Written by Barry J. Reiter and Gary S.A. Solway
Recent D&O Case Shows Why Reviewing Policy is Important
The world of D&O insurance contains a number of strange and dangerous concepts. And the specific wording of D&O insurance policies is extremely important.
We are attaching the recent decision of the U.S. District Court for the District of Minnesota in Ideal Development Corporation vs. United States Liability Insurance Company. In this case, directors found themselves uninsured in a law suit brought by a former director who had launched a hostile takeover bid that was thwarted by the board's actions. The D&O insurer denied coverage on the basis of an "insured vs. insured" exclusion (under which the insurance is not available when insured parties sue each other). The directors sued the insurer arguing that the suing director was suing them in a capacity other than as an insured director. The Court construed the (very typical) insured vs. insured exclusion in its plain English meaning, so that if one person who can potentially benefit from the insurance sues another, there is no coverage.
The case is instructive and a good reminder to review your insurance program. While insured vs. insured (and related "major shareholder") exclusions are common in many policy forms, they can be addressed in a variety of ways such as carve outs, additional policies without the exclusion or waivers/releases from coinsured directors or major shareholders. We have considerable experience with all of these approaches and have had success mitigating or eliminating the impact of the exclusions.
In our D&O Insurance Practice, we regularly review actual and proposed insurance programs and provide suggestions for improvement which are frequently accepted by insurers (and often involve no additional premium).
UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA
Ideal Development Corporation, Civil No. 10-772 (PAM/RLE) Mike Fogarty, J.W. Sullivan, George Riches, Warren Kleinsasser, H. Duitsman, Paul Sandelin, Lonny Thomas, Bill Anderson, Ted Silva, and Darrell Swanson, Plaintiffs,
MEMORANDUM AND ORDER
United States Liability Insurance Company, Defendant.
This matter is before the Court on Defendant's Motion to Dismiss and Plaintiffs' Motion for Summary Judgment. For the reasons that follow, Defendant's Motion is granted and Plaintiffs' Motion is denied.
Plaintiffs are Ideal Development Corporation ("Ideal") and past and present members of Ideal's board of directors. In 2007, James Gammello, another member of Ideal's board and an Ideal shareholder, launched a tender offer for Ideal through Gammello's solely owned LLC, Whitefish Golf Acquisition ("Whitefish"). Ideal's board blocked the tender offer, and some time later, Ideal brought suit against Gammello in state court. Gammello counterclaimed against Ideal and raised third-party claims against the individual Plaintiffs. Ideal tendered the counterclaims/third-party claims to its directors and officers liability insurer, United States Liability Insurance Company ("US Liability") for defense and indemnification. US Liability denied coverage under the policy's "insured vs. insured" exclusion. Two more state-court lawsuits between Gammello and Ideal followed. In the first lawsuit, Gammello and Whitefish brought claims against Ideal and its directors for breach of fiduciary duty and related claims arising out of the Whitefish tender offer. Two months later, that complaint was amended to remove Gammello from the pleadings and to assert claims only on behalf of Whitefish. The final lawsuit was brought almost simultaneously with the second, and was a shareholder derivative action involving Gammello and 11 other Ideal shareholders.
Ideal tendered each of Gammello's complaints to US Liability, and US Liability refused to provide defense and indemnification on the basis of the insured vs. insured exclusion. In January 2010, the parties to the state-court lawsuits entered into a global settlement that, including attorneys fees and costs, exceeded the $1 million limit in Ideal's policy with US Liability. Ideal then brought this lawsuit contending that the terms of the policy unambiguously require US Liability to provide defense and indemnification. US Liability argues that the policy unambiguously excludes coverage.
The policy at issue is a directors and officers liability policy which provides insurance coverage to the company, or "Organization," and its officers and directors, defined as "Insureds," for "Wrongful Acts arising solely out of an Insured's duties on behalf of the Organization." (Corporate Directors & Officers Liability Policy between US Liability and Ideal (Docket No. 13), at 10 (July 2, 2006 to July 1, 2007).) There is a dispute as to which version of the US Liability policy applies here. All of the policies are "claims-made" policies, meaning that the insurance coverage applies to claims made against Ideal or the other insureds during the relevant policy period. Plaintiffs rely on the policy in effect from July 1, 2008 to July 1, 2009. However, Gammello brought his counterclaims and third-party claims in April 2008, before the effective date of the policy on which Plaintiffs rely. US Liability relies on the policy in effect from July 1, 2006 through July 1, 2007, contending that Gammello sent Ideal a demand letter in May 2007 that triggered the policy in effect at that time. There does not appear to be a significant difference between the 2006-2007 policy and the 2007-2008 policy, which was indisputedly in effect when Gammello filed the second and third lawsuits. The 2008-2009 policy, however, contains an endorsement regarding the allocation of defense costs that the other two policies do not contain. Because there is no dispute that all claims were in existence before the effective date of the 2008-2009 policy, the Court will rely on the earlier versions of the policy. Plaintiffs' arguments about the import of the allocation provision are thus without merit.
The policy defines "Insureds" to include directors such as all of the individual Plaintiffs and Gammello. See id. at 11 ("Individual Insured(s) means: (1) any persons who were, now are or shall be duly elected or appointed Directors, Officers, Managing Members of Employees of the Organization . . . ."). The policy excludes from coverage:
I. any Claim by, at the behest of or on behalf of the Organization and/or any Individual Insured; provided that this exclusion shall not apply to:
(1) any derivative action by a security holder of the Organization on behalf of, or in the name or right of, the Organization, if such action is brought and maintained totally independent of, and without the solicitation, assistance, participation or intervention of, any of the Insureds; or
(2) a Claim that is brought and maintained by or on behalf of any Individual Insured for contribution or indemnity which is part of or results directly from a Claim which is otherwise covered by the terms of this Policy . . . .
Id. at 12.
Although Plaintiffs seek summary judgment and US Liability seeks dismissal on the pleadings, the parties agree that there are no material factual issues remaining to be resolved and that final judgment is therefore appropriate on Plaintiffs' claim that US Liability has the duty to defend Plaintiffs against Gammello's lawsuits. The parties have presented evidence outside the pleadings, and thus the Court will evaluate both parties' Motions under the Rule 56 summary-judgment standard.
Summary judgment is proper if there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The Court must view the evidence and the inferences that may be reasonably drawn from the evidence in the light most favourable to the non-moving party. Enter. Bank v. Magna Bank, 92 F.3d 743, 747 (8th Cir. 1996). However, a party opposing a properly supported motion for summary judgment may not rest on mere allegations or denials, but must set forth specific facts in the record showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).
An insurer has a duty to defend claims that "arguably fall within the scope of the policy." Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 415 (Minn. 1997). It is well settled that exclusions in coverage are construed strictly against the insurer. Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 327 (Minn. 1993)
To succeed on their claims and to defeat US Liability's Motion, Plaintiffs must show that the policy exclusion does not apply to claims brought by insureds such as Gammello in a capacity other than as a director of Ideal. In other words, Plaintiffs contend that the Court should read into the policy a requirement that a claim brought by an insured in some other capacity—as a shareholder or a disgruntled employee, for example—does not fall within the insured vs. insured exclusion.
The policy is straightforward, however. It does not apply to any claims brought by an insured, whether on behalf of that insured or at his behest. Plaintiffs' interpretation of the policy language is nonsensical. The exclusion unambiguously excludes all lawsuits brought by, on behalf of, or at the behest of, an insured. Moreover, the interpretation Plaintiffs urge cannot be squared with the first subsection of the exclusion, which provides that shareholder derivative suits are not excluded from coverage if such suits are "brought and maintained totally independent of, and without the solicitation, assistance, participation or intervention of, any of the Insureds." The clear implication of this subsection is that other lawsuits, not brought independently of an insured, are excluded from coverage. In addition, this subsection unambiguously and specifically excludes from coverage the shareholder derivative action brought by Gammello and other shareholders, and Plaintiffs' claims regarding that lawsuit must be dismissed.
Plaintiffs insist that their claims regarding the other two lawsuits survive. As noted above, Plaintiffs ask the Court to read into the policies a "capacity" requirement. Thus, according to Plaintiffs, the insured vs. insured exclusions apply only if the claims are brought by an insured in his capacity as an insured. Plaintiffs point to Conklin Co. v. Nat'l Union Fire Ins. Co., No. 4-86-860, 1987 WL 108957 (D. Minn. Jan. 28, 1987) (MacLaughlin, J.) to support their argument. In Conklin, the Court denied an insurer's motion to dismiss, finding that an insured vs. insured exclusion did not apply to exclude from coverage a wrongful discharge claim brought by a former officer of the corporation. The court relied on "the purpose of [the insured vs. insured exclusion]" which was, according to the court, "to prevent collusive or friendly lawsuits." Id. at *2. As support for this determination, the court relied on a law review article, but did not cite any caselaw. Because the lawsuit at issue in Conklin was not collusive, the court found that the insurance company could potentially be required to provide a defense to the lawsuit, and thus denied the insurer's motion to dismiss. Id. at *3. The court notably did not determine as a matter of law that the insurer was required to provide defense and indemnification for the lawsuit.
US Liability relies on a more recent case from this District, Miller v. ACE USA, 261 F. Supp. 2d 1130 (D. Minn. 2003) (Montgomery, J.). In Miller, a former employee brought allegations of sex discrimination and retaliation against a company and some of its officers. The court determined that the insured vs. insured exclusion barred coverage for the former employee's lawsuit, and granted the insurer's motion for summary judgment. Id. at 1139.
The insured vs. insured exclusion in Miller is nearly identical to the exclusion at issue here. In Miller, the exclusion applied to "claims by, on behalf [of], or at the direction of any of the Insureds . . . ." Id. at 1138; but cf.Conklin, 1987 WL 108957, at *1 (policy's exclusion applied to "claims made against the Insureds by an Insured"). This Court agrees with Miller that there is no ambiguity in the insured vs. insured exclusion, and thus no need to look to the purpose of the exclusion to determine its meaning. See Miller, 261 F. Supp. 2d at 1139 (citing Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 151 (Minn. Ct. App. 2001)). The insured vs. insured exclusion in Ideal's policy unambiguously excludes from coverage the lawsuits at issue here.
Although the Court agrees with US Liability that Miller is ultimately more persuasive than Conklin, the Court must comment on US Liability's discussion of these decisions. In that discussion, US Liability fundamentally misapprehends how the federal district courts operate. US Liability repeatedly comments that Conklin is an unpublished opinion while Miller is published, implying that a case's publication status renders that case more or less persuasive. This is simply not so. In federal court, district court opinions have persuasive value based on the reasoning of the opinion, and publication or lack thereof has no influence other than ease of citation.
In addition, US Liability contends that the Miller case "superseded" Conklin, because Miller was decided after Conklin and did not adopt Conklin's reasoning. This is also a misunderstanding of federal district courts. Opinions authored by other judges of this District, or by judges in any other district court, are persuasive but not binding authority on this Court. One judge's opinion simply cannot "supersede" another judge's opinion. Only a Circuit Court of Appeals or the United States Supreme Court can supersede a district court's decisions.
All of the lawsuits here involve Gammello, either personally or at his behest. The policy language is clear that such lawsuits are excluded from coverage.
Accordingly, IT IS HEREBY ORDERED that:
1. Plaintiffs' Motion for Summary Judgment (Docket No. 15) is DENIED;
2. Defendant's Motion to Dismiss (Docket No. 6) is GRANTED; and
3. Plaintiffs' claims are DISMISSED with prejudice.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: Monday, July 12, 2010
s/ Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge