In This Issue:

• Washington Supreme Court Rules That It Was Error To Delay Adjudication Of Insurer’s Duty To Defend, But Should Stay Discovery As To Insurer’s Coverage Defenses
• “Insured v. Insured” Exclusion In D&O Policy Doesn’t Preclude Coverage To Bank Execs For FDIC Suit
• Insured Person Under CGL Policy Did Not Include Supervisory Employee
• 6th Circuit: Excess Insurance Triggered By Primary’s Refusal To Defend

Washington Supreme Court Rules That It Was Error To Delay Adjudication Of Insurer’s Duty To Defend, But Should Stay Discovery As To Insurer’s Coverage Defenses

Why it matters
The Washington Supreme Court handed down two holdings that should significantly benefit policyholders. Recognizing that a duty to defend is triggered if the insurance policy conceivably covers allegations in the complaint, the Court ruled that a trial court had erred by allowing an insurer to delay a decision on its duty to defend in order to conduct discovery regarding potential coverage defenses. The Supreme Court also clarified that once an insured establishes that the duty to defend is triggered, the insurer will be on the hook for payments until a court determination, after more discovery and briefing, that the insurer is excused. The Court further held that any discovery that is potentially prejudicial to an insured in an underlying litigation must be stayed until the underlying litigation is fully adjudicated.

Detailed Discussion
In this case, Expedia and its affiliates faced a barrage of lawsuits filed by various taxing authorities alleging that Expedia had underpaid hotel taxes.

Expedia tendered the lawsuits to Zurich and a number of other insurers (collectively, “Zurich”). Zurich denied that it had a duty to defend on a number of grounds, including that the action was potentially willfully dishonest and thus excluded under the policy.

Faced with increasing defense costs, Expedia sought a declaration that Zurich had a duty to defend. In response, Zurich requested that the trial court delay ruling on Expedia’s motion until Zurich conducted discovery related to the coverage issues, including what Expedia knew about its potential liability in the underlying taxing dispute. Recognizing that there was a “dangerous overlap” between the issues in the coverage case and the underlying cases, the trial court stayed Expedia’s duty-to-defend motion. The court also refused to allow Zurich to conduct discovery into facts that might have prejudiced Expedia’s defense in the underlying cases. That, of course, left Expedia to front the costs of defending the underlying lawsuits.

When the matter reached the Washington Supreme Court, the Court ruled that the trial court should have adjudicated the duty-to-defend issue first. Then Zurich could attempt to prove its defenses. “In the meantime, however, Zurich should have been required to defend Expedia if the court found that the duty to defend had been triggered.”

The Court observed that the duty to defend is a broader duty than the duty to indemnify and that the duty to defend is triggered whenever a complaint could be construed to allege facts that would impose liability within the policy’s coverage. Here, the underlying complaints could be read to allege facts within the policy’s coverage. Therefore, the duty was triggered.

In addition, the Court held that the trial court erred by allowing Zurich to conduct discovery as to the issue of whether Expedia’s tax actions were willful rather than negligent and therefore outside the scope of coverage. The Court agreed with Expedia that this discovery was potentially prejudicial to Expedia in its litigation with taxing authorities since the issue of Expedia’s willfulness was part of the tax claims against it.

To read the opinion in Expedia, Inc. v. Steadfast Insurance Co., click here.

“Insured v. Insured” Exclusion In D&O Policy Doesn’t Preclude Coverage To Bank Execs For FDIC Suit

Why it matters
The United States District Court for the District of Puerto Rico held that a D&O policy’s “insured v. insured” exclusion did not foreclose coverage for a suit against bank executive insureds by the FDIC because the FDIC was not suing them on behalf of an “Insured” or an “Organization” but instead was bringing its claim on behalf of non-insureds, including the bank’s depositors and accountholders. In addition, the court held that when only part of a complaint made by the FDIC against former officers and directors of a failed bank relates back to a prior claim against the insureds, the complaint triggers two policy periods.

Detailed Discussion
Beginning in 2006, lawsuits were filed against the directors and officers of Westernbank in Puerto Rico. The lawsuits alleged that the bank’s directors and officers engaged in a pattern of allegedly reckless and negligent conduct in handling a series of loans, including one loan referred to as the “Inyx loan.” The insurers agreed to defend under a 2006-2007 directors & officers liability policy.

A few years later the bank failed. The FDIC took control as a receiver and filed a lawsuit against the directors and officers including similar allegations that the bank’s officers acted recklessly and negligently in the handling of loans. The FDIC sought recovery for eight separate borrowers – one of which was the Inyx loan.

The primary insurer argued that coverage was barred by the policy’s insured v. insured exclusion. The court noted that some courts had found that the insured v. insured exclusion prevents FDIC suits because the FDIC steps into the shoes of the failed bank and effectively becomes an insured, while other courts hold that the FDIC is statutorily and practically distinct from insured parties because it represents depositors, account holders, and the depositors’ insurance fund. Noting this split in authority, the Court stressed the “obvious intent” behind the exclusion, stating that the FDIC is not suing on behalf of an insured or an organization but on behalf of the depositors’ insurance fund.

Due to the overlapping allegations in the FDIC’s suit and the earlier Inyx lawsuit, the insurers also argued that the FDIC’s lawsuit relates to and thus is considered a single “Claim” with the earlier lawsuits first made in the 2006-2007 policy period. Given that the coverage for that year had already been seriously depleted, the directors and officers and the FDIC objected.

The policy defined “Claim” in relevant part as “a written demand” or “a civil . . . proceeding,” and it provided that where the insureds have given written notice of a Claim, then a subsequent Claim “alleging, arising out of, based upon or attributable to the facts alleged in the Claim or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim shall be considered related to the first Claim of which such notice has been given” and is “subject to the one aggregate limit of liability.”

The directors and officers and the FDIC argued that the FDIC’s lawsuit triggered both policy periods; they contended that only the allegations as to the Inyx loan related back to the 2006-2007 policy period, and the allegations as to the remaining seven borrowers are a “Claim” under the 2009-2010 policy period.

The court sided with the directors and officers and the FDIC, holding that the FDIC’s claim triggered both policy periods.

The court noted that the FDIC’s complaint “substantially overlaps with the complaints in the earlier Inyx lawsuit regarding general allegations of grossly negligent practices,” but nonetheless held that only the allegations as to the single borrower at issue in the prior suits sufficiently overlap for purposes of the policy’s related claims provision. Accordingly, the court held that the FDIC’s claim with respect to the Inyx borrower relates back to and is treated as a single claim with the lawsuits first filed under the 2006-2007 policy period, but the FDIC’s claim as to the remaining seven borrowers is a claim made under the 2009-2010 policy period.

To read the opinion in W Holding Co. v. AIG Insurance Co., click here.

Insured Person Under CGL Policy Did Not Include Supervisory Employee

Why it matters
Applying a limited reading of an insured’s policy providing coverage for “directors,” the Eighth U.S. Circuit Court of Appeals determined that a supervisory employee was not entitled to coverage because he was not on the company’s Board of Directors. The CGL policy defined insureds as “executive officers and directors.” The policyholder argued that the employee in question directed other workers and thus the employee was an “insured” under the policy. But the federal appellate panel disagreed, ruling that the policy unambiguously insures only members of the insured’s Board of Directors, rather than all employees who may “direct” some aspect of the company. Thus it is important for policyholders to understand which employees are and are not “insureds” under their policies and seek to obtain coverage for those who are not, if necessary.

Detailed Discussion
United Fire & Casualty Insurance Co. insured Rose Concrete under a CGL policy. A worker at Rose Concrete in Missouri was injured on the job and sued the company as well as his supervisor, Wayne Rockett. The worker alleged that Rockett acted negligently because he knew the dump truck driven by the plaintiff was defective and yet continued to allow him to operate the vehicle.

United Fire agreed to represent Rockett in the suit but reserved its rights because it believed Rockett did not qualify as an “Insured” under the policy. A state trial court judge entered an $850,000 judgment against Rockett, prompting United Fire to file the declaratory judgment action.

The trial court entered summary judgment in favor of United Fire, finding that Rockett was not an insured because he was not an executive officer or director within the meaning of the policy’s terms. In addition, the district court found that the policy contained exclusions relating to employee coverage, so Rockett could not be covered as an employee either.

To avoid liability, United Fire argued that Rockett was not an “Insured” under the policy because the relevant section of the policy limited coverage to “executive officers and directors” and “only with respect to their duties as [insured’s] officers or directors.”

Although Rose Concrete did not have specific job titles for its employees, it contended that Rockett was a “director” because he was generally referred to as the company’s director of operations, and that he “directed” people and processes as part of his job.

But the Eighth Circuit disagreed.

When analyzing the term “directors” within the context of the United Fire policy as a whole, the policy unambiguously insures only members of Rose Concrete’s Board of Directors, rather than all employees who may “direct” some aspect of, or an activity at, the company. Therefore, the parties’ debate over Rockett’s job title and whether he “directed” Rose Concrete employees is immaterial because the parties agree that Rockett was never a member of Rose Concrete’s Board of Directors.

To read the opinion in United Fire & Casualty Insurance Co. v. Thompson, click here.

6th Circuit: Excess Insurance Triggered By Primary’s Refusal To Defend

Why it matters
When a primary insurer improperly refused to provide coverage, an excess insurer should have stepped in, the Sixth U.S. Circuit Court recently ruled. In the unpublished opinion, the panel noted the excess insurer was contractually obligated to undertake the defense when the primary refused. Had it done so at that time, the excess insurer unquestionably would have been entitled to subrogation rights against the primary. However, after the underlying case was settled, the insured reached an agreement with the primary insurer including a release from further liability. The court noted that allowing the excess insurer to obtain any sort of set-off from the primary now would run counter to the well-established public policy favoring settlement of insurance disputes. The court recognized that the excess insurer likely did not anticipate the risk of funding the insured’s defense without the possibility of reimbursement – but neither did the insured.

Detailed Discussion
IMG Worldwide was a consultant to a failed real estate development project in Orlando, Florida. A group of investors filed a $300 million lawsuit against IMG and the other companies involved in the project, alleging the defendants engaged in fraud when they sold properties with the promise that the properties would be developed into high-end condominiums.

IMG sought coverage from both Great Divide, its primary commercial general liability insurer, and Westchester Fire Insurance Co., its excess insurer. Both carriers denied coverage, contending, among other defenses, that IMG’s conduct was intentional rather than accidental.

IMG eventually settled the underlying suit for $5 million, having incurred more than $8 million in defense costs. IMG continued to seek coverage from both insurers and reached a settlement with its primary, Great Divide, for $1.25 million. This represented the primary policy limits of $1 million plus an additional $250,000 for defense costs. As part of the settlement, IMG released the primary insurer from further liability. Westchester refused to settle and IMG filed suit.

After a trial, a jury found the claims in the underlying action were covered under the excess policy and that Westchester therefore was obligated to reimburse IMG for $3.9 million – the settlement amount in excess of the funds it received from Great Divide. The court retained the question of whether Westchester also was obligated to defend IMG and thus liable for defense costs. The trial court concluded there was no duty to defend under the circumstances and found in favor of Westchester.

Both parties appealed.

The Sixth Circuit first affirmed the jury’s verdict, finding “ample evidence” to support the jury’s finding that the underlying claims were covered under the terms of Westchester’s excess policy.

The panel then turned to the issue of whether Westchester breached its duty to defend IMG.

The policy provided that the insurer has a “duty to defend the insured against any ‘suit’ seeking damages for . . . ‘property damage’ when the ‘underlying insurance’ [Great Divide] does not provide coverage.” Finding two possible interpretations of the provision, the panel deemed it ambiguous and construed it against Westchester.

“Because the [underlying] suit was a ‘suit’ seeking damages for ‘property damage,’ and Great Divide did not undertake to deliver coverage, we find that Westchester had a duty to defend IMG after Great Divide wrongfully denied coverage,” the court ruled.

The panel also found a second, separate provision of the policy independently supported its conclusion that Westchester wrongfully denied coverage. The provision read: “If no other insurer defends, [Westchester] will undertake to do so, but [Westchester] will be entitled to the insured’s rights against all those other insurers.”

At the time the underlying suit was brought and IMG requested coverage from Westchester, “no other insurer” had defended IMG. “Westchester breached the policy when it refused to provide a defense despite IMG’s specific demand after the underlying insurance, Great Divide, refused to provide a defense.”

As for damages, IMG’s remaining defense costs – just under $8 million after the $250,000 from Great Divide was deducted, plus prejudgment interest – the court held Westchester was contractually obligated to pay and was not excused by IMG’s settlement with Great Divide.

“We recognize that Westchester did not anticipate the risk of funding IMG’s defense costs without the possibility of reimbursement from Great Divide.” However, the court reasoned that “neither did IMG. IMG negotiated and paid for CGL policies from Great Divide and Westchester to cover itself from liability in precisely this type of situation. Certainly, as the non-breaching party, IMG must not be left holding the bag.”

To read the decision in IMG Worldwide, Inc. v. Westchester Fire Insurance Co., click here.