Insurance Exclusion Applies to Liquidator, Nebraska Court Rules

March 24, 2009

A regulatory exclusion in a directors and officers liability insurance policy applies to an insurance regulator acting as liquidator, according to the Nebraska Supreme Court.

The ruling is believed to be the first by any state Supreme Court upholding a regulatory exclusion as applied to insurance regulators.

In the case, L. Tim Wagner, the former director of the Nebraska Department of Insurance, who died in 2007, had asked the court to invalidate a regulatory exclusion contained in a $5 million directors and officers liability insurance policy that United National Insurance Co. had issued to Amwest Surety Insurance Co., an insolvent insurer for which Wagner was liquidator.

Wagner had argued that the exclusion, which precluded coverage under the policy for a lawsuit he had brought against Amwest’s former directors and officers, did not apply to him when he was acting in the capacity as liquidator and that the exclusion was void as against public policy.

The Nebraska Supreme Court affirmed a Lancaster County District Court’s ruling that found that the exclusion applied to the liquidator and that it was consistent with public policy.

Amwest purchased a D&O insurance policy from National Union Fire Insurance Co. on Sept. 30, 1999. Amwest also purchased D&O policies from United National and GAINSCO. The United National policy was in excess to the National Union policy, and the GAINSCO policy was in excess to both policies. Each supplemental policy carried a limit of $5 million.

In his suit against the directors and officers of Amwest, the liquidator alleged that Amwest became insolvent through the wrongful conduct and breach of multiple fiduciary duties of its officers and directors. The liquidator requested that the district court invalidate the regulatory exclusions contained in both the United National and GAINSCO policies.

The United National regulatory exclusion provides:
This Policy does not apply to any Claims brought by or on behalf of, any insurance regulatory agency or supervisory authority including but not limited to any state or local insurance department or Commission, or any state or local Insurance Guaranty or Insolvency Fund (any of the foregoing organizations hereafter referred to as an “Agency”), including any type of legal or equitable action which such Agency has the legal right to bring as receiver, conservator, liquidator or assignee of the insured, its security/ unit holders or its creditors, or otherwise; whether such action or proceeding is brought in the name of such Agency or by or on behalf of such Agency in the name of any other entity(ies) or solely in the name of any third entity(ies).

The liquidator argued that the position of liquidator could not be considered as an “‘agency, authority, department, fund, or organization'” under the regulatory exclusion.

United National argued that because the Director of Insurance is the liquidator, the liquidator is a “‘supervisory authority'” under the regulatory exclusion.

The liquidator claimed that the role of liquidator is legally separate from the role of Director of Insurance and that the liquidator is an officer of the court and is under the authority of the court. For that reason, the liquidator claimed he cannot be considered as either an “‘agency'” or an “‘authority.'”

The district court was not persuaded by Wagner’s argument and found that the regulatory exclusion applied to the liquidator and was not void as against public policy. It granted summary judgment to United National and GAINSCO.

The case was appealed to Nebraska’s high court.

Michael P. Comiskey and Hugh S. Balsam, partners based in the Chicago office of Locke Lord Bissell & Liddell, successfully represented Pennsylvania-based United National Insurance in the case.

“This case is significant for United National and the insurance industry, both for its precedential value and because it was an all-or-nothing decision about whether the Insurance Director was entitled to the $5 million policy limits,” said Comiskey, who handled the case in the trial court. Balsam wrote the appellate brief and argued the case before the Nebraska Supreme Court.

Topics Legislation Directors Officers Nebraska

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