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Court rules against Gallagher over discovery effort in malpractice case


The Illinois Supreme Court on Thursday ruled against an Arthur J. Gallagher & Co. unit in the latest round of the brokerage’s legal fight with charitable foundations that allege Gallagher was negligent in a directors and officers liability placement.

Overturning an appeals court ruling, the state high court ruled that Gallagher is not entitled to access communications between the foundations and their attorneys relating to their investments in a company that later filed for bankruptcy protection, which resulted in a D&O claim that was denied.

The case, Robert R. McCormick Foundation et al. v. Arthur J. Gallagher Risk Management Services Inc., dates to the 2010 renewal of the Robert R. McCormick Foundation and the Cantigny Foundation’s D&O program. The brokerage offered the foundations the choice of renewing a $25 million policy with Federal Insurance Co., a unit of Chubb Ltd., or moving the program to Chartis Insurance Co., a unit of American International Group Inc., for a $3,400 reduction in premium, the ruling states.

Gallagher assured the foundations that the coverage would be the same, and it recommended moving to AIG, the ruling states.

“Unbeknownst to the foundations, the Chartis policy actually contained a broad exclusion of claims that in any way related to the purchase or sale of securities. By contrast, the expiring Chubb policy contained a narrower securities exclusion,” court documents say.

The foundations were significant investors in the Tribune Co., a media conglomerate that owned TV stations and newspapers, including the Chicago Tribune and the Los Angeles Times. In 2007, the foundations sold $2 billion in stock in the Tribune during a leveraged buyout of the company, and about a year later the Tribune filed for bankruptcy protection, court papers say.

In 2011, the foundations were named as defendants in shareholder suits that alleged the foundations helped orchestrate a fraudulent LBO.

The foundations sought coverage for defense costs under the AIG policy, but the insurer said the policy excluded claims related to securities purchases, court paper say.

The foundations allege that the so-far-successful defense of the shareholder litigation has been expensive, is likely to continue for years and that the costs would have been covered under their prior policy with Chubb, court papers say. They sued Gallagher for breach of contract and professional negligence.

Gallagher argued that the Chubb policy would have barred coverage, too, but an appeals court later ruled that the policy did not necessarily bar coverage. Gallagher also asserted, among other things, that the foundations’ conduct in the LBO transaction was fraudulent and therefore uninsurable and that the foundations knew of the loss before changing insurers in 2010.

To prove the allegations, Gallagher sought all communications between the foundations and their attorneys regarding the LBO. The foundations refused, citing attorney-client privilege, but a trial court agreed with Gallagher that under Illinois legal precedent in the so-called Waste Management ruling in 1991, it should have access to the communications because it was standing in the insurer’s shoes for the purpose of the malpractice allegation and its interests were aligned with the foundations in defeating or settling the underlying litigation, court papers say. An appeals court largely agreed.

The state Supreme Court disagreed. Among other things, the ruling states, “no Illinois case has expanded the common-interest exception beyond the context of the insurer-insured relationship.”

In addition, “It seems to us that Gallagher’s and the foundations’ interests were always adverse, and there was not a commonality of interest in the same way that is the case when an insurer has a duty to indemnify and defend from the beginning,” the court ruled.

The high court reversed the portion of the appeal’s court judgement that compelled discovery and remanded the case for further proceedings.

Gallagher declined to comment on the ruling.



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