Tribune Shareholder Suit Against Chicago Insurance Broker OK’d to Proceed

Finding an exclusion in a directors and officers (D&O) policy to be “ambiguous,” an Illinois appeals court has allowed to go forward a lawsuit filed against a large Chicago insurance brokerage by two former Tribune Co. shareholders.

The case stems from the failed leveraged buyout (LBO) of the Tribune Co. in 2007 that led to the media company filing for bankruptcy at the end of 2008.

In late 2011, two of the Tribune’s largest former shareholders, the Robert R. McCormick Foundation and the associated Cantigny Foundation, were hit with several creditor lawsuits as a result of the bankruptcy. Those suits alleged that as “controlling shareholders” the McCormick and Cantigny foundations had breached their fiduciary duty by allowing the disastrous LBO. The foundations deny they were “controlling shareholders” and none of the LBO complaints accused them of having violated any federal or state securities laws.

Mounting a defense against the various suits, the foundations discovered a lack of defense coverage in their D&O policy placed by their former insurance broker, Arthur J. Gallagher Risk Management Services Inc.

The foundations filed a complaint against Gallagher, alleging the insurance broker had wrongly advised them to switch insurers, which resulted in a loss of coverage under their policy.

The Illinois Second District Appellate Court took up the case on appeal from the DuPage County Circuit Court, which had dismissed the complaint against Gallagher.

In the appellate court’s opinion, Justice Susan Hutchinson wrote:

“In 2008, several years before the LBO lawsuits were filed, the Foundations purchased through Gallagher a $15 million D&O policy issued by Chubb Insurance and a $10 million excess policy issued by a separate company. (For convenience we refer to it as a single $25 million Chubb D&O policy.) In 2010 Gallagher advised the Foundations that instead of renewing the Chubb policy they could obtain identical ‘apples-to-apples’ D&O coverage at a reduced premium with a $25 million policy from Chartis Insurance.”

The foundations followed Gallagher’s advice and purchased the insurance from Chartis.

When the LBO suits were later filed against the foundations, the organizations sought defense coverage from Chartis but the insurer refused, relying on a securities-related exclusion in the D&O policy.

The foundations began paying their own defense and sued Gallagher, saying they would have been covered for defense and indemnification under the Chubb policy. They also maintained they would have continued the coverage with Chubb had it not been for the erroneous advice they received from Gallagher.

Gallagher countered that coverage would also have been precluded due to a section 5(k) exclusion in the Chubb policy. The DuPage County Circuit Court agreed, determining that the Chubb exclusion would have prevented coverage under the D&O policy and ruling in favor of Gallagher.

On appeal, the appellate court considered “the limited question of whether the exclusion in section 5(k) of the Chubb policy would have precluded coverage of the Foundations’ defense costs for the underlying LBO suits,” Hutchinson wrote.

The court examined the language in the applicable exclusions in both the Chartis and Chubb policies and found that the Chartis policy clearly excluded coverage, as it “excludes any claim ‘in any way relating to any purchase or sale of securities.'” The justices found the Chubb policy language to be ambiguous, however. Because of that ambiguity, the appeals court ruled in favor of the insured in the case against Gallagher.

Finding that the first three clauses in the Chubb exclusion’s definition of “Securities Laws” concerned violations of securities laws related to illegal actions such as stock manipulation or insider trading in the sale or purchase of stocks, actions of which the foundations were not accused, the court focused on the fourth and final clause under the exclusion in section 5(k).

That clause adds to the definition: “any other provision of statutory or common law used to impose liability in connection with the offer to sell or purchase, or the sale or purchase, of securities.”

Gallagher and the foundations each offered different interpretations of that clause.

Gallagher contended that “the exclusion bars coverage for any litigation—based on any ‘statutory or common law used to impose liability’ — in any way arising ‘in connection with’ a stock sale,” Hutchinson wrote.

The foundations interpreted the clause more narrowly, asserting that the phrase “any other provision” alludes to any provision similar to the federal and state regulations mentioned in the first three clauses.

Without acknowledging another reasonable interpretation of the final clause, the foundations asserted that if an ambiguity does exist in “the definition it should be construed in their favor.”

The appellate court agreed and remanded the case to the trial court.

The “Foundations are right; the narrow interpretation of the clause is the one that controls,” Hutchinson wrote.

The case is Robert R. McCormick Foundation and Cantigny Foundation v. Arthur J. Gallagher Risk Management Services, Inc.

Topics Lawsuits Agencies A.J. Gallagher Oklahoma Chubb