Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which a global advisory firm claimed it had no duty to defend or indemnify defendant who was seeking coverage following ESOP and Bankruptcy Actions under a professional liability insurance policy. Under Michigan law, the court found that an insurer’s duty to defend is broader than its duty to indemnify, and arises if the underlying claim is actually, or even arguably, covered by the policy. In addition, the court held that if one claim falls within the policy, the insurer must defend all claims.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. 

Great American Fidelity Ins. Co. vs. Stout Risius Ross, Inc., No. 19-cv-11294 (E.D. Mich., 2/14/20)

*Under Michigan law, an insurer’s duty to defend is broader than its duty to indemnify, and arises if the underlying claim is actually, or even arguably, covered by the policy.

**If one claim falls within the policy, the insurer must defend all claims.

Defendant, a global advisory firm, was hired by the Trustees of the Appvion ESOP to independently evaluate the stock of Paperweight Development Corporation, Appvion’s parent company. Appvion later went bankrupt and the ESOP, which incurred losses, sued Defendant and others for negligently or fraudulently overstating the value of the ESOP’s stock in Paperweight (the “ESOP Action”). Defendant was also sued by the co-trustees of the Appvion Liquidating Trust who alleged Defendant’s Paperweight valuation was flawed and contributed to plaintiffs’ losses and Defendant received more payment than it was entitled to from Appvion (the “Bankruptcy Action”).

Defendant requested coverage from Great American for both actions under its professional liability insurance policy. Great American brought this case seeking a declaratory judgment that it has no duty to defend or indemnify Defendant and moved for partial summary judgment, citing a policy exclusion which excluded all claims “based on or arising out of actual or alleged violation” of either ERISA or securities laws. The parties agreed that Michigan law governed the Court’s interpretation of the contract.

The Court first examines Great American’s duty to defend, because it is broader than the duty to indemnify. Under Michigan law, the Court notes, the duty to defend all claims arises if just one of the underlying claims is actually, or even arguably, covered by the policy. Finding the exclusion unambiguous, the Court determines Great American did not carry its burden of showing that every reasonable jury would find the underlying claims fall outside the plain meaning of the exclusion. While acknowledging that the “based on or arising out of” language is generally interpreted broadly, the Court finds the exclusion restrictive, because it excludes only those claims based on or arising out of an ERISA or securities law violation. Viewed this way, the Court finds the common law fraud and negligent misrepresentation claims in the ESOP Action do not arise out of an ERISA or securities law violation, are not excluded, and concludes, therefore, Great American must defend that action.

The Court uses the same analysis to find Great American must defend the Bankruptcy Action; the avoidable preference and avoidable transfer claims are not based on and do not arise out of an ERISA or securities law violation. The Court declines to address Great American’s duty to indemnify argument, because Defendant’s underlying liability has not been established. The Court dismisses the matter without prejudice to Great American’s right to request declaratory relief on its duty to indemnify after the underlying actions are resolved.