There is a saying: “Hard cases make bad law.” Nowhere is that maxim more apparent than in insurance law.

A truly unusual case came down recently. The Seventh Circuit Court of Appeals withdrew an earlier opinion.1 It is worth noting what that case was, and why the issue is important to us.

In brief (the case is much more complicated than I will set out here), an insured had entered into a corporate transaction, a going-private deal, announced in 2010 and culminating in 2011. Claims were filed by unhappy shareholders (the 2010 suits), and those claims were reported to the then-current carrier, Chubb, which covered the claims under a reservation of rights. At the end of the transaction, there were a number of preferred shareholders who retained their shares. The transactions and the suits were disclosed in a footnote to a 2010 SEC filing.

In 2011, in connection with another transaction, the insured sought to assure that it maintained control of the company. The board of directors issued a preferred stock repurchase plan to conduct a Dutch auction for further shares. Later, an ESOP was announced. These actions, among others, were disclosed for the first time in an SEC filing in 2012.

The preferred shareholders sued, claiming that the actions had an adverse impact on their holdings (the 2012 suit). This suit, like the 2010 suit, referenced the going-private transactions disclosed in 2010, as well as the later transactions undertaken and disclosed in 2012.

The insured, uncertain of which policy applied, submitted the claim to both Chubb and its new carrier, AIG. AIG denied coverage based on a “specific litigation exclusion” that barred coverage based on claims as reported under a specific Chubb policy, as well as claims related to events disclosed in the footnote to the 2010 SEC filing. AIG claimed that the 2012 suit was related to the events disclosed in the 2010 SEC filing, pointing to the fact that both the 2010 suit and the 2012 suit referenced the transactions disclosed in the 2010 SEC filing.

Further, even if the 2012 suit were not related to the events in the footnote, AIG claimed, the suit had been sent or reported to Chubb at the same time it had been sent to AIG.

The parties moved for summary judgment. The district court found that the specific litigation exclusion did not bar coverage for the 2012 suit, because:

  1. The 2012 suits were not brought because of the events disclosed in the 2010 SEC filing, and therefore were not related or interrelated to the earlier claims.
  2. As for the second prong of the exclusion, the court found that the exclusion only applied to claims reported prior to the date that the AIG policy took effect.2

In deciding the second point, the district court found that “as reported” meant “having been reported already at the time the exclusion was written,” not “reported at any time.” To enforce AIG’s position, the court said, meant that insureds would have to engage in a guessing game about the correct carrier to which it should send notice of claims, and would penalize insureds for being overly cautious.

AIG appealed to the Seventh Circuit, which reversed. The appeals court ruled on a single issue, despite the Byzantine arguments presented. It held that “as reported” carries no temporal limitations, and that the exclusion therefore applied to bar coverage for a claim reported to the earlier carrier at any time, including while the later policy was in effect.

The insured made a motion for rehearing. The Seventh Circuit then withdrew its opinion without explanation and reinstated the District Court’s opinion.

What does this mean for our clients?

To say that this case is unusual is an understatement. The facts, the claims and the policy language are unique to the situation.

Further, one of the key issues—that of whether the 2012 suit was related to the 2011 suits—relies upon the specific facts therein. No bright-line rule can be drawn from the holding, except to note that the standard used to determine relatedness is likely favorable to insureds. Rather than look at the similarity of allegations, the District Court looked at the root cause of the 2012. Was it brought because of the events listed in the 2010 SEC filing? Using that standard, the answer is clearly no.

The court may have used a different standard, such as whether the 2012 suit alleged the same facts or circumstances as the 2010 suits. Under that standard, the court could have come to an opposite conclusion.

More importantly, however, the district court ruled on a more troubling issue: Had the court found that simply sending the 2012 claim to Chubb precluded coverage under the AIG policy, a serious coverage gap would be created. The insured—and by extension, the broker—would have to guess which coverage would be triggered in difficult cases and punish an incorrect guess with a complete forfeiture of coverage.

As the court noted, this places the insured in an untenable position, in which a prudent action can lead to the forfeiture of coverage.

Nevertheless, it clearly would have been preferable for the insured if the exclusion had the now fairly common language that precluded coverage if a claim has been submitted and accepted by the prior carrier, as well as a limitation that the submission be to a prior or earlier carrier.

The Seventh Circuit withdrawal leaves the District Court’s decision in place. Unfortunately, such decisions have little precedential value. Still, it is helpful that the earlier decision—which would be precedential in the Seventh Circuit—has been withdrawn.

As always, Gallagher professionals are ready to assist.

1 Emmis Communications Corp. v. Illinois National Ins. Co,. No. 18-3392 (7th Cir. August 21 2019).
2 Emmis Communications Corp. v. Illinois National Ins. Co,. No. 1:16-cv-0089 (S.D. Ind. March 21, 2019).

About the Author: Donna Ferrara, Esq., is a senior vice president in Gallagher’s Management Liability practice. This group focuses on risk management services, including insurance placement related to executive and management liability issues. During Ms. Ferrara’s three decades in the industry, her vast experience includes litigating and analyzing insurance issues, drafting policies, and aiding the settlement process. Ms. Ferrara is a frequent participant in industry forums as well as a respected contributor of articles on insurance, law and technology, having been published in both legal and trade press. She has also been recognized as a Power Thought Leader by Risk & Insurance magazine.