The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | March 3, 2017 • 4 min read

Insured-Vs.-Insured Exclusion Cited in Dismissal

Cheryl Sullivan became a member of the JEI board of directors in April 2013, upon the death of her father, Jerry Paulson, who had expanded a small butcher shop into JEI, a retail and grocery store chain in Minnesota, Wisconsin and Florida. Sullivan redeemed her 28 percent of all company shares a few months later, after which she and her daughters sued the company, saying that JEI’s directors “designed to lower the value of their shares.”

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Sullivan and her daughters reached a confidential settlement with JEI. The company sought coverage for the payment under a directors and officers policy issued by U.S. Specialty Insurance Co.

The insurer rejected the claim and JEI filed suit. After the U.S. District Court for the District of Minnesota ruled against JEI, it appealed to the U.S. 8th Circuit Court of Appeals.

On Jan. 11, the appeals court agreed with U.S. Specialty. The two main issues related to the policy’s insured-versus-insured exclusion and its allocation clause. The insured-versus-insured exclusion barred coverage for any suit brought by a former director of the company.

But Sullivan’s daughters were not former directors, and the allocation clause provided that losses should be allocated between covered and uncovered claims. The appeals court ruled that Sullivan was “an active participant” in the lawsuit as well as its “driving force.” Because of that, the policy’s allocation provision for coverage as long as a director or officer “did not solicit, assist or actively participate in the lawsuit” did not apply to Sullivan or her daughters.

Scorecard: The insurance company does not need to indemnify JEI for the settlement payment.

Takeaway: The allocation clause “does not restore coverage for a suit brought with the active participation of an insured person,” the court ruled.

Bird Flu Transmission is Crucial to Case

Farms in minnesota from eight to 20 miles away from rembrandt Enterprises’ egg-producing facilities euthanized their chickens due to avian bird flu in 2015. In April and May of that year, Rembrandt’s flock was infected and a month later, more than 9 million birds were euthanized.

Rembrandt filed a claim with Illinois Union Insurance Co., which had issued a premises pollution liability insurance policy. The policy insured Rembrandt’s farms from the “discharge, dispersal, release, escape, migration or seepage of any … irritant, contaminant, or pollutant … on, in, into, or upon [covered] land and structures.”

The carrier denied the claim, saying the flu was not a contaminant and that coverage excluded losses relating to “naturally occurring materials” unless they were present because of human activities. Illinois Union Insurance later conceded the flu was a contaminant, but said there was no proof that human activities led to the bird flu being transmitted to Rembrandt’s farms. Rembrandt filed suit, claiming the carrier breached its policy. The carrier sought to dismiss the case.

An infectious diseases expert on behalf of Rembrandt said the bird flu was “detected in air samples taken inside and outside infected poultry houses,” and that the flock depopulations at nearby farms created a “virus cloud” that carried the flu to Rembrandt’s farms.

On Jan. 12, the U.S. District Court for the District of Minnesota refused to dismiss the case, ruling further hearings were needed.

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“Despite extensive briefing, on this record, the Court is simply not in a position to determine as a matter of law how the bird flu spread to Rembrandt’s farms and, accordingly, neither party is entitled to summary judgment,” the court ruled.

Scorecard: No decision was issued on whether the farms will collect for the loss of more than 9 million birds.

Takeaway: While the disease may be spread by air, it is not clear whether it was aided by human activity.

Court: Policy Excludes $64 Million Claim

Imprudent loans, resulting in more than $64 million in losses, caused the California Department of Financial Institutions to close Security Pacific Bank.

The Federal Deposit Insurance Corp. (FDIC), which was named receiver, filed suit against BancInsure Inc., seeking coverage for losses “arising from the negligence, gross negligence and breach of fiduciary duty allegedly committed by” the failed bank’s former directors and officers.

The U.S. District Court for the Central District of California concluded that the D&O policy issued by BancInsure covered the FDIC’s claims. The U.S. 9th Circuit Court of Appeals reversed that decision on Jan. 10.

The D&O policy excluded coverage for losses arising from legal actions brought by “any successor, trustee, assignee or receiver” of the bank. The FDIC argued that it is “not a ‘receiver’ within the meaning of the insured-versus-insured exclusion because, by statute, it has a ‘unique role’ representing ‘multiple interests,’ ”including shareholders and depositors. It pointed to an exception to the exclusion for “a shareholder’s derivative action,” which could be filed against the failed bank by shareholders who are not insureds under the D&O policy.

The appeals court rejected that argument. “We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific,” it ruled, ordering the lower court to dismiss the case.

Scorecard: The FDIC will not be able to collect more than $64 million in losses from BancInsure.

Takeaway: The right of the FDIC to bring a shareholder derivative action was secondary to the FDIC’s right to bring the same claims directly as the failed bank’s receiver.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

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