It is rare for the federal courts of appeals to grant petitions for rehearing. See Hon. R. Arnold, “Why Judges Don’t Like Petitions for Rehearing,” 3 J. App. Prac. & Proc. 29 (2001). Current statistics are a bit hard to find, but the Fourth Circuit Court of Appeals notes that it grants only 1.1% of all requests for panel rehearing. http://www.ca4.uscourts.gov/faqs/faqs---statistics. The Federal Circuit informs us that it grants few petitions for rehearing each year “because they typically fail to articulate sufficient grounds upon which to grant them.” http://www.cafc.uscourts.gov/sites/default/files/cmecf/Petitions_ Rehearing_En_Banc_-_Information_Sheet.pdf. The Tenth Circuit has probably taken the harshest stance, warning litigants that “A petition for rehearing should not be filed routinely. Rehearing will be granted only if a significant issue has been overlooked or misconstrued by the court.” 10th Cir. R. 40.1(A). Moreover, “If a petition for rehearing is found to be frivolous, vexatious, or filed for delay, the court may impose a money penalty of up to $500. Counsel may be required to pay the penalty personally to the opposing party.” 10th Cir. R. 40.1(B). Consequently, it is noteworthy when a federal appeals court grants a petition for rehearing.
Such has now happened in the Seventh Circuit case Emmis Commc’ns Corp. v. Ill. Nat’l Ins. Co., initially reported at 929 F.3d 441 (7th Cir. 2019). Emmis had “claims made” coverage, first with Chubb Insurance Company in 2009-2010 and then with Illinois National in 2011-2012. “Claims made” insurance covers “claims” that are first made against the insured during the policy period. Emmis got sued in 2012 but wasn’t sure whether the “claim” had first been made during the Illinois National policy period or related back to prior lawsuits filed in 2010, during the Chubb policy period. To be safe, Emmis notified both insurers. This prudent course of action appeared to backfire horribly when on July 2, 2019, the Seventh Circuit reversed the district court’s summary judgment ruling in favor of Emmis and held that Illinois National had correctly denied coverage for the claim. The Illinois National policy contained an exclusion that excluded coverage for losses in connection with “all notices of claim or circumstances as reported” under a previous policy. The Seventh Circuit held that “as reported” was unambiguous and did not contain any temporal limitation, meaning that the exclusion applied even though the claim had not been “reported” to Chubb prior to the inception of the Illinois National policy. At the time, some commentators observed that the decision put insureds that aren’t sure if or when claims have been made in the difficult situation of having to choose which insurer to notify, with potentially fatal consequences to coverage if they pick incorrectly.
Undaunted, or perhaps feeling that it had nothing more to lose, Emmis filed a petition for rehearing, asking that the panel either revisit its decision or else refer the matter to the Seventh Circuit en banc. Surprisingly, on August 21, 2019, the Seventh Circuit granted the petition, reversed itself, held that Emmis in fact was insured for the 2012 claim, and adopted the district court’s summary judgment ruling. See Emmis Commc’ns Corp. v. Ill. Nat’l Ins. Co., ___ F.3d ___, 2019 U.S. App. LEXIS 24930, 2019 WL 3945939 (7th Cir. Aug. 21, 2019) (adopting district court ruling reported at 323 F. Supp. 3d 1012 (S.D. Ind. 2019)).
The Seventh Circuit doesn’t say why it granted the petition for rehearing, so we can only guess. In any event, the district court’s decision, which is now Seventh Circuit law, contains a few holdings worth discussing.
First, of course, is the court’s ruling that the “as reported” exclusion did not bar coverage. The court found that the exclusion was ambiguous, in that it could reasonably be read to mean reported at any time (as argued by Illinois National), but equally could be read to mean reported prior to the inception of the Illinois National policy (as argued by Ennis). 323 F. Supp. 3d at 1023. The court noted that the phrase is written in the past tense and “thus should be read as referring to events that had already occurred at the time of drafting.” Id. The resulting ambiguity had to be read against the drafter, Illinois National, under the doctrine of contra proferentum. Id. at 1023-24. Accordingly, the exclusion did not apply because the claim had not been reported to Chubb prior to the effective date of the Illinois National policy. Id.
The court next discussed two other exclusions in the Illinois National policy. The Seventh Circuit did not address these exclusions in its first opinion, because it found the “as reported” exclusion to be dispositive. One exclusion barred coverage for any Loss in connection with “any Claim(s) arising from the Event(s),” and the other barred coverage for any Loss in connection with “any Claim alleging, arising out of, based upon, attributable to or in any way directly or indirectly, in part or in whole, to an Interrelated Wrongful Act.” Id. at 1025-26.
Briefly, the 2010 lawsuits had been filed on behalf of shareholders who opposed an attempt by Emmis’ CEO and largest shareholder to take the company private. Id. at 1017. Emmis lost funding for the attempt to take the company private, which therefore failed. Id. The shareholder lawsuits then were dismissed. Id. The 2012 lawsuit was filed by five holders of preferred shares of Emmis’ stock. The plaintiffs alleged that Emmis and its officers and directors had violated federal and state securities laws in another attempt to take the company private and eliminate the value of the preferred stock. Id. at 1020-21. The complaint in the 2012 lawsuit referred to the 2010 lawsuits and Emmis’ prior attempt to go private, and alleged that Emmis’ CEO had hatched the new scheme in part to retaliate against the shareholders who had opposed the first attempt. Id. Emmis and its directors and officers prevailed in the 2012 lawsuit and sought their defense costs from Illinois National.
The Illinois National policy defined “Event” in part as the 2010 shareholder lawsuits and “Interrelated Wrongful Act” in part as “the same or related facts, circumstances, transactions or events alleged in any of the Event(s).” Illinois National argued that these definitions meant: (1) the 2012 lawsuit arose out of the 2010 lawsuits; and (2) the 2012 lawsuit alleged excluded “Interrelated Wrongful Acts.”
The court rejected both arguments. Under Indiana law, “arising out of” as used in insurance policies means the “efficient and predominating” cause. Id. at 1025. The court found that the 2010 lawsuits did not “cause” the 2012 lawsuit. “The fact that the complaints in the cases included some of the same factual allegations is simply irrelevant to the inquiry of whether the earlier cases were a cause of the [2012] Action.” Id. (emphasis in original).
The court also found that the 2012 lawsuit did not alleged “Interrelated Wrongful Acts” contained in the 2010 lawsuits. The court found that reading “the same or … related facts” literally, as urged by Illinois National, would lead to the absurd result that virtually any lawsuit filed against Emmis would be excluded, because all such lawsuits would allege the “same facts” that Emmis is an Indiana corporation with its principal place of business in that state. Id. at 1026. In order to avoid such an absurd result, the exclusion for “Interrelated Wrongful Acts” had to be read to exclude “only those claims that share operative facts with” prior claims – i.e., facts that form the basis for both claims’ causes of action. Id. at 1027 (emphasis in original). Facts taken from a prior lawsuit or claim that are included in a pleading to provide background, context, or “window dressing” do not make the two claims interrelated for purposes of the exclusion. Id. The court found that the operative facts in the 2012 lawsuit were those that the plaintiffs’ alleged constituted securities law violations, not the references to the 2010 lawsuits. Id. Similarly, the motive of Emmis’ CEO in attempting to take the company private in 2012 was irrelevant to liability under the securities laws. Id.
Regarding the court’s analysis of the “arising out of” exclusion, it must be noted that Indiana’s interpretation of that phrase appears to be different from that of many other courts. In other states, courts have interpreted “arising out of” as used in insurance policies to mean “but for” causation.” See, e.g., State Auto. Mut. Ins. Co. v. Kingsport Dev., LLC, 846 N.E.2d 974, 981 (Ill. App. Ct. 2006). Had the Emmis court been required to use this interpretation rather than the “efficient and predominating” cause standard under Indiana law, it might have been a closer question whether the 2010 lawsuits “caused” the 2012 lawsuit. (Note, though, that courts have interpreted “arising out of” broadly because they have determined the phrase to be vague and ambiguous and thus must be construed in favor of the insured. Id. at 981. Where, as in Emmis, the phrase is found in an exclusion, the doctrine of contra proferentum requires it to be interpreted more narrowly. See, e.g., Toler v. Country Mut. Ins. Co., 462 N.E.2d 909, 915 (Ill. App. Ct. 1984).)
The court’s discussion of “Interrelated Wrongful Acts” is important because the definition, and therefore the exclusion, facially are all encompassing. Disputes about whether multiple claims allege or involve “interrelated” conduct have vexed insurers and insureds for as long as there have been claims made policies, and the courts have not been consistent in their rulings. As a result, the existence of coverage can end up depending on which state’s law applies to the dispute. The Emmis court’s decision to limit the concept of interrelatedness to “operative facts” seems to be a sensible one and could provide some much needed guidance in this area now that a federal appeals court has adopted the decision.
A last cautionary word, though. “Interrelated Wrongful Acts” is a double-edged sword. In some cases, it is in the insured’s interest to have multiple claims grouped together into a single claim, for example for purposes of applying a single retention or in order to trigger coverage under the earliest policy. At other times, as in Emmis, the insurer will benefit from aggregating claims. There is no global solution here. Rather, it behooves insureds to carefully study their policies, know what law is likely to apply to them, and seek to negotiate the terms and definitions that they believe will best suit their needs.
