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Court corrects its own error in profit for D&O policyholders



Last month, the U.S. District Court for the District of Connecticut granted an insurer's request for summary judgment in Connecticut Municipal Electric Energy Cooperative v. National Union Fire Insurance Company of Pittsburgh, PA no. 3: 19cv839 (JBA), which found that there was no coverage under a policy for directors and officers for defense costs in connection with responding to a lawsuit from the government. Last week, in line with our comment, which highlighted several critical shortcomings in the court's original ruling, the court changed and granted reconsideration, finding that there is in fact coverage.

First decision

The case comes from the U.S. Attorney's Attorney. Office Criminal Investigation by the Connecticut Municipal Electric Energy Cooperative ("CMEEC"). The government issued two summonses to the CMEEC, and after a two-year investigation, the jury prosecuted five CMEEC officials and directors of fraud. CMEEC sought coverage from the National Union for its legal costs to respond to the lawsuits, but the National Union refused to pay. The Court initially agreed with the National Union that there was no coverage.

In an article in Law360 we analyzed two crucial errors in the Court's original decision. First, the Court erroneously limited the scope of the obligation to advance defense costs. Many D&O insurances stipulate that the insurer has an obligation to defend the insured. On the other hand, CMEEC's policy required that CMEEC could control its own defense, but the National Union had to pay the defense costs. The National Union had the right to agree to defense costs, but could not unreasonably refuse its consent. It is well known that the obligation to defend is broader than the obligation to compensate, and the obligation to defend is triggered whenever there is only possibility that a lawsuit against the policyholder can be covered, even if in the end there is no compensation for a subsequent settlement or negative judgment. Courts dealing with the obligation to advance defense costs have considered that it is equivalent to the scope of the defense obligation. The District of Connecticut erroneously considered in its original decision that the obligation to carry forward defense costs was narrower and was only triggered if there was actual (not potential for) coverage.

Second, the court held that a Government summons is not a "claim" for an erroneous act. The CMEEC policy defined "Claim" as both a "written requirement of monetary, non-monetary or injunction" and a "criminal procedure." The courts have been divided on this issue, but the majority of the courts have considered that a lawsuit from the government meets one or both of these types of "requirements". These courts argued that a lawsuit requires "relief" in the form of "production of documents or testimony." Syracuse Univ. V. Nat’l Union Fire Ins. Co. of Pittsburgh, PA 975 N.Y.S.2d 370 (Table), 201

3 WL 3357812, at * 2 (N.Y. Sup. Ct. 2013) (finds coverage under identical policy). They also found that a lawsuit by the grand jury is a criminal case. Id. at * 3. Notably, the District of Connecticut ignored binding precedents from the other circuit and decisions that found coverage that interpreted identical policy language. MBIA Inc. v. Fed. Ins. Co. 652 F.3d 152, 160 (2d Cir. 2011).

Second judgment

At CMEEC's request for reconsideration, the court changed the course of the indictment and held that there was an indictment. . , and found that CMEEC's claim based on the lawsuit amounted to a claim for an erroneous act that was sufficient to trigger coverage under the insurance. The reversal was based in part on previously overlooked testimonies from National Union representatives that prosecution arising from the lawsuit was indeed a "claim" for "wrongdoing" by the insured. As the allegations stemmed from the lawsuit filed by CMEEC during the insurance period, they were considered to have been made during the insurance period. Neither the National Union's reservation of rights nor its objection to the CMEEC's statement of material facts were sufficient to preclude a summary assessment in favor of the CMEEC in that matter.

Conclusion

This judgment is a gain for policyholders facing state investigations. It also illustrates the importance of examining the insurer's interpretation of the policy at discovery. The testimony of the witness showed that they had denied the claim in bad faith, even though they knew it was covered.


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