The U.S. Court of Appeals for the Eighth Circuit has overturned the lower court's ruling in favor of an insurer in a directors and officers (D&O) lawsuit on the issue of whether the D&O policy required the insurer to indemnify and defend a company and its chief executive officer against claims brought by investors, stating that the policy was ambiguous on this point. The case is Verto Med. Sols., L.L.C. v. Allied World Specialty Ins. Co., No. 19-3511, 2021 U.S. App. LEXIS 13830 (8th Cir. May 11, 2021).
According to the ruling, Seth Burgett, founder of Verto Medical Solutions, L.L.C., a headphone manufacturer, sold the company to Harman International Industries Inc.
To gain the approval of Verto's investors, Burgett agreed to reallocate a portion of the payments made in connection with the deal to the investors.
A dispute arose between Harman and Verto when Harman kept money it had initially held back from the deal; refused to make the first round of earn-out payments; and terminated Burgett, who had been hired by Harman. The parties entered into a settlement agreement requiring a $3.5 million one-time payment to Verto.
Burgett kept a large portion of the settlement for himself, and investors sued him in Iowa state court on charges including fraud.
Verto's E&O insurer, Allied World Assurance unit Allied World Specialty, refused to defend or indemnify Verto in the litigation. The ruling stated that defending the lawsuit without Allied's help led to more than $600,000 in attorney fees and expenses.
Verto and Burgett filed suit against Allied. The U.S. District Court in St. Louis found in favor of Allied World, but that decision was overturned by a unanimous three-judge appeals court panel.
At issue here are policy endorsements.
The policy contained an exclusion, assigned the letter "D," which states that Allied would "not cover any Loss in connection with any Claim. . . based upon, arising from, or in consequence of any actual or alleged liability of any Insured under any express contract or agreement." This standard contractual liability exclusion is called "original D" for the purposes of this case. The policy also included two key endorsements. The first, Endorsement 11, deleted Exclusion D in its entirety and replaced it with a new contractual-liability exclusion also labeled with the letter "D." This exclusion, called "New D" for the purposes of this case, included different exceptions but was otherwise identical to original D.
Allied argued that Endorsement 11 unambiguously excluded coverage. Verto and Burgett argued that the policy was ambiguous because Endorsements 11 and 13 each purport to replace an exclusion with the letter "D" without specifying each one. The district court ruled that Endorsements 11 and 13 together replaced original D, leaving new D in its place and the insureds without coverage.
The ruling by the three-judge panel said that according to Missouri law, "[w]hen an ambiguity exists, we must construe it against the insurer, the policy's drafter, even if extrinsic evidence of the parties' intent is available." The panel reversed the lower court and remanded the case for further proceedings.
Editor's Note: A note for insurers from the 8th Circuit three-judge appeals panel. "If the insurance policy seems unclear, it is."