D&O Policy Responsible for Underlying Bankruptcy Settlement Rules Court

When a company files for chapter 11 bankruptcy, it is up to the court to determine which insurance policy will cover an underlying misrepresentations suit.
By: | June 4, 2019

American Trucking and Transportation Insurance Company (ATTIC) is a risk-retention group that offers members certain benefits not generally available to insureds on the open market. In exchange, its members are subject to heightened duties to ATTIC and other insured stakeholders.

One such shareholder, Gorman Group, and its subsidiary Tango Transport, became ATTIC insureds under this business model. The policy provided them with commercial trucking, property and personal injury liability coverage with a $5 million per occurrence policy limit.

When Tango Transport began experiencing financial difficulties, Tango told ATTIC it would either sell its operating equipment or cease operations. ATTIC took over all open liability claims under the policy.

In doing so, however, ATTIC found reason to believe Tango failed to satisfy its obligations under the ATTIC Shareholders Agreement and Bylaws and was negligent in the way it handled its claims.

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Meanwhile, ATTIC still agreed to extend Tango’s policy for 45 days to allow it time to transfer its operating equipment to a purchasing entity. Tango paid a flat rate and transferred funds to ATTIC for unpaid claims. Soon after, Tango had to file for chapter 11 bankruptcy.

ATTIC filed suit, alleging 10 counts against Tango’s Dan Dooley, the restructuring agent, including negligent misrepresentation, fraud, constructive fraud and more.

Legal fees from the underlying Tango v. ATTIC suit began to add up. Gorman Group, which had a D&O policy issued by Westchester Surplus Lines Insurance Company, sought defense for Dooley as well as three other executives named in the suit. Westchester denied having a duty to defend, citing the policy’s creditor exclusion.

Gorman Group agreed to settle with ATTIC in the amount of a little more than $3 million in exchange for a complete release of any and all claims. ATTIC agreed to the settlement.

As for the Dooley allegations, the complaints were denied in part and granted in part, leading to ATTIC submitting an amended complaint, adding Westchester as a defendant.

Westchester refused to pay for the settlement with ATTIC. ATTIC in turn sought judicial declaration of Westchester’s obligations under its policy and for liability for the settlement agreement. Westchester asked the court to compel arbitration, in accordance with its policy requirements.

“Westchester denied a defense to the Westchester Insureds because it believed the Westchester Policy’s Creditor exclusion barred coverage,” explained court documents. “As a threshold matter, the Court finds that a valid arbitration clause exists.”

But, “Westchester should have initially offered a defense to its Insureds under a reservation of rights and then filed a declaratory judgment action regarding coverage. Because Westchester failed to provide a defense … Westchester has lost its right to invoke insurance contract defenses, including the right to arbitrate.”

Scorecard: Westchester is now responsible for the $3 million settlement. Dooley still has an opportunity to win against ATTIC’s claims.

Takeaway: When caught in a legal dispute, seek counsel on the best way to respond throughout the process. Missteps can complicate matters further or even work against your organization’s interests. &

Autumn Heisler is the digital producer at Risk & Insurance®. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]