Hunton Andrews Kurth's insurance protection team recently published a customer warning discussing a dispute over D&O coverage due to an exclusion of contractual liability.
The Eighth District Court held that a D&O liability insurer could not rely on ambiguous approvals as a basis. to deny coverage for claims from investors against the insured company and its CEO. Reverse Eastern District of Missouri, Court of Appeals in Verto Medical Solutions LLC, et al. v. Allied World Specialty Insurance Co. No. 19-3511 (8th cir.), The policy found ambiguous whether an exclusion of contractual liability had been erased by approval and thus the insurer must provide coverage for the underlying claims.
Allied World issued a D&O policy covering both Verto Medical Solutions, a headphone manufacturer and its CEO, Seth Burgett. The policy had an exclusion of contractual liability identified as exclusion "D." The policy also had two important statements:
- Note 1
- Note 13 sa “Exceptions A., B., C. and D … . deleted in its entirety and replaced "with a new list of exceptions marked" A "," B "and" C. "None of these replacements contained an exemption from contractual liability, and no one referred to the" new "exclusion" D. "
If your head is spinning, you are in good company with the panel of eighth circuit judges tasked with analyzing the policy in connection with a contractual dispute between Verto and a third party.
Verto and Burgett asked Allied World for compensation and defense coverage according to the policy. Allied World declined on both counts, and Verto and Burgett incurred more than $ 600,000 in attorneys' fees and expenses in the underlying suit before reaching a settlement. Verto and Burgett then filed a breach of contractual action against Allied World seeking compensation. The insurer moved to termination and claimed that the D&O policy excludes claims for contractual liability because note 11 – the approval that deleted and replaced the exclusion of contractual liability "D" – unequivocally excludes coverage. In response, Verto and Burgett argued that the policy was ambiguous on this point because statements 11 and 13 were alleged to replace an exclusion "D" without specifying which – original "D" or replacement "D." The district court agreed with Allied World's interpretation and dismissed Verto and Burgett's complaints. It argued that notes 11 and 13 together replaced the original exclusion of contractual liability and left the new excluded exclusion of liability from note 11 in place.
Decision and Analysis
On appeal, the Eighth Circle turned and ruled in favor of Verto and Burgett. The panel began its discussion with a statement that most coverage attorneys can agree on: "[l] Like many insurance policies, this one is complicated." The Court found that approval 13 injected "uncertainty" by deleting exclusion "D" without specifying which version – the original exclusion or the new exclusion introduced by approval 11 – was deleted. The court found the "possibility" that the endorsements deleted and replaced both the original exclusion "D" and the new "D" that replaced it, which would leave the policy without contractual liability exclusion at all. This would mean that the contractual exclusion of liability that Allied World invoked to deny coverage was completely removed from the policy. As Allied World's policy was reasonably open to two constructions, one followed by Allied World and another presented by the policyholder, the policy was ambiguous as to whether the exclusion of contractual liability remains in force. As such, the Missouri Act required the court to adopt the policyholders' reading in favor of coverage. The court instructed that Allied World could not claim that the insurance contained an exemption from contractual liability.
The eighth circle correctly followed the insurance principles for black letters and kept the insurer highly proven that an exception unequivocally applies to a certain requirement and is not subject to any other reasonable interpretation. When the court faced a lack of clarity, the court also correctly resolved the ambiguity in favor of coverage and against the insurer who drafted the policy.
The combined effect of these principles on insurers is clear: if an approval is intended to erase one, it must be clear about it. Otherwise, the insurer may lose the advantage of the exclusive language in both the form of insurance and its approvals. In the case of policyholders, the decision Verto emphasizes the importance of carefully taking into account statements aimed at amending, amending or completely deleting important insurance contracts, definitions and exceptions. The policyholder should not assume that the insurer's interpretations are unavailable or, if the insurer's view is reasonable, that the insurer's interpretation is the only one . After all, as the eastern district of Pennsylvania aptly noted by analogy with Alice in Wonderland and Minotaur's Labyrinth to an insurance:
The over 100-page insurance policy in question can only be described as a maze of pages, paragraphs and statements. The terms of the insurance require the insured to fall into a rabbit hole and wander through a large thickness of proverb that makes even the most careful reader be mystified by the pages' labyrinths to be compiled and deciphered to determine if there is coverage on the other side.
Susan Spath Hegedus, Inc., v. Ace Fire Underwriters Ins. Co. No. 20-2832 (ED Pa. 7 May 2021) (denied an insurer's proposal to dismiss a COVID-19 corporate income claim).
The court gamely acknowledged, “the interpretation of this policy is not a task for the faint of heart. “In fact, both cases emphasize the importance of retaining experienced brokers and coverage advisors, not only once a claim arises but also in connection with any policy placement or renewal.