Second Circuit Applies “But For” Test To Exclusion In Finding No Coverage Under D&O Policy

Paraco Gas Corporation purchased an insurance policy for Directors, Officers and Private Company Liability (“D&O”) from Ironshore Indemnity, Inc. that covered certain acts of Paraco’s officers and directors. Paraco shareholders filed a derivative action against two Paraco officers alleging that they transferred shares violating the terms of two Paraco Shareholder Agreements. The officers tendered the action to Ironshore, which denied coverage. Paraco and the officers filed a declaratory judgment action seeking coverage from Ironshore. The Second Circuit found that claims in the shareholder action arose out of obligations under the Shareholder Agreements, and thus, fell within the policy’s exclusion for any claim against the insured “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability or obligation of the Company or an Insured Person under any contract [or] agreement ….” Paraco argued that one of the claims fell outside the exclusion because it was based on the Board’s alleged abdication of its corporate and fiduciary duties to shareholders by allegedly rubberstamping the officer’s actions or concealing them.  The Second Circuit disagreed, reasoning that New York courts have historically interpreted “arising out of” broadly, which requires a “but for” test. Because the claims “could not exist but for the contractual obligations created by the Class A shareholder agreement,” the Second Circuit concluded that coverage was precluded by the exclusion. [Paraco Gas Corp. v. Ironshore Indem. Inc., 2024 U.S. App. LEXIS 14628 (2d Cir. June 17, 2024).] 

Second Department Keeps Coverage Action In New York And Applies New York Law To Find No Coverage Under Pollution Exclusion

The New Jersey Department of Environmental Protection sued Getty Properties Corp. to recover damages for the contamination of surface and ground waters with methyl tertiary butyl ether (MTBE), a fuel additive used in gasoline. Others also sued Getty for such contamination in Pennsylvania and Maryland. In turn, various Travelers insurance companies sued Getty in New York seeking a declaration that Travelers had no duty to defend or to indemnify Getty in the underlying MTBE actions. Three weeks later, Getty filed a competing coverage action in New Jersey as to Travelers’ coverage obligations for the New Jersey MTBE action. The New York Appellate Division, Second Department, held that the New York trial court “did not improvidently exercise its discretion” in denying Getty’s motion seeking the dismissal of Travelers’ coverage action as to the New Jersey MTBE action. The Second Department noted that the trial court correctly considered, among other things, that Getty’s principal place of business was in New York. In a companion decision on the same day, the Second Department held that New York law should be applied in the New York coverage action, stressing that where liability policies cover risks over multiple states, the insured’s principal place of business is “deemed to be a proxy for the principal location of the insured risk and would ordinarily be the source of the applicable law.” The court found that the existence of state-specific endorsements in some of the policies did not raise a triable issue of fact as to whether the parties expected that multiple states’ laws would be applied in a future coverage dispute, and that, importantly, the application of New York law to the entire coverage dispute favors the goal of “certainty, predictability and uniformity of result ….” In its final decision that day, the Second Department found that Getty failed to meet its burden to “demonstrate a reasonable interpretation of the underlying complaint[s] potentially bringing the claims [for pollution over many years] within the sudden and accidental discharge exception to the exclusion of pollution coverage, or to show that extrinsic evidence exists that the discharge was, in fact, sudden and accidental.” The Second Department rejected Getty’s argument that it did not know that MTBE (which was required by the Environmental Protection Agency as a fuel additive) was harmful and, therefore, should not be considered a pollutant within the meaning of the pollution exclusion. [St. Paul Fire & Mar. Ins. Co. v. Getty Props. Corp., 2024 N.Y. App. Div. LEXIS 3543, 3522 & 3517 (2d Dep’t June 26, 2024).]