by Chris Graham and Joseph Kelly

Fidelity Bank v. Chartis Specialty Insurance Company, Case No. 1:12-CV-4259-RWS (N.D. Ga. August 7, 2013)

A class action suit was filed by customers of Fidelity Bank alleging Fidelity charged overdraft fees that were usurious interest charges in violation of Georgia law. Fidelity tendered the defense and indemnity of the suit to Chartis, its D&O insurer. Chartis agreed to defend Fidelity in the suit but wouldn’t indemnify the bank for any judgment or settlement. Fidelity settled the class action suit and then sued Chartis claiming it had a duty to indemnify Fidelity. Chartis then moved for summary judgment, which the District Court granted for two reasons.

First, the court held that the amounts sought in the class action were uninsurable, stating:

“To require [Chartis] to pay restitution for amounts [Fidelity] collected pursuant to illegal practices would result in a windfall to [Fidelity]. If this Court were to require [Chartis] to indemnify [Fidelity] under these facts, it would amount to a ruling that [Fidelity] is free to collect fees and make profits from its customers through illegal conduct, and [Chartis] is on the hook when the customers sue while [Fidelity] keeps the ill-gotten gains.”

Second, the court held that the professional services exclusion applied. That exclusion provides that Chartis is not “liable to make any payment for Loss in connection with any Claim made against any Insured … alleging, arising out of, based upon or attributable to, directly or indirectly, any dispute involving fees, commissions or other charges for any Professional Service rendered or required to be rendered by the Insured, or that portion of any settlement or award representing an amount equal to such fees, commissions or other compensations; provided, however, that this exclusion shall not apply to Defense Costs incurred in connection with a Claim alleging a Wrongful Act[.]” “Professional Services” are defined as “those services, including online banking services, of the Company as set forth in an endorsement to this policy by the Insurer, which services are permitted by law or regulation, to be rendered by an Insured pursuant to a written agreement with the customer or client as long as such service is rendered for a fee, commission or other compensation (“Compensation”), or (ii) without Compensation as long as such non-compensated services are rendered in conjunction with services rendered for Compensation.”

The Court stated that “it is clear that [the professional services exclusion] speaks to exactly this type of claim” and “excludes from indemnification (but not defense) disputes involving fees and commissions or, in other words, amounts that Plaintiff was accused of wrongfully or excessively charging its customers.”

by Chris Graham and Joseph Kelly

Carolina Casualty Ins. Co. v. Merge Healthcare Solutions, Inc., Case Nos. 12-2275 & 12-2341 (7th Cir. July 16, 2013)

D&O insurer sought summary judgment that multiplied portion of attorneys’ fee award was multiplied damages and not covered. Applying Illinois law, Judge Easterbrook denied insurer’s summary judgment motion.

Amicas, Inc. agreed to merge with Thoma Bravo, LLC with Amicas shares valued at $5.35 for the transaction. Some Amicas shareholders filed suit in Massachusetts seeking an injunction. That case settled after Merge offered $6.05 per share. The court awarded the shareholders’ lawyers their fees – namely, $3,150,000 based on a lodestar of $630,000 multiplied by five based on the risk of nonpayment and the favorable result.

Carolina Casualty, in litigation in the Northern District of Illinois, didn’t dispute the $630,000 lodestar was covered, but disputed coverage for the multiplied portion of the fee award. The District Court found the entire fee award was covered. Carolina Casualty appealed.

Carolina Casualty relied on the policy’s definition of Loss, which stated in pertinent part:

“Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds, or matters which may be deemed uninsurable under the law pursuant to which this Policy shall be construed.”

The 7th Circuit concluded that an award of attorneys’ fees is different than “damages”.

The Court stated “[t]he context of the phrase ‘multiplied portion of multiplied damages’ tells us that treble damages and the like are the target.”

The Court focused on the list of items excluded from “Loss” “covers a category of losses that insurers regularly exclude to curtail moral hazard—the fact that insurance induces the insured to take extra risks.”

The Court further noted “Adversaries’ attorneys’ fees in commercial litigation are not remotely like punitive damages, trebled damages, or criminal fines and penalties.”

The Seventh Circuit thus concluded the entire $3,150,000 fee award was covered under Carolina Casualty’s policy.

by Chris Graham and Joseph Kelly

Reis, et al v. Federal Insurance Co., Case No. CV-11-09835 (C.D. Cal. July 12, 2013)

Federal issued a D&O policy to Alliance Bank of Culver City, California. Alliance Bank was shut down and the FDIC as receiver for the Alliance notified Federal that it had grounds to bring claims of negligence and breach of fiduciary duty against Alliance’s directors and officers and made a monetary demand for those claims.

Federal declined coverage, in part, based on its policy’s regulatory exclusion, which provided:

“[A]s respects the Directors & Officers Liability Coverage Section(s) of this policy, the Company shall not be liable for Loss on account of any Claim by, on behalf of, or at the behest of . . . [the] Federal Deposit Insurance Corporation. . . in any capacity whatsoever.”

Two years later, the former directors and officers sued Federal for breach of contract and bad faith. The District Court granted Federal’s motion for summary judgment, holding that “the FDIC’s claim against [the former directors and officers] was the type of claim contemplated by the Regulatory Exclusion Endorsement” and that Federal thus didn’t breach its contractual duties or act in bad faith in denying coverage based on the regulatory exclusion.

by Chris Graham and Joseph Kelly

Secure Energy, Inc. v. Philadelphia Indemnity Insurance Company, Case No. 4:11CV1636TIA (E.D. Mo. May 15, 2013)

Philadelphia Indemnity issued D&O policies to Secure Energy, Inc. annually from October 11, 2007 to October 11, 2012.

On December 28, 2007, Secure Energy’s Board of Directors received a demand from its salesman for money owed for commissions. The salesman filed suit on May 16, 2008, but not against Secure Energy. Secure Energy was added as a defendant on April 13, 2009. The suit was voluntarily dismissed on June 25, 2009 and re-filed on July 8, 2009. Secure Energy didn’t give notice to its D&O insurer until May 4, 2011.

The policy provided, in pertinent part:

“In the event that a Claim is made against the Insured, the Insured shall, as a condition precedent to the obligations of the Underwriter under this Policy, give written notice to the Underwriter as soon as practicable after any of the directors, officers, governors, trustees, management committee members, or members of the Board of Members first become aware of such Claim, but, no later than 60 days after the expiration of this Policy, Extension Period, or Run-Off Policy, if applicable.”

Philadelphia moved for summary judgment arguing there was no coverage under its policy due to Secure Energy’s late notice.

Relying on Missouri Supreme Court precedent, the District Court stated that “Notice must be given to the insurer during the policy period. If the insured does not give notice within the contractually required policy period, there is simply no coverage under a claims made policy, whether or not the insurer was prejudiced.”

Secure Energy’s late notice thus precluded coverage even without prejudice to Philadelphia.

by Chris Graham and Joseph Kelly

Western Heritage Bank f/k/a Mesilla Valley Bank, et al v. Federal Ins. Co., Case No. CV 11-0630 MV/WPL (D. N.M. March 21, 2013)

D&O insurer, Federal, received a summary judgment; Federal had no duty to defend Bank in suit against Bank for fraudulently placing deeds of trust and liens on property to secure Bank loans and wrongfully refusing to release the liens.

The policy’s Lending Services exclusion provided that Federal “shall not be liable for Loss on account of any Claim: . . . based upon, arising from, or in consequence of the performing or failure to perform . . . Lending Services.”

“Lending Services” were defined as: “any act performed by an Insured for a Lending Customer of the Organization in the course of extending or refusing to extend credit or granting or refusing to grant a loan or any transaction in the nature of a loan, including any act of restructure, termination, transfer, repossession or foreclosure.”

Under New Mexico law interpreting exclusions “arising out of” is broad and means “originating from,” “having its origin in,” “growing out of” or “flowing from.” Here, the Bank’s placing of liens on the property and its subsequent refusal to remove them was a direct result of the Bank’s lending services and activities, and coverage thus was excluded.

by Chris Graham and Joseph Kelly

Zayed v. Arch Ins. Co., Case No. 11-CV-1319 (PJS/TNL) (D. Minn. March 20, 2013)

Right before being shut down by the government for ponzi schemes, Trevor Cook sued Edward Baker and several Baker-affiliated companies, including Mesa Holdings, Inc. for fraud. Cook’s court-appointed receiver pursued the suit against Baker and Mesa. D&O insurer Arch refused to defend or indemnify Baker or Mesa for that suit. The case resulted in a Miller-Shugart settlement under which $1 million and $500,000 judgments were entered against Baker and Mesa, respectively, and Baker and Mesa assigned any claims against Arch to Receiver. Receiver sued Arch for the $1.5 million in judgments and about $70,000 in attorneys’ fees incurred by Baker and Mesa in defending Receiver’s suit.

Court granted Arch’s motion for summary judgment that Arch had no duty to indemnify Baker or Mesa because the amounts sought were “uninsurable” as a matter of law. The Policy defines “Loss” as “the amount the Insureds are legally obligated to pay resulting from a Claim”; but that definition also excludes “matters that are uninsurable under the law pursuant to which this Policy shall be construed.” When deciding whether a Minnesota claim is insurable, courts first look to the substance of the claim rather than labels; and then look to moral hazard and whether if a particular type of wrongdoing is insured, people will engage in more of that wrongdoing. Court found this suit uninsurable because Baker and Mesa’s conduct was fraudulent and insuring such conduct would lead to more fraud.

Arch unsuccessfully argued that the contractual liability exclusion excluded coverage. The policy excluded coverage for “Loss for any claim . . . arising from, based upon, or attributable to any liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement.” Arch argued that “but for” the contracts between Cook and Mesa, Mesa (and Baker) wouldn’t be liable for fraud. Court found that the Policy doesn’t exclude coverage for claims that wouldn’t exist “but for” a contract; rather, the Policy excludes coverage for claims that wouldn’t exist but for contractual liability (breach of contract).

by Chris Graham and Joseph Kelly

Anderson, et al v. The Cincinnati Insurance Company, et al,Case No. 1:12-156-HMH (W.D. N.C. Feb. 5, 2013)

Directors of failed bank obtained a declaration that notice to D&O insurer of FDIC lawsuit was timely. Bank failed on January 21, 2011 and FDIC filed suit on December 29, 2011, the same day directors gave notice. The D&O policy period was 11/3/07 to 11/3/10, with a 60-day “basic” extended reporting period which allowed for notice of claims 60 days beyond end of policy period; and the policy had a 12-month “supplemental” extended reporting period via endorsement allowing for an additional 12 months after the policy period to report claims. The insured’s notice of claim was more than 12 months but less than 14 months after the expiration of the policy period. The issue was whether the insured forfeited the 60-day “basic” extended reporting period by purchasing the 12 month “supplemental” extended reporting period. The court found that the “the evidence is clear that the Plaintiffs did not know or intend to forfeit the 60-day Basic Extended Reporting Period. To the contrary, the only inference that can be drawn from the evidence is that the Plaintiffs paid for 14-months of extended reporting coverage, which includes the 60-day Basic Extended Reporting Period and the 12-month Supplemental Extended Reporting Period.”

by Chris Graham and Joseph Kelly

Onebeacon America Ins. Co. v. City of Granite City, et al, Case No. 12-CV-0156-DRH-DGW (S.D. Ill. Feb. 13, 2013)

Insurer granted summary judgment that it had no duty to defend or indemnify City of Granite City for underlying class action suit seeking return of car towing fees wrongfully collected. Court cited Level 3 Commc’ns v. Fed Ins. co., 272 F. 3d 908 (7^th Cir. 2001) and Ryerson Inc. v. Fed. Ins. Co., 676 F.3d 610 (7^th Cir. 2012) for the principle that suits seeking “restoration or an ill-gotten gain”, like this suit, aren’t a “loss” within the meaning of an insurance contract.

by Chris Graham and Joseph Kelly

Federal Ins. Co. v. Sandusky (E.D. MI March 13, 2013)

D&O Insurer for the Second Mile – the charity foundation of former Penn State football coach Jerry Sandusky –moved for summary judgment in its suit for a declaration that it owed no duty to defend Sandusky in civil and criminal sexual abuse proceedings. The court previously granted the insurer’s motion for a judgment on the pleadings that it had no duty to indemnify Sandusky on public policy grounds). The court compared the allegations against Sandusky to the policy and found that “it is clear that Defendant Sandusky was not acting in his capacity as an employee or executive of The Second Mile in sexually abusing and molesting the victims named in the criminal and civil cases brought against him.”

by Chris Graham and Joseph Kelly

William Beaumont Hospital v. Federal Ins. Co., Case No. 11-15528 (E.D. MI March 13, 2013)

Hospital obtained declaration that D&O insurer is obligated to defend and indemnify hospital in class action Sherman Act anti-trust suit filed by nurses. The primary issue was whether the damages sought were “Loss” under the policy. The policy’s definition of “Loss” via endorsement provided coverage for “Claims for Antitrust Activities”; the definition of “Antitrust Activities” specifically included actual or alleged violations of the Sherman Act; and for claims “based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled, the term ‘loss’… shall not include disgorgement by any Insured or any amount reimbursed by any Insured Person.” D&O insurer argued plaintiff nurses sought disgorgement so there was no “Loss.” But the court found plaintiff nurses’ Sherman Act claims weren’t “based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled.” Rather the claims were based on an alleged conspiracy by various hospitals to hold down nurses wages in violation of the Sherman Act. Hospital cited Level 3 Communications v. Fed. Ins. Co., 272 F. 3d 908 (7^th Cir. 2001) for the proposition that “coverage for restitution or disgorgement is uninsurable as a matter of public policy.” The court rejected this argument in three ways – namely, (1) there’s no need to identify a public policy basis to exclude disgorgement from “Loss” when the policy here already incorporates that principle; (2) Level 3 didn’t cite to Michigan caselaw; and (3) the damages sought weren’t really restitution or disgorgement when the nurses were seeking ordinary compensatory damages under the Sherman Act.
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