Insurance Coverage Update - Mother's Participation in Lawsuit As Insured Person Sinks Daughters' Claims Under Insured v. Insured Exclusion
Coverage for a lawsuit brought by an Insured Person, a former Director of the defendant company, and non-Insureds, her daughters, was barred by the Insured v. Insured exclusion of a D&O Policy in a recent ruling by the Eighth Circuit, Jerry's Enterprises, Inc. v. U.S. Specialty Ins. Co., No. 15-3324, 2017 WL 104468 (8th Cir. Jan. 11, 2017).
Jerry Paulson founded Jerry’s Enterprises, Inc. (“JEI”), a chain of grocery stores operating in Minnesota, Wisconsin and Florida. He gifted shares in JEI to his three daughters, including Cheryl Sullivan, and to his grandchildren, including Sullivan’s daughters Kelly and Monica. Upon his death in 2013, Paulson’s estate plan appointed his daughters to the JEI Board of Directors. Under the plan, they would remain as directors until such time as their shares and the shares of his grandchildren were redeemed. Sullivan served as a director for approximately four months, during which time she raised concerns with the directors of JEI regarding the valuation of her shares. Shortly after cashing out her shares, she and her daughters sued JEI, claiming they were forced to redeem their shares for less than they were worth.
The policy also included an allocation provision which specified that:
The Eighth Circuit disagreed, affirming the lower court decision, since the language of the exclusion did not leave room “to apply the clause to some parts of a lawsuit but not others.” Furthermore, the Eighth Circuit noted that all of the claims in the lawsuit were brought by all three plaintiffs jointly; meaning Sullivan’s claims could not be separated from her daughters’. While acknowledging that tension existed between the IvI Exclusion and the allocation provision, the court concluded “loss associated with the Sullivan lawsuit is not covered under the insurance policy due to the presence of a former director – Sullivan – as an active participant.”
Policyholder advocates will likely bemoan the Eighth Circuit’s refusal to apply the allocation clause, arguing the claims of the Sullivan daughters, who were not insureds under the policy, should not have been barred. However, the court properly applied the maxim of contract law that specific contract language controls over general language. The language of the IvI exclusion spoke specifically to Claims brought with the participation of Insured Persons, whereas the allocation provision spoke generally to Claims that included both covered and uncovered matters. Insurers should take solace in this decision where the court interpreted the exclusion’s language in a straightforward manner and applied the exclusion to the Claim as a whole.
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