Arizona Court Holds Insured Person Exclusions Applicable to Consolidated Securities Claims

In its recent decision in Amerco v. Nat’l Union Fire Ins. Co., 2014 U.S. Dist. LEXIS 69066 (D. Ariz. May 20, 2014), the United States District Court for the District of Arizona had occasion to consider the application of insured persons exclusions to several underlying consolidated claims brought by both insured and non-insured plaintiffs.

National Union insured Amerco under a D&O policy containing two notable exclusions applicable to claims brought by insured persons. The first exclusion applied to:

… any Loss in connection with a Claim . . . by any security holder of the company, whether directly or derivatively, unless such security holder’s claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any Insured or the Company.

The second exclusion applied to:

…any Loss in connection with any Claims(s) . . . brought by any security holder of the Company, whether directly or derivatively, unless such Claim(s) is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any member of the Shoen family.

During the policy period, a member of the Shoen family, who also was a former director of Amerco, brought suit against Amerco’s directors and officers in Nevada state court for alleged securities violations. The suit was tendered to National Union, which denied coverage on the basis of the exclusions. Amerco did not contest National Union’s disclaimer of coverage.

Two later suits were filed in Nevada state court against Amerco’s directors and officers, neither of which was brought by an insured under the policy. The suits, however, were consolidated by the court under the original suit brought by the Shoen plaintiff. National Union thereafter denied coverage for the two additional suits on the basis that the consolidated suit was “being brought with the assistance of, active participation of and intervention of a member of the Schoen Family” and therefore fell within the scope of the two exclusions. Subsequent to National Union’s disclaimer yet another two suits were filed in the same court, and the various plaintiffs agreed to merge their claims into a single complaint, prompting National Union to disclaim coverage for the two additional claims on the same grounds.

In the ensuing declaratory judgment action, Amerco argued on motion for summary judgment that the consolidation of the four subsequently filed suits “for case management purposes” was not a sufficient ground on which to conclude that these suits were brought by insured persons for the purpose of the exclusions. In support of this argument, Amerco cited to the Seventh Circuit decisions in Level 3 Comm’ns, Inc. v. Fed. Ins. Co., 168 F.3d 956 (7th Cir. 1999), and Miller v. St. Paul Mercury Ins. Co., 683 F.3d 871 (7th Cir. 2012). The cases, argued Amerco, stood for the proposition that when a claim is brought by insureds and non-insureds, an insurer is required to allocate among the covered and non-covered claims rather than disclaim coverage in its entirety.

The court found the cases cited by Amerco to be distinguished as they did not contain an exclusion as specific as contained in the National Union policy applicable to any suits in which a Shoen family member assists or participates. Notable to the court in this regard was that the five underlying suits were eventually consolidated into a single complaint in which Schoen was an active participant. As the court explained, Shoen:

… was a plaintiff at the outset of the underlying case. Shoen’s case was the first filed. When the state court ordered the later filed cases to be consolidated with Shoen’s, Shoen took a leading role in litigating the action, and when the Nevada Supreme Court reversed the court’s order dismissing the case, the plaintiffs again filed a consolidated complaint. Under these circumstances the claims were not pursued independently of Shoen’s participation. Given the unambiguous language of Exclusion 4(i) and Endorsement 13, this is not the “odd result” that concerned the court in Level 3 but rather the outcome contemplated in the Policy.

Thus, the court held that allocation was not a proper outcome as was the case in Level 3 and Miller, but that National Union instead was entitled to disclaim coverage for each of the underlying suits.

Topics:  Case Consolidation, D&O Insurance, Declaratory Judgments, Policy Exclusions, Shareholder Litigation

Published In: Business Torts Updates, Civil Procedure Updates, General Business Updates, Insurance Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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