the Insured;

but this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the Insured’s products or work performed by or on behalf of the Insured after such products or work have been put to use by any person or organization other than an insured

 

(e) to damages claimed for the withdrawal, inspection, repair, replacement, or loss of use of the Insured’s products or work completed by or for an Insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from the market or from use because of any known or suspected defect or deficiency therein;

 

* * *

 

It is agreed that such insurance as is provided by the policy for bodily injury, personal injury, or property damage does not apply if such injury or damage arises out of any claim for Professional Liability or Malpractice made against an Insured caused by any negligent act , error, or omission of an Insured or any other person for whose acts an Insured is legally liable in the conduct of any business, trade, profession, municipal service, such as, but not limited to, law enforcement departments, fire departments (including volunteer), health departments, ambulance service, paramedics, lawyers, or judges.

 

20. The allegations of the Pineville First Amended Complaint affirmatively establish that the defendants are not entitled to defense or indemnity under the Cincinnati policies, because the Pineville action alleges causes of action based on fraudulent conduct and breach of contract; it does not allege an "occurrence" as defined by the policies; it does not allege "property damage" as defined by the policies; it does not allege that any "occurrence" or "property damage" happened during the policy period as required by the policies; it does not seek recovery for sums paid "as damages" as required by the policies; it alleges a loss which was a known loss from the viewpoint of SDS; it alleges a loss which was not fortuitous from the viewpoint of SDS; it alleges a loss that was in progress; and SDS' efforts to invoke insurance coverage for the alleged loss are barred by principles of equity.

21. The allegations of the Pineville First Amended Complaint affirmatively establish that the defendants are not entitled to defense or indemnity under the Cincinnati policies because one or more coverage exclusions, singly or in combination, eliminate coverage with respect to the Pineville action.

WHEREFORE, plaintiff, CINCINNATI INSURANCE COMPANY, respectfully requests this Honorable Court to declare and enter judgment as follows: