Specific Litigation Exclusion Enforced
Claims made and reported policies – Directors and Officers or Errors and Omissions – are based upon an application telling about litigation history. When the insured discloses a prior lawsuit or pending claim in an application the insurer prudently excludes any claim arising out of that prior claim or suit.
In RSUI Indemnity Company v. Worldwide Wagering, Inc., William H. Johnston, Jr., William H. Johnston, III, Steven E. Anton, F. Phillip, Langley, Lester H. Mckeever and Stephen Swindal, Case No. 17-CV-01690, United States District Court For The Northern District Of Illinois Eastern Division, (July 17, 2017) an insured sought defense and indemnity for a lawsuit that arose as a result of the insured’s bribe of ex-Chicago Mayor Rod Blagojevich. The insurer refused because it had specifically excluded the specific claim.
Defendants were involved in the Underlying Litigation and Plaintiff’s duty to defend Defendants in that lawsuit pursuant to Defendants’ insurance policy with Plaintiff. Plaintiff brought a two-count complaint seeking a declaration that it has no duty to defend Defendants or indemnify them under their insurance policy. Defendants then brought a Counterclaim seeking a judgment that Plaintiff has a duty to defend Defendants and alleging that Plaintiff has breached its contract by failing to defend Defendants in the Underlying Litigation.
The Insurance Policy
Plaintiff issued to WWW an insurance policy (the “Policy”). The Policy provides directors’ and officers’ liability insurance to WWW and its directors and officers, and the Directors are “Insured Persons” under the Policy. Similarly, WWW is the “Insured Organization” under the Policy. The Policy contains a “Duty to Defend” provision and the Insuring Agreements of the policy provide that the Insurer agrees to defend and indemnify the insured if a covered even occurs and is reported during the policy period.
The Riverboat Matter
The parties endorsed the following exclusion to the Policy:
“The Insurer shall not be liable to make any payment for Loss arising out of or in connection with any Claim made against any Insured alleging, arising out of, based upon or attributable to, directly or indirectly, in whole or in part, the following litigation: Riverboat matter, claim #233457 on Chubb loss runs dated 4/8/2014.” The Riverboat matter and the Chubb loss runs refers to a lawsuit known as Empress Casino Joliet Corporation, et. al. v. Rod Blagojevich, et. al., Case No. 1:09-cv-03585 (the “Riverboat Matter”), which the plaintiffs, a group of riverboat casinos, filed in this District on June 12, 2009 and which named Rod Blagojevich, Friends of Blagojevich, John Johnston, Balmoral Racing Club, Maywood Park Trotting Association, Arlington Park Racecourse, Fairmount Park, and Hawthorn Racecourse as defendants.”
The plaintiffs in the Riverboat Matter alleged a RICO claim against ex-Chicago Mayor Blagojevich, Friends of Blagojevich, Johnston, Balmoral Park, and Maywood Park and sought a constructive trust of funds received by the defendant racetracks pursuant to the 2006 and 2008 Racing Act. Specifically, the plaintiffs alleged that John Johnston agreed to pay former Governor Blagojevich a bribe of $100,000 in exchange for his support of legislation that would require Illinois riverboat casinos to pay 3% of their revenue to the Illinois horseracing industry. After a trial, the jury awarded approximately $78 million in damages against the defendants, and shortly thereafter, Defendants, who were liable for the damages in the Riverboat Matter, filed for bankruptcy protection.
Upon receipt of the complaint in the Underlying Litigation, Defendants tendered the complaint to Plaintiff for defense and Plaintiff issued a denial of coverage letter in which it disclaimed any duty to defend or indemnify Defendants with respect to the Underlying Litigation.
Specific Litigation Exclusion
Plaintiff first argues that it has no duty to defend Defendants in the Underlying Litigation because the Policy specifically excluded litigation arising out of the Riverboat Matter, and the Underlying Litigation arises out of the Riverboat Matter. Defendants argue in response that Plaintiff has a duty to defend them in the Underlying Litigation because the Underlying Litigation involves different parties and claims than those involved in the Riverboat Matter. Specifically, Defendants argue that although some of the parties and funds at issue are the same in both cases, the Riverboat Matter involved a bribe of Governor Blagojevich, while the Underlying Litigation involves the corporate mismanagement of WWW.
Under Delaware law insurance contracts, like all contracts, are construed as a whole, to give effect to the intentions of the parties. Courts analyzing whether an insurance company has a duty to defend an insured against a third party must look to the allegations of the underlying third party complaint to assess whether that complaint alleges a risk within the coverage of the policy.
The prior litigation exclusion provided that the insurer was not obligated to offer coverage for any loss “alleging, arising out of, based upon or attributable to any pending or prior litigation . . . alleging or derived from the same or essentially the same facts.”
In this case, the exclusion in the Policy provides: “The Insurer shall not be liable to make any payment for Loss arising out of or in connection with any Claim made against any Insured alleging, arising out of, based upon or attributable to, directly or indirectly, in whole or in part, the following litigation: Riverboat matter, claim #233457.” This provision is clear, unambiguous, and broad, and it plainly states that Plaintiff is not liable for any claims arising out of or based upon, in whole or in part, the Riverboat Matter.
The claims in the Underlying Litigation, at least in part, arise from the Riverboat Matter. The complaint in the Underlying Litigation alleges that, Defendants, knowing that their entities were at risk of a massive judgment in the Riverboat Matter, engaged in a deliberate scheme to manipulate their entities’ assets and conceal them from their creditors in the Riverboat Matter. Specifically, the complaint alleges that the Defendants “raided” their entities and fraudulently transferred the entities’ funds to enrich themselves in breach of their fiduciary duties, all in anticipation of a judgment in the Riverboat Matter, which they had no intention of satisfying.
Given these allegations, it is clear that Defendants’ fraudulent scheme to transfer assets, as alleged in the Underlying Litigation, was a direct effort to avoid paying the judgment in the Riverboat Matter and to shield and plunder the assets of their entities before creditors from the Riverboat Matter could reach them.
The exclusion provision in the Policy did not require that litigation be identical to the Riverboat Matter to be excluded from coverage, litigation merely had to arise from or be based in part on the Riverboat Matter, and here, the Underlying Litigation meets that criteria. Accordingly, the Court granted Plaintiff’s motion for judgment on the pleadings and finds that Plaintiff has no duty to defend or indemnify Defendants in the Underlying Litigation and that it has thus not breached its contract with Defendants.
Trying to increase the profits of a business by successfully bribing the Mayor of Chicago and then finding itself in trouble when the Mayor was arrested and convicted. It was sued and disclosed that suit to its insurer when it applied for insurance. The insurer, prudently, excluded anything resulting from the claim. The defendants tried to find some way to get coverage for a claim they already agreed should not be covered because the parties were different. The District Court properly judged that there was no coverage for defense or indemnity.
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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