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A federal appeals court overturned a lower court’s ruling in favor of an Allied World Assurance Co. unit Tuesday in a directors and officers lawsuit, stating the policy was ambiguous.
Seth Burgett, who founded St. Louis-based Verto Medical Solutions LLC, a headphone manufacturer, sold the company to Stanford, Connecticut-based Harman International Industries Inc., according to the ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Verto Medical Solutions, LLC v. Allied World Specialty Insurance Co.
To gain Verto’s investors’ approval, Mr. Burgett agreed to reallocate a portion of the payments made in connection with the deal to them.
A dispute developed between Harman and Verto, which was resolved with a settlement agreement that required a $3.5 million one-time payment to Verto.
After Mr. Burgett kept a large portion of the settlement money for himself, investors sued him in Iowa state court on charges including fraud.
Verto’s D&O insurer, Allied World Assurance unit Allied World Specialty, refused to defend or indemnify Verto in this litigation, and defending the lawsuit without Allied’s help led to more than $600,000 in attorney fees and expenses, the ruling said.
Verto and Mr. Burgett filed a coverage suit against Allied. The U.S. District Court in St. Louis ruled in Allied World’s favor, but was overturned by a unanimous three-judge appeals court panel.
At issue in the case are policy endorsements. Allied’s position was that one of the endorsements unambiguously excluded coverage, while Verto and Mr. Burgett contended this was ambiguous.
“If the insurance policy seems unclear, it is,” the ruling by the unanimous three-judge appeals court panel said, stating the policy is open to at least two reasonable constructions.
“Missouri law tells us what to do next,” the ruling said. “When an ambiguity exists, we must construe it against the insurer, the policy’s drafter, even if extrinsic evidence of the parties’ intent is available,” it said, in reversing the lower court, and remanding the case for further proceedings.
Verto attorney Morry S. Cole, with Gray Ritter & Graham PC in St. Louis, said in a statement, “Insurance contracts are largely contracts of adhesion. Insurance companies and their attorneys write policies and name the premium. Insureds take it or leave it.
“When an ambiguity exists in a policy Missouri law is clear: ambiguities are construed against the insurer and in favor of coverage. The Eighth Circuit correctly applied Missouri law in this case.”
Allied World’s attorneys did not respond to a request for comment.
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