As I have noted in prior posts (most recently here), a recurring D&O insurance coverage issue is the question of whether or not an insured person was acting in an insured capacity at the time he or she allegedly committed the wrongful acts alleged against him or her. These questions arise because individuals often act in numerous capacities, but the D&O policy provides coverage only for those acts undertaken as a director or officer of the insured company.
A recent case involved similar questions arising under a professional liability insurance policy that provided coverage for the insured individual’s acts in his capacity as the trustee of two trusts. The individual sought coverage under the policy for claims brought against him in his capacity as a director or officer of separate companies in which the trusts held controlling ownership interests. In a June 30, 2016 opinion (here), the Wisconsin Supreme Court, applying Wisconsin law, affirmed the intermediate appellate court’s holding that under the policy’s business enterprise exclusion, which precluded coverage for claims arising from the individual’s actions for entities other than the specified trusts, there was no coverage under the policy and the insurer had not breached its duty to defend.
David Marks serves as trustee of two trusts, the Irrevocable Children’s Trusts (“ICT”) and the Irrevocable Children’s Trusts No. 2 (“ICT2”). Marks was insured under a professional liability insurance policy that provided coverage for “any Loss or Claims Expenses … as the Insured acting in the profession described in Item 3 of the Declarations shall become legally obligated to pay.” Item 3 of the Declarations lists Marks’ profession as “solely in the performance of services of the Trustee of the Irrevocable Children’s Trust (ICT), and/or Irrevocable Children’s Trust No. 2 (ICT2).”
The professional liability insurance policy also contained a so-called business enterprise exclusion, which precluded coverage “for liability arising out of the Insured’s services and or/capacity as: 1) an officer, director, partner, trustee, or employee of a business enterprise not named in the Declarations …”
ICT and ICT2 owned a controlling interest in Titan Global Holding, Inc. Between 2007 and 2009, five complaints and one counterclaim were filed against Marks and Titan in various courts around the country. The allegations against Marks in these complaints alleged misconduct against him in his capacity as a director or officer of Titan (and/or related enterprises).
Marks sought to have the professional liability insurer defend him in the six lawsuits. The professional liability insurer denied that it had a duty to indemnify or duty to defend Marks in the various lawsuits, contending that the claims against him in the lawsuits did not arise out of his capacity as a Trustee of the trusts, and also because the business enterprise exclusion precluded coverage for claims arising out of Marks’ service or capacity as an officer or director of a business enterprise not named in the policy declarations.
Marks filed a declaratory judgment against the insurer. The parties filed motions for summary judgment. The trial court granted the insurer’s motion for summary judgment in reliance on the business enterprises exclusion, and the intermediate appellate court affirmed the trial court, holding that because the business enterprises exclusion precluded coverage, the court did not have to reach the question of whether or not there was coverage in the first place under the policy. Marks appealed to the Wisconsin Supreme Court.
One development in the underlying litigation against Marks is worth noting. On January 25, 2010 (that is, after the expiration of the professional liability insurance policy), Hawaii Global and Transpac Telecom, Inc., one of the claimants one of the underlying claims, filed a supplemental counterclaim that among other things, and after reciting that Marks served as Trustee of the ICT and ICT2 Trusts, added allegations against Marks in his “representative capacity as ostensible trustee” of what the counterclaim described as the “alter ego entities.”
The June 30, 2016 Opinion
In a June 30, 2016 opinion written for a unanimous court (with two justices concurring) by Justice Annette Kingsland Ziegler, the Wisconsin Supreme Court, applying Wisconsin law, affirmed the intermediate appellate court, holding that because the business enterprise exclusion precluded coverage under the policy, the insurer had not breached its duty to defend under the policy in refusing to defend Marks in the various lawsuits. The Court agreed with the intermediate appellate court that because of the operation of the exclusion, the Court did not have to reach the question of whether or not the policy provides an initial grant of coverage based on the allegations in the six lawsuits.
The business enterprise exclusion, the Court said, “unambiguously precludes coverage for Marks’ activities as an officer or director of any business enterprise not named in the declarations.” The claims against Marks, the Court said, “attack him in his capacity as an officer or director of Titan,” and the policy “does not provide coverage for Marks’ liability as a director or officer of Titan or other business enterprises not mentioned in the policy’s declarations.” Marks could have obtained coverage for his work as a director or officer had he purchased a policy that named Titan in the policy declarations.
Marks argued that ICT and ICT2 own controlling interests in Titan, and that he had accepted the seat on the Titan board “solely by virtue of the trusts’ controlling investments in Titan.” The Court said that this argument only identifies a “causal relationship” – that is, that his position as Trustee of the trusts “caused him to accept a role as an officer or director of Titan.” However, the Court noted, he is being sued for his alleged failures as officer or director of Titan, not for any alleged failures as Trustee.
The Court acknowledged the supplemental counterclaim in the Hawaii Global action, noting that the supplemental counterclaim was filed three months after the policy expired and two months after Marks had first sued the insurer seeking coverage. The Court said of the supplemental counterclaim only that it had not been part of the insurer’s duty to defend analysis and that it was not a part of the Court’s own duty to defend analysis. In a very long footnote (footnote 25 of the opinion), the Court said, among other things, that “we are not faced with a developed argument that [the insurer] separate breached a duty to defend” when the supplemental counterclaim was filed (outside of the applicable policy period), noting that such a claim would face “its own hurdles.”
The Court then considered and rejected Marks arguments that the business enterprises exclusion should not be given effect, first, because the exclusion renders the policy illusory; and second, because the insurer unilaterally disclaimed coverage it is estopped from using policy exclusions to contest coverage.
In contending that the exclusion rendered policy coverage illusory, Marks relied on the reference in the exclusion precluding coverage for his service as a “trustee.” (How this makes coverage illusory frankly eludes me, as this provision would only preclude coverage for service as trustee of trusts not named in the policy declarations; it would not have any effect on coverage for his service as trustee of trusts that are named in the declarations.) The court basically said that even if Marks’ contention were true, his remedy would be policy reformation with respect to the “trust/trustee” provision of the exclusion; even if that provision were reformed, the policy would still not afford Marks coverage for the claims against him as an officer or director of Titan.
Finally, in making the argument that the insurer could not rely on the policy exclusion to contest coverage, Marks relied on lower court authority which the Supreme Court reviewed at length, ultimately concluding that the authority was “unsound in principle” and accordingly the Court “explicitly overruled” the precedent, concluding that the business enterprise exclusion was properly considered in the determination of coverage.
The policy at issue here was pretty clearly set up so that it provided insurance for Marks only in his capacity as Trustee of the two trusts, so that the policy did not provide coverage for his actions in other capacities. As the Supreme Court noted, if Marks had intended to have the policy insure him in his capacity as a director or officer of Titan, he could have purchased a policy that named Titan in the policy declarations. Actually, the better course would have been for Titan to have purchased its own D&O insurance policy providing insurance for all of its directors and officers including Marks.
Titan’s lack of D&O insurance is a little bit of a puzzle; among other things the Court’s factual recital quotes from a Form 10-K that Titan filed, which suggests that Titan was a publicly traded company (or at least was a reporting company). Ordinarily, you would expect a public company to have purchased D&O insurance. Whatever the reason why Titan lacked D&O insurance, it was Titan’s apparent lack of D&O insurance that put Marks in the position of trying to argue that the professional liability policy provided coverage for him in connection with the various lawsuits against him.
In any event, this case provides a good illustration of the significance for coverage determination purposes of “insured capacity.” It is not unusual for an individual to be acting in multiple capacities. For example, a corporate executive may be acting in a personal capacity as well as a corporate capacity. A representative of a private equity firm who sits on the board of a portfolio company may be acting both in his capacity as a representative of the PE firm and of the portfolio company. Because individuals often act in dual or multiple capacities, it is important that the insurance policy does not require that the insured person was acting “solely” in an insured capacity in order for coverage to apply. I note in that regard that the relevant language of the professional liability policy at issue in this case used the word “solely.”
It is worth noting that the Supreme Court’s conclusion was based on its interpretation of the business enterprises exclusion. It is not clear whether in the absence of the exclusion the outcome would have been the same – that is, whether the court would have concluded that there was or was not policy coverage because of the capacity in which Marks has been sued. Interestingly, the trial court had concluded that the policy could be construed to provide coverage for the work of a trustee when working as an officer or director of a corporation in which the trust corpus is invested. I am not sure I agree with this analysis, but the intermediate appellate court and the Supreme Court concluded they did not need to reach this issue, because the business enterprises exclusion precluded coverage. It is an interesting question whether or not this policy might have provided coverage in the absence of the exclusion.
While I do not find the outcome of this case to be particularly surprising, there is one aspect of the Court’s analysis that I find a little bit disappointing. The question of whether or not the Hawaii Golden supplemental counterclaim triggered coverage at least for Marks’s defense of that counterclaim does not seem to me to have been fully considered; the Court’s analysis is limited and mostly restricted to a long, wordy footnote that doesn’t really address the issues. There are, as the Court notes, barriers that potentially could have prevented any conclusion that the supplemental counterclaim triggered policy coverage. But the supplemental counterclaim did seem to sue Marks in his capacity as trustee of the Trusts, and though the supplemental counterclaim was filed after the policy expired, there is at least the possibility, which the Court acknowledged, that the later filed supplemental counterclaim would relate back to earlier filings in the Hawaii Global lawsuit. Apparently, the Court did not feel obliged to consider these issues because, it said, it was not provided with a “developed argument.”
Important Global D&O Claims Trends: The latest issue of Munich Re’s publication Schadenspiegel (roughly translated, loss journal), includes an article I wrote about global D&O claims trends, and in particular about the rise in D&O claims activity outside of the U.S. The Munich Re claims publication can be found here.