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Approval overrides policy



After Tile Shop Holdings, Inc. settled several lawsuits with its shareholders, the company sought damages under the insurance of its board members. Its redundant insurer, the Allied World National Assurance Company, denied coverage. Tile Shop sued, but the district court granted Allied's request for a summary judgment. In Tile Shop Holdings, Inc. v Allied World National Assurance Company No. 19-2404, United States Court of Appeals for the Eighth Circuit (December 7, 2020) Tile Shop asked the Eighth Circuit to rule that an approval of a delivery note policy was not effective in depriving it of coverage.

FACTS

Robert Rucker started Tile Shop in 1984. The company, which operates a chain of retail plates, was privately owned until 2012, when Rucker decided to publish the company. The reason for the move was the potential for "a national presence."

The new company, Tile Shop Holdings, Inc., submitted a series of documents to the Securities and Exchange Commission, including a registration notice in June 2012, several amendments in July and a prospectus in early August. These applications never mentioned certain transactions with related parties. Specifically, Tile Shop had received millions of dollars in supplies from Chinese export companies owned and operated largely by Rucker's brother-in-law.

About 15 months after Tile Shop went public, an investment research firm reported that Tile Shop had failed to disclose related party transactions as the report compared comparisons with the systems operated by "Bernie Madoff and Allen Stanford []" and stated that " Tile Shop's gross margins [we] are too good to be true. " Shareholders were urged to “sell. . . immediately.

Tile Shop's alleged misconduct led to two types of litigation. The first was litigation for shareholders under the Securities Act of 1933 and the Securities Exchange Act of 1934. The second was derivative cases against the company's executives and board members for breaches of the administrative duty and unfair enrichment. Both sets of trials were eventually settled.

Kakelbutik sought benefits according to its board members. American International Group, Inc. was its primary insurer. Tile Shop's claims exceeded the $ 10 million policy limit, so Tile Shop turned to Allied, its exaggerated insurer, which denied coverage. The reason was a political exclusion for wrongful past actions.

Tile Shop filed a declaration of relief and damages in federal court just so that the court, on a draft summary judgment, would agree with the Allies that the losses could not be recovered under a policy exclusion.

ANALYSIS

Allied admitted that the Tile Shop proved that its losses were covered by the insurance clause. Allies, however, convinced the trial court that the allegations were covered by an exclusion.

Tile Shop's surplus policy contains a "compliance clause", which is subject to the terms of the primary policy. The idea is to limit the risk for the surplus insurer by covering the same basic risks as the primary insurer, even if the surplus policy contains some of its own unique terms.

The question is whether this exception was made part of the surplus policy through its accompanying clause.

The relevant exceptions here are "previous acts." The first exception from previous documents explains that:

The insurer shall not be liable to pay for Loss in connection with any claim against a Insured claiming any Incorrect act occurring before August 20, 2012 or after the end of the insurance period. This policy only provides coverage for Wrongful actions that occur on or after August 20, 2012. . . . Loss arising from the same or related Wrongful Act shall be deemed to arise from the first same or related Wrongful Act.

The last sentence is a relationship -back clause. It treats certain erroneous acts that occur after August 20, 2012, the policy's retroactive dates, as if they had occurred earlier. Losses are excluded from coverage if the underlying erroneous act occurred "before August 20, 2012", or is "the same [as] or related [to]" an act before August 20. In other words, erroneous acts can be attributed to an earlier date. The second exclusion of previous documents is shown only in the surplus policy itself. It states that:

“[the] Policy shall not cover any loss in connection with any claim alleged, arising from, based on or attributable to wrongful acts committed, attempted, or alleged to have been committed or attempted before August 20, 2012. This policy should only cover with respect to erroneous acts that occur on or after August 20, 2012 . ”(Emphasis added)

The dispute concerns whether the second exclusion of previous acts is a complement or a substitute for the first. Allies argued that the exclusion of their own previous actions contributes to that contained in the primary policy. The Eighth Circuit concluded that the clear language of the surplus policy required that the second exclusion of previous documents be a complement. Because a recommendation is a change of an insurance policy. it "changes [s]" policy "by adding " the second exception from previous actions.

Courts must interpret a treaty as a whole and try to harmonize all its clauses. The Eighth Circle therefore concluded that the Allies were not responsible for the losses from previous actions which it has excluded in its own policy or those which have been excluded under the primary policy. in both guidelines, the question is whether Allied's denial of coverage falls under either of these. Undoubtedly, "[l] us [es]" "was connecting [ed]" to "[c] laim [s]" against Tile Shop. In fact, the underlying complaints alleged "[w] rongful [a] cts" from the company, including "critical negligence", "concealment [ment]," misleading "petitions", "breaches of administrative duties" and breaches of SEC rules. These alleged misconduct also occurred "before" August 20, 2012 or were "the same" as or "related" to documents before August 20.

clauses.

The Eighth Circle read the policy as a whole and concluded, as the wording of the policy required, that the approval added an exception and that the allied policy did not cover any wrongdoing occurred before 20 August 2012 and that it was therefore not owed Tile Shop.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to employment as an insurance consultant specializing in insurance coverage, handling insurance claims, infidelity and insurance fraud almost equally for insurers and policyholders. He also acts as an arbitrator or mediator for insurance-related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims lawyer and more than 52 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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