Court: Tribune Shareholder Suit Against Chicago Insurance Broker May Proceed
Finding an exclusion in a directors and officers (D&O) policy to be “ambiguous,” an Illinois appeals court has allowed to proceed a lawsuit filed against a large Chicago insurance brokerage by two former Tribune Co. shareholders.
The case stems from the failed leveraged buyout (LBO) of the Tribune Co. in 2007 that led to its filing for bankruptcy at the end of 2008.
In late 2011, two of the Tribune’s largest former shareholders, the Robert R. McCormick Foundation and the Cantigny Foundation, were hit with several creditor lawsuits as a result of the bankruptcy. Those suits alleged that as “controlling shareholders” the foundations had breached their fiduciary duty by allowing the disastrous LBO. None of the LBO complaints accused them of having violated any federal or state securities laws.
Mounting a defense against the various suits, the foundations discovered a lack of defense coverage in the D&O policy placed by their former insurance broker, Arthur J. Gallagher Risk Management Services Inc. The foundations filed suit, alleging Gallagher had wrongly advised them to switch insurers, which resulted in the loss of coverage.
The Illinois Second District Appellate Court took the case on appeal from the DuPage County Circuit Court, which had dismissed the foundations’ complaint against Gallagher.
In the appellate court’s opinion, Justice Susan Hutchinson wrote:
“In 2008, several years before the LBO lawsuits were filed, the Foundations purchased through Gallagher a $15 million D&O policy issued by Chubb Insurance and a $10 million excess policy issued by a separate company. (For convenience we refer to it as a single $25 million Chubb D&O policy.) In 2010 Gallagher advised the Foundations that instead of renewing the Chubb policy they could obtain identical ‘apples-to-apples’ D&O coverage at a reduced premium with a $25 million policy from Chartis Insurance.”
The foundations followed Gallagher’s advice and purchased the Chartis policy.
When the LBO suits were filed against the foundations, they sought defense and indemnification coverage from Chartis but the insurer refused, relying on a securities-related exclusion in the D&O policy.
In the complaint against Gallagher, the foundations said they would have been covered under the Chubb policy and that they would have continued the coverage with Chubb had it not been for the erroneous advice they received from Gallagher.
Gallagher countered that coverage would also have been precluded due to a section 5(k) exclusion in the Chubb policy. The DuPage County Circuit Court agreed and dismissed the case.
The Chubb Exclusion
On appeal, the court considered “the limited question of whether the exclusion in section 5(k) of the Chubb policy would have precluded coverage of the Foundations’ defense costs for the underlying LBO suits.”
Examining the applicable exclusions in both the Chartis and Chubb policies, the court found the Chartis policy clearly denied coverage, as it “excludes any claim ‘in any way relating to any purchase or sale of securities.'” The justices found the Chubb policy language to be ambiguous, however.
Deciding the first three clauses in the Chubb exclusion’s definition of “Securities Laws” concerned violations of securities laws related to illegal actions such as stock manipulation or insider trading in the sale or purchase of stocks, actions of which the foundations were not accused, the court focused on the definition’s fourth and final clause, which adds: “any other provision of statutory or common law used to impose liability in connection with the offer to sell or purchase, or the sale or purchase, of securities.”
Gallagher contended the clause “bars coverage for any litigation – based on any ‘statutory or common law used to impose liability’ – in any way arising ‘in connection with’ a stock sale,” Hutchinson wrote.
The foundations interpreted the clause more narrowly, asserting that the phrase “any other provision” alludes to any provision similar to the federal and state regulations mentioned in the first three clauses. Without acknowledging another reasonable interpretation, the foundations asserted that if an ambiguity does exist in “the definition it should be construed in their favor.”
The appellate court agreed. The “Foundations are right; the narrow interpretation of the clause is the one that controls,” Hutchinson wrote.
The case is Robert R. McCormick Foundation and Cantigny Foundation v. Arthur J. Gallagher Risk Management Services, Inc.