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Courts and Coverage

Why Insurance Policy Language Matters

David Knapp | December 13, 2019

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Nonlawyers often roll their eyes when they hear lawyers obsessing about minutiae, such as the placement of a comma or the difference between "the" and "an." 1 When it comes to interpreting an insurance policy, however, language matters.

The recent case of Emmis Communs. Corp. v. Ill. Nat'l Ins. Co., 937 F.3d 836 (7th Cir. 2019), from the Seventh Circuit Court of Appeals serves as a good reminder that loose language in a policy can lead to unexpected results. Those results can be especially problematic when the language at issue deals with the reporting requirements of a claims-made-and-reported policy.

The Prior Notice Exclusion

Claims-made-and-reported policies contain a "prior notice" exclusion restricting coverage for claims and circumstances that were reported under a prior policy. These policies also contain language providing that (1) where an insured reports a circumstance that later gives rise to a claim, the claim is deemed first made during the policy period, and (2) claims that are related to a previously reported claim are treated as a single claim, first made at the time the original claim is reported. Together, these provisions operate to ensure that claims that are brought during an earlier policy period and claims that are related to a circumstance or claim reported during an earlier policy period are covered under the earlier policy, not the current policy. See, e.g., Financial Mgmt. Advisors, LLC v. American Int'l Specialty Lines Ins. Co., 506 F.3d 922 (9th Cir. 2007). Conversely, a new claim that is unrelated to a previously reported claim or circumstance would be covered under the current policy.

A typical prior notice exclusion in a claims-made-and-reported policy provides that the policy does not cover claims.

[A]lleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained in any Claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time[.]

The past-tense, "has been reported" and "has been given," clearly indicates that the exclusion applies only to those claims and circumstances that were reported under a prior policy before the inception date of the current policy. This is consistent with the intent that if a claim arises out of a circumstance, or is related to a claim, that was reported to a prior insurer during the earlier policy's period, the earlier policy should afford coverage for the claim.

Sometimes, it is not clear whether a claim is related to a claim or circumstance that previously was reported under an earlier policy. In that case, it is common practice for a policyholder or its broker to tender the claim under both the current policy and the earlier policy and let the insurers decide which policy affords coverage. This avoids the policyholder having to guess whether its insurers will deem the claim to be related to the previously reported claim or circumstance and ensures that the notice and reporting requirements of the policies are satisfied. If the current policy contains the typical prior notice exclusion wording, the claim would only be excluded if it related to a claim or circumstance that previously was reported during the earlier policy period to the prior insurer.

What happens, however, when a policy contains language that is slightly different than the typical prior notice exclusion? Enter the Emmis Communs. Corp. v. Ill. Nat'l Ins. Co. case.

The Underlying Actions

In 2010, the CEO and largest shareholder of Emmis Communications Corporation proposed a transaction that would take the company private by forming an entity (JSA) to acquire the company's common stock and convert preferred stock into subordinated debt instruments. The attempt to go private failed, however, after the fund that offered to finance the deal, Alden Global Distressed Opportunities Master Fund, withdrew its offer.

Prior to the failure of the go-private attempt, Emmis shareholders filed seven lawsuits between April and June 2010, alleging that the deal undervalued company shares and was coercive to preferred shareholders and that the company's directors had breached their fiduciary duties in approving the deal (the 2010 Shareholder Suits). Emmis had a claims-made-and-reported directors and officers (D&O) policy with Chubb Insurance covering the period from October 1, 2009–10. Emmis's broker tendered the 2010 Shareholder Suits to Chubb, which agreed to defend them under a reservation of rights. After the go-private attempt failed, the 2010 Shareholder Suits were voluntarily dismissed.

In September 2011, JSA sued Alden for breach of contract arising from Alden's backing out of the go-private deal. In February 2011, Alden filed suit against Emmis, alleging that the company's board breached their fiduciary duties by agreeing to loan money to JSA to fund its lawsuit against Alden and that Emmis's CEO, through JSA, filed the lawsuit as a personal vendetta against Alden for backing out of the go-private deal (the 2011 Alden Suit). Emmis's broker tendered the February 2011 Alden lawsuit to Chubb, who agreed to defend on the basis that the Alden lawsuit and the prior shareholder suits were related claims because they both arose out of the 2010 go-private attempt.

In November 2011, the company announced another plan to try and take the company private, which included a preferred stock repurchase plan and a tender offer to purchase preferred stock. After acquiring additional preferred shares through the plans, Emmis's board approved the creation of an employee benefit plan trust, to which it would issue 400,000 shares of preferred stock, which could be voted as directed by the company's board.

In April 2012, five preferred shareholders filed a lawsuit against Emmis and its directors and officers, alleging that the company's acquisition of preferred stock and issuance of preferred stock to the employee benefit plan trust violated federal securities laws and state law (the 2012 Shareholder Suit).

Emmis Reports the Claim to Its Insurers

At the time of the 2012 Shareholder Suit, Emmis had D&O coverage with Illinois National, which covered the period from October 1, 2011–12. Emmis's broker tendered the 2012 Shareholder Suit to Illinois National under the 2011–12 policy but also tendered it to Chubb under the prior policies, to the extent the 2012 Shareholder Suit was deemed to be related to the earlier lawsuits arising out of Emmis's attempts to go private.

Chubb took the position that the 2012 Shareholder Suit was not related to the prior lawsuits and denied coverage. Illinois National also denied coverage, citing a "Specific Event Exclusion" in its policy, which provided that the insurer was not liable to make any payment for loss in connection with "[a]ll notices of claim or circumstances as reported under [the Chubb policy]." Emmis Commc'ns. Corp. v. Illinois Nat'l Ins., 323 F. Supp. 3d 1012 (S.D. Ind. 2018) (emphasis added). Illinois National contended that the phrase "as reported" in the exclusion included all claims that were reported to Chubb, regardless of when the claims were reported. In other words, Illinois National's position was that by reporting the 2012 Shareholder Suit to Chubb, Emmis had vitiated coverage under the Illinois National policy.

The Litigation

Emmis filed suit against Illinois National, asserting, among other things, that the phrase "as reported" refers to only those claims that already had been reported to Chubb as of the effective date of the Illinois National policy, and, since the 2012 Shareholder Suit was not reported to Chubb during the policy period of the Chubb policy, it did not fall within the exclusion.

The district court found that the language was ambiguous, as it "could be read to refer to any claim that is reported under the Chubb Policy at any time, as urged by [Illinois National], but it also reasonably could be read to refer to any claims that had been reported under the Chubb Policy at the time the [Illinois National policy] went into effect … as urged by Emmis." Id. at 1023. Accordingly, the district court construed the language in favor of Emmis and held that the exclusion did not apply.

Illinois National appealed the decision to the Seventh Circuit. Illinois National's appellate brief focused primarily on other arguments—that the 2012 Shareholder Suit was related to the 2010 Shareholder Suits and, therefore, should fall within the coverage of the Chubb policy, not the Illinois National policy. Illinois National's last argument, however, was that the phrase "as reported" in the specific events exclusion should be read broadly such that coverage for the 2012 Shareholder Suit is excluded because Emmis reported it to Chubb.

The Seventh Circuit Decisions

Despite the "as reported" argument being somewhat of an afterthought in Illinois National's briefing, the Seventh Circuit issued a three-page decision on July 2, 2019, finding it dispositive. The entirety of the court's analysis was as follows.

On appeal, the parties briefed many legal issues arising from the Byzantine exclusion language. But we can resolve this case on a single issue: the meaning of "as reported." We disagree with the district court's opinion; Illinois National's proposed interpretation is correct. The phrase has no discernable temporal limitations. Once Emmis or one of its agents reports a claim to Chubb, at any time, then that claim is "reported"—and so is excluded. The timing of the report is irrelevant. Emmis acknowledged in its brief that it did in fact report its claim to Chubb. That resolves our inquiry.

Following the decision, Emmis moved for a rehearing, arguing that the court failed to consider applicable rules of policy interpretation in construing the exclusion broadly as it did. Emmis's motion was supported by amicus curiae representing policyholders and insurance brokers, who argued that the court's decision upends how brokers and policyholders provide notice to insurers under claims-made-and-reported policies. They explained that brokers typically provide notice to all insurers who might be responsible for a claim in order to preserve coverage for the claim. Under the court's decision, however, brokers and policyholders would be placed in the untenable position of having to analyze coverage under multiple policies and choose the correct policy that responds to the claim at the risk of forfeiting coverage if they select the wrong policy. Moreover, the decision would often have to be made very quickly—sometimes in a matter of days if a claim is asserted near the end of a policy period—to comply with the notice and reporting requirements of the policy. They also argued that the court's decision opened the door for extensive liability for brokers if they happen to report a claim to the wrong insurer.

Illinois National argued that the court's decision correctly construed the language of the Specific Events Exclusion. In particular, Illinois National argued that, unlike the standard wording in a prior notice exclusion—which uses the past-tense "has been reported" and "has been given"—the phrase "as reported" in the manuscript endorsement was a "prepositional phrase," which "describes the form in which event[s] are reported, at any time during the past, present, or future." In so arguing, Illinois National conceded that the typical prior notice language "unambiguously refers to events that were reported in the past."

On August 21, 2019, the Seventh Circuit issued a two-paragraph decision in which it vacated its prior decision and affirmed the district court's decision for the reasons stated by the district court. The Seventh Circuit's swift summary reversal of its initial decision suggests that the court had not considered the impact that the decision would have on the way policyholders and brokers report claims to their insurers.

Lessons Learned

It surely was not the insurer's intent when drafting the "specific event exclusion" to set a procedural trap for its insured by vitiating coverage for new claims if they were reported to multiple insurers. It seems more likely that the insurer was simply trying to exclude claims related to the 2010 Shareholder Suits and the 2011 Alden Suit, which were covered under the Chubb policy. Using the word "as" rather than the typical prior notice exclusion wording of "have been," however, opened the door for Illinois National to argue that there was no coverage under its policy for a claim that properly should have been covered. While the Seventh Circuit eventually reached the correct result, this case should serve as a sharp reminder that policy language should be examined carefully—particularly manuscript policy language that deviates from the words typically used in insurance policies—as the failure to do so could have unintended consequences.

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1 For a good discussion of "the" versus "an" in the context of the employers liability exclusion of the standard CGL policy, see "Employers Liability Exclusion in the CGL Policy" by Craig Stanovich,