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.