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Former directors and officers of a bankrupt real estate investment trust firm prevailed Monday in directors and officers’ litigation against a Chubb Ltd. unit over the issue of application of the insured vs. insured exclusion.
The former directors and officers of New York-based RCAP Holdings LLC won a partial summary judgment against Chubb Ltd. unit Westchester Fire Insurance Co., over an excess policy issued by the insurer, according to the ruling by the New York Supreme Court in New York in Westchester Fire Insurance Co. v. Nicholas Schorsch et al.
Westchester Fire had issued an excess, follow-form RCAP D&O policy, the seventh level of a tower of policies over the primary policy, that provided $5 million in coverage excess of $35 million in coverage provided by the lower level policies, subject to applicable retention limits, according to the ruling. The primary policy covered RCAP as well as individual directors and officers, according to the ruling.
RCAP filed for bankruptcy in March 2016 and under a restructuring support agreement, a creditor trust was established to gather and distribute creditor assets, according to the ruling.
In March 2017, the creditor trust filed suit in Delaware Chancery court against parties including the defendants Mr. Schorsch, Edward M. Weil, Jr., William Kahane and Peter M. Budoko plus former chief financial officer and director Brian S. Block, according to the ruling.
The litigation charged the defendants with breach of fiduciary duty to RCAP for the benefit of a different company in which the individual defendants and Mr. Block had ownership interests, according to the ruling.
In November 2017, Mr. Block was found guilty of securities fraud, conspiracy to commit securities fraud, filing false statements in Securities and Exchange Commission filings and false certification of SEC filings.
Meanwhile, settlement of a separate action exhausted $31 million in coverage under the primary policy and the first five levels of excess coverage, and Westchester asserted exhaustion of its coverage was “imminent,” according to the ruling.
In March 2018, Westchester denied coverage on grounds including an exclusion for insured vs. insureds claims, and filed suit against the former directors and officers.
The insurer contended in litigation that was joined by another excess insurer, Atlanta-based RSUI Indemnity Co. Inc., that the exclusion precluded coverage because it prevents a company from recovering business losses caused by its own officers and directors. The individual defendants disagreed, and the court ruled in their favor on the issue.
The insured vs. insured exclusion “is intended to prevent a company from recovering business losses that it was in a position to avoid by more carefully supervising its own officers and directors,” said the ruling.
“The exclusion has exceptions for a bankruptcy trustee or a similar authority, since the funds recovered will be used for the benefit of creditors, rather than the company, and are subject to supervision by the bankruptcy court or a regulator authority,”’ the ruling said.
“However, the Primary Policy uses the phrase ‘comparable authority’ which phrase is not defined. The phrase is ambiguous and therefore must be constructed against the insurer, particularly since it is being invoked to exclude coverage,” said the ruling, in refusing the insurers’ motion to dismiss the individual defendants’ counterclaim for breach of contract.
The court ordered that Westchester and RSUI Indemnity, respectively, are obligated to pay for all defense and indemnity costs incurred in the pending Delaware Chancery Court action up to the limits of their policies.
RSUI is the 9th excess layer, providing $5 million in coverage according to a plaintiff attorney in the case, Natasha Romagnoli, a principal with McKool Smith P.C. in New York.
Commenting on the ruling, Ms. Romagnoli said, the ruling is significant “in light of the fact that there are a lot of coverage cases right now that are dealing with the various permutations of different types of committees established in the bankruptcy process, that this decision makes clear that coverage is to be interpreted broadly for the insured.”
Other attorneys in the case could not be reached for comment.
The 2nd U.S. Circuit Court of Appeals in New York has overturned a lower court ruling in favor of a Chubb Ltd. unit in a case in which a chocolate company was denied coverage for damage caused by Hurricane Sandy’s storm surges.