In This Issue:

• D&Os Entitled to Unfettered Access to Bankrupt Company’s Policy Proceeds to Fund Defense Costs
• Court Rules CGL Insurer’s Reservation of Rights Letters Insufficient, Upholds Bad Faith Verdict
• Policyholder Forfeited Coverage by Settling With Underlying Insurers
• Courts Weigh In on TCPA Coverage

D&Os Entitled to Unfettered Access to Bankrupt Company’s Policy Proceeds to Fund Defense Costs

Why it matters
In an important victory for directors and officers of a bankrupt company, a New York court removed a cap that had previously limited the amount of insurance proceeds directors and officers could access to fund their defenses. After exhausting the cap in the defense of claims, the insured directors and officers asked the court to increase available policy proceeds. Over the bankruptcy administrator’s objections, the court allowed the insured directors and officers almost unlimited access to the policy proceeds. The court reasoned that the D&O policies contained direct “Side A” coverage, which generally protects individual directors and officers from having to use their own resources to pay the costs of any claims for which they are not indemnified by the company. Because of the Side A coverage and the advanced stage of the bankruptcy proceedings, the court ruled that MF Global had no property interest in the D&O insurance proceeds and, therefore, it was no longer part of the estate. The court ruled that it could no longer regulate how the insurance was used.

Detailed Discussion
In October 2011, MF Global filed for bankruptcy protection in New York federal court. In quick succession, the officers and directors of MF Global were named as defendants in several lawsuits.

The insured D&Os sought bankruptcy court approval to access the proceeds of MF Global’s D&O policies to pay defense costs in an array of lawsuits filed against them by, among others, securities holders, commodity customers and other plaintiffs.

The court had previously lifted the automatic stay of Section 362(a) of the Bankruptcy Code to allow the insured D&Os access to the insurance, but had set a cap on draws of $30 million. The insureds succeeded in having this “cap” raised to cover $43.8 million in defense costs.

For the third time, the insureds asked the court for more money. The insureds argued that the court no longer had the right to limit access to the policies because they were not property of the bankrupt company. The court agreed, stating the D&O insurance policies in question provided direct Side A coverage which afforded protection against individual directors and officers having to use their own resources to pay the costs of any claims for which they are not indemnified by the company.

The court noted that under such provisions, as well as the current procedural posture of the case, MF Global had no property interest in the D&O insurance proceeds and therefore it was not proper for the bankruptcy court to make determinations about their disposition.

The court, however, did hold back about $13 million to cover the estimated maximum amount of indemnification claims the executives filed against the bankrupt company – otherwise granting the insureds access to most of the $200 million in D&O policy proceeds.

To read the order in In re MF Global Holdings Ltd., click here.

Court Rules CGL Insurer’s Reservation of Rights Letters Insufficient, Upholds Bad Faith Verdict

Why it matters
A Missouri appellate court recently determined that a commercial liability insurer was estopped from denying coverage for an underlying multimillion-dollar construction defect suit against its insured because its reservation of rights letters were ineffective to preserve the insurer’s right to deny coverage. The court held that the insurer’s purported reservation of rights letters were insufficient because they failed to “clearly and unambiguously” explain what coverage issues might exist and which few policy terms really mattered. A “proper reservation of rights,” according to the court, provides the insured “with full knowledge of the position of the insurance company.” As a result, the court upheld a jury’s bad faith damages award of $5 million – even though the court had previously found that the CGL policy at issue did not cover the claims in the underlying lawsuit against the insured.

Detailed Discussion
Advantage Building & Exteriors, a construction company, was sued in 2008 for property damage as a result of purported construction defects. Pursuant to the terms of a commercial general liability (CGL) policy with Mid-Continent, Advantage tendered the suit seeking a defense and indemnity.

Mid-Continent agreed to defend the claim subject to a “reservation of rights” (“ROR”) letter. Throughout the underlying litigation, Mid-Continent sent additional ROR letters and promised to advise Advantage when it made a coverage decision.

After refusing repeated requests from Advantage to settle the underlying litigation within the policy limits (and engaging in other bad faith conduct recounted at length in the appellate decision), Mid-Continent denied coverage on the eve of trial, withdrew its defense, and initiated a coverage action.

Advantage promptly reached an agreement with the underlying claimant to assign its rights to the proceeds of any award Advantage received when it sued Mid-Continent.

After a bench trial, the court in the underlying case ruled in favor of the claimant. Advantage then asserted a counterclaim in Mid-Continent’s parallel declaratory judgment action accusing Mid-Continent of bad faith for failing to settle the underlying action within policy limits. Advantage sought recovery of the compensatory damages awarded in the underlying lawsuit as well as punitive damages.

Mid-Continent obtained a summary judgment ruling in its favor that there was no coverage so it was not obligated to reimburse Advantage for the compensatory damages award. However, the trial court permitted Advantage’s bad faith claim to go the jury.

The jury ruled in Advantage’s favor, awarding damages for its bad faith claim, and also assessed punitive damages against Mid-Continent.

Mid-Continent appealed. The appellate court held that the purported ROR letters issued by Mid-Continent were insufficient under Missouri law. A “proper reservation of rights,” according to the court, provides the insured “with full knowledge of the position of the insurance company.” The letters sent by Mid-Continent did not meet this standard, as they only “vaguely” explained that the insurer was investigating its coverage defenses.

As such, the court concluded, Mid-Continent had not effectively reserved its rights and was therefore estopped from denying coverage.

The issue of damages was remanded because of an improper jury instruction, so the case stands only for the proposition that the RORs were not effective.

To read the opinion in Advantage Buildings & Exteriors, Inc. v. Mid-Continent Casualty Co., click here.

Policyholder Forfeited Coverage by Settling With Underlying Insurers

Why it matters
Taking an opposite approach from a Texas appellate court (see here), New York’s highest court ruled that an excess insurer’s coverage was not triggered because the lower-tier insurers did not pay their full policy limits. The dispute involved funding for a $65 million securities class action settlement. Coverage for the policyholder included a primary layer and seven excess layers, each with a limit of $10 million. After exhausting the primary level and four excess levels, the insured turned to the last three excess carriers. Layers five and six settled for less than their policy limits and the seventh insurer then refused to pay, arguing that its coverage was not triggered even though the insured “filled in the gaps.” A trial court and state appellate court agreed (see here) and the state’s highest court affirmed the rulings without comment.

Detailed Discussion
Forest Laboratories faced multiple lawsuits alleging securities fraud. After the cases were consolidated, Forest paid $65 million to settle the litigation. With defense costs, the total cost was roughly $84 million.

Forest had an eight-level tower of insurance coverage. A primary layer was followed by seven excess layers, each with a limit of $10 million. Exhausting the primary level and four excess layers to pay defense costs and part of the settlement, Forest then filed suit against the three remaining excess carriers: Arch Insurance Company (level five), Old Republic Insurance Company (level six), and RSUI (the seventh and final layer).

Arch and Old Republic settled for less than their $10 million policy limits. Arguing that it “filled in the gaps” to reach RSUI’s coverage, Forest filed an amended complaint seeking contribution. Taking the position that the “attachment point” was not reached because neither Arch nor Old Republic paid for the entirety of their policy limits, RSUI refused to pay.

The trial court agreed. RSUI’s policy provided that it “will pay upon the exhaustion of the underlying policies ‘solely as a result of actual payment of a Covered Claim pursuant to the terms and conditions of the Underlying Insurance thereunder.’ ”

Ruling that the policy language was not ambiguous, the court stated that it “requires RSUI to pay only after the insurance has been paid under the provisions of the underlying policies (‘terms and conditions of the Underlying Insurance thereunder’), which provisions necessarily include their term limits,” the trial court wrote. “Thus, RSUI pays only after the underlying insurers pay up to their policy limits.”

Forest appealed but an appellate panel affirmed, stating “[t]he motion court properly determined that the express terms of RSUI’s policy providing excess coverage to plaintiff required the previous layer of excess coverage to be exhausted through actual payment of that policy’s limit prior to RSUI being required to pay.”

Again Forest appealed and again the court sided with the insurer, affirming the lower court rulings without comment.

To read the trial court’s decision in Forest Laboratories v. Arch Insurance Co., click here.

To read the New York Appellate Division’s order, click here.

To read the New York Court of Appeal’s order, click here.

Courts Weigh In on TCPA Coverage

Why it matters
Class action lawsuits alleging violations of the Telephone Consumer Protection Act (“TCPA”) have proliferated in recent years, and courts are now struggling with a broad variety of coverage issues related to the underlying litigation. A recent pair of cases demonstrates the spectrum of TCPA-related coverage litigation. In Delaware, a state court held that for purposes of determining insurer’s duty to defend, a putative class action against an insured alleging violations of TCPA was not related to, and therefore did not arise from or involve, prior lawsuits against insured involving third-party product vendors. The court determined that TCPA claims stand alone and are unrelated to prior lawsuits grounded in fraud, negligence and unfair competition. Meanwhile, an Illinois appellate court held that a TCPA exclusion negated any potential for coverage for the entire complaint, notwithstanding the underlying plaintiff’s attempt to plead around the exclusion by amending its claims for conversion and consumer fraud so that they did not allege violations of the TCPA.

Prior Suits Don’t Preclude Coverage
The Delaware coverage dispute arose out of the following circumstances. RSUI issued a claims-made D&O liability policy to Sempris effective from March 1, 2013, through March 1, 2014. Sempris is a marketing services company serving retailers, Internet companies, and third-party call centers.

A class action lawsuit was filed in October 2013 against Sempris alleging violations of the TCPA for unsolicited telemarketing phone calls and improper use of automatic telephone dialing systems. Sempris tendered the underlying lawsuit to RSUI during the policy period. RSUI denied coverage and filed its declaratory judgment action against Sempris and the parties filed cross-motions for summary judgment.

The parties agreed that the lawsuit met the definition of a “claim” under Sempris’ policy with RSUI. However, RSUI asserted that the underlying class action was nothing more than an extension of four prior lawsuits filed against Sempris, all of which were filed before the inception of the RSUI policy. Those prior lawsuits asserted causes of action for, among others, fraud, negligence, unfair competition, and breach of contract. Importantly, none of the four prior lawsuits alleged violations of the TCPA.

RSUI argued that the policy required that a claim be made during the policy period and because the underlying class action was related to the prior lawsuits, Sempris’ failure to make a claim during the policy period precluded coverage in the first instance. In addition, RSUI argued that the underlying lawsuit was related to the prior lawsuits and constituted a single claim under the policy pursuant to a policy condition which stated that “[a]ll claims based on … the same or related facts … shall be deemed to be a single Claim.”

The court rejected RSUI’s arguments.

The court concluded that the allegations in the prior lawsuits did not and would not give rise to a cause of action under the TCPA.

The court also rejected RSUI’s other arguments in finding that, for the same reasons above, the prior notice exclusion did not apply.

Finding that the policy provided coverage for the underlying lawsuit and no exclusions applied, the judge granted summary judgment for Sempris and ordered RSUI to provide a defense.

To read the opinion in RSUI Indemnity Co. v. Sempris LLC, click here.

Amended Complaint Fails to Dodge Exclusion
In another case addressing a TCPA coverage-related issue, an Illinois appellate court held that State Farm’s TCPA exclusion negated any potential for coverage for the entire complaint, notwithstanding the underlying plaintiff’s attempt to plead around the exclusion by amending its claims for conversion and consumer fraud so they did not allege violations of the TCPA.

A third-party claimant, G.M. Sign, sued Michael Schane and his company, Academy Engraving, for sending unsolicited fax advertisements.

The underlying suit, initially filed in August 2010, alleged that the insured Schane and his company had sent mass unsolicited fax advertisements to G.M. Sign and at least 39 other recipients. The underlying claimants alleged conversion and violations of the Illinois Consumer Fraud Act and the TCPA.

Schane tendered the suit to his insurer, State Farm Fire and Casualty Company, which refused to provide coverage, based on the policy’s TCPA exclusion which precluded from coverage damages “arising directly or indirectly out of any action or omission that violates or is alleged to violate … The Telephone Consumer Protection Act.”

G.M. Sign and Schane reached a settlement agreement, in which Schane acknowledged that he faxed a total of 49,825 ads to class members during the defined class period and that a finding of statutory liability based on the number of faxes (roughly $25 million) would bankrupt him. The parties agreed to a judgment of $4.9 million, which amount could be satisfied only by the State Farm insurance policy.

After the settlement agreement was granted preliminary approval by the court, G.M. Sign filed an amended complaint. This time, however, G.M. Sign omitted any reference to the TCPA and alleged only conversion and violation of the Illinois Consumer Fraud Act; both causes of action were included in the initial complaint. State Farm again denied coverage for the amended complaint and G.M. Sign filed a declaratory judgment.

Reversing the trial court, the appellate court held that the TCPA exclusion applied. The court reasoned that the TCPA exclusion precluded coverage for damages “arising directly or indirectly” out of actions that violate the TCPA. The court, therefore, held that the exclusion extended to alternative theories premised in the same facts.

“Although the alternative counts selectively incorporated only those factual allegations that contained no reference to the TCPA, to the faxes being advertisements, or to the lack of any established business relationships between Schane and the class members, they nevertheless were based on the same facts as the TCPA count.”

“G.M. Sign argues nothing more than it should be allowed to avoid application of the policy exclusion by deliberately and strategically leaving its complaint so bereft of factual allegations that myriad unpleaded scenarios could fall within its scope.”

The court also frowned upon G.M. Sign’s litigation tactics in its efforts to garner coverage under the policy. “Having obtained the benefit of its settlement agreement in the underlying litigation by taking the position that Schane sent unsolicited fax advertisements in violation of the TCPA, G.M. Sign should not now be permitted to argue that State Farm owed a duty to defend Schane because its amended complaint potentially included faxes that fell outside of the TCPA.”

To read the opinion in G.M. Sign v. State Farm, click here.