Illinois Appellate Court Finds D&O Securities Law Exclusion Ambiguousshoke2013
Tribune shareholders can maintain claim against broker for negligence.
An Illinois Appellate Court, applying Illinois law, held that the trial court erred in concluding that an exclusion in a directors’ and officers’ (“D&O”) policy would have precluded coverage for underlying suits filed against policyholders, the Robert R. McCormick Foundation and the Cantigny Foundation (collectively “Policyholders”). Consequently, Policyholders were allowed to proceed with their negligence claim against their former insurance broker, Arthur J. Gallagher Risk Management Services, Inc. (“Gallagher”), for the loss of defense coverage under Policyholders’ D&O policy.
Policyholders were previously the second largest shareholders of Tribune Company (“Tribune”). Policyholders sold the last of their Tribune stock when Tribune was sold in a leveraged buyout (“LBO”) in 2007. Shortly thereafter, in 2008, Tribune entered bankruptcy. In 2012, Policyholders were named as defendants in three lawsuits filed by different groups of bondholders relating to the LBO.
In 2008, Policyholders purchased through Gallagher a D&O policy issued by Chubb Insurance. In 2010, Gallagher advised Policyholders that instead of renewing the Chubb policy they could obtain identical “apples-to-apples” D&O coverage from Chartis Insurance at a reduced premium. Policyholders followed Gallagher’s advice, purchased the Chartis policy, and let the Chubb policy lapse. Thereafter, Policyholders were sued and tendered the three lawsuits to Chartis for defense. Chartis refused to defend based on a securities exclusion in its D&O policy. Policyholders paid their own defense costs and sued Gallagher for malpractice.
Policyholders alleged that they would have received defense and indemnity under the lapsed Chubb policy and that they would have maintained the Chubb policy but for Gallagher’s erroneous advice. Gallagher, who stands in Chubb’s shoes for the purpose of the malpractice action, argued that a securities exclusion in section 5(k) of the Chubb policy would have barred coverage.
The Chubb policy provided coverage for any claim against Policyholders, unless the claim was based on a “violation of Securities Laws.” The Chubb policy defined “Securities Laws” to include both traditional state and federal securities law, as well as “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 argued that “‘any other provision’ means ‘any other provision’ in all of the law.” Policyholders argued that “any other provision” means “any other provision” like the federal and state securities laws alluded to in the definition of “Securities Laws.”
The Appellate Court determined that the clause was ambiguous. “None of the suits is based on an alleged violation of either ‘Securities Laws’ or ‘securities laws’ … and each contains allegations that would fall outside the exclusion.” Accordingly, the Appellate Court determined that each of the three complaints would not have been excluded from defense coverage by virtue of section 5(k) of the Chubb policy. Robert R. McCormick Found. v. Arthur J. Gallagher Risk Mgmt. Servs., Inc., No. 2-15-0303 (Ill. App. March 31, 2016).