Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-90-03057/USCOURTS-ca10-90-03057-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

RICHARD BENDIS, ROBERT H. MANN, 

JR., JOHN PAPPAJOHN and 

W. TERRENCE SCHREIER, 

FILED 

United States Court of Appeals 

T,r:,rth .+·rnit 

2 0 1991 

ROBERT L. HOECKER 

Clerk 

Plaintiffs-Appellants, 

v. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

No. 90-3057 

(D.C. No. 89-2035-S) 

( D. Kan.) 

FEDERAL INSURANCE COMPANY, 

Defendant-Appellee. 

ORDER AND JUDGMENT* 

Before LOGAN, SETH and TACHA, Circuit Judges. 

This appeal involves a declaratory judgment to determine the 

extent of coverage under a director and officer liability 

insurance policy. The trial court treated a motion to dismiss as 

a motion for summary judgment. Two questions are presented. 

First, whether the appellants made a claim against the appellee, 

Federal Insurance Company (Federal), during the policy period. 

Second, assuming a claim was validly made, whether the claim is 

barred under a specific policy exclusion. The trial court focused 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppal. 10th Cir. R. 36.3. 

Appellate Case: 90-3057 Document: 010110128159 Date Filed: 06/20/1991 Page: 1 
on the latter question and granted summary judgment in favor of 

Federal. We agree with the decision of the trial court and also 

affirm the judgment for the reason that appellants failed to make 

a "claim" during the relevant policy period. 

Appellants Richard Bendis, Robert H. Mann, Jr., John 

Pappajohn and Terrence Schreier are former officers and directors 

of the Continental Healthcare Systems, Inc. (CHSI), a company 

providing computer software to hospitals. Appellee, Federal 

Insurance Company, issued a "claims made" policy covering 

executive liability and indemnification to the officers and 

directors of CHSI. The policy states, "THIS IS A CLAIMS MADE 

POLICY. Except as otherwise provided herein, this policy covers 

only claims first made against the Insured during the Policy 

Period." (Emphasis in original.) The policy was effective 

between May 1, 1986 and May 1, 1987. 

On June 10, 1986, CHSI merged with TBG, Inc. This merger 

resulted in two lawsuits, one of which is relevant to the present 

appeal. On June 9, 1988, TBG filed an eleven-count suit against 

appellants, their accounting firm Ernst & Whinney, and their law 

firm Shook, Hardy & Bacon. TBG contends that appellants provided 

fraudulent and misleading information regarding the financial 

status of CHSI. Two of the eleven counts against appellants 

(counts X and XI) allege common law fraud and misrepresentation. 

The TBG lawsuit is relevant to the present suit because 

appellants want Federal to cover potential losses stemming from 

counts X and XI. Appellants concede that the first nine counts 

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Appellate Case: 90-3057 Document: 010110128159 Date Filed: 06/20/1991 Page: 2 
involve actual or alleged violations of securities laws and thus 

are excluded under exclusion (h). Exclusion (h) states: 

"The Company shall not be liable under this 

policy to make any payment for Loss in 

connection with any claim(s) made against any 

Insured Person(s): 

"(h) where all or part of such claim is, 

directly or indirectly, based on, attributable 

to, arising out of, resulting from or in any 

manner related to any actual or alleged 

violation of the Securities Act of 1933, the 

Securities Exchange Act of 1934, the 

Investment Company Act of 1940, the Public 

Utility Holding Act of 1935, any state Blue 

Sky or securities law, all as they may be 

amended, or any other law relating to 

securities transactions, or any of their 

amendments." 

Appellants argue, however, that counts X and XI do not arise out 

of securities law violations. The district court disagreed and 

concluded that exclusion (h) covered all eleven counts raised in 

the TBG suit. 

We review the district court's summary judgment ruling de 

novo taking all the evidence and any possible inferences from the 

evidence in the light most favorable to the party opposing the 

motion. Laidley v. McClain, 914 F.2d 1386, 1390 (10th Cir.). 

Summary judgment is appropriate when "there is no genuine issue as 

to any material fact and ..• the moving party is entitled to 

judgment as a matter of law." Fed. R. Civ. P. 56(c). 

The terms of Federal's insurance policy are construed 

applying the law of the state in which the policy was written, in 

this case Kansas. Under Kansas law, the intent of the parties is 

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determined from the instrument as a whole and the circumstances of 

the parties. Kansas State Bank & Trust v. Emery Air Freight, 656 

F. Supp. 200, 202 (D. Kan.) (citing American Media, Inc. v. Home 

Indemnity Co., 658 P.2d 1015 (Kan.)). When terms are ambiguous or 

uncertain, the construction favoring the insured should prevail. 

Id. A policy is ambiguous when it "contain[s] language of 

doubtful and conflicting meaning as determined from a natural and 

reasonable reading." Kansas State Bank, 656 F. Supp. at 202 

(citing Dronge v. Monarch Ins. Co. of Ohio, 511 F. Supp. 1, 4 

(D. Kan.)). Exclusions and limitations in a policy are narrowly 

construed. Id. 

Before addressing the applicability of the exclusions in 

Federal's policy, a threshold issue exists as to whether 

appellants introduced sufficient evidence to establish that a 

claim was made within the relevant policy period. Neither party 

disputes the fact that the TBG lawsuit was filed on June 9, 1988, 

more than a year after the policy's coverage ended on May 1, 1987. 

The dispute centers on whether appellants made a claim prior to 

May 1, 1987. 

Appellants' argument that such a claim was made rests 

exclusively on the affidavit of Thomas w. Van Dyke. The relevant 

portions of the affidavit state as follows: 

"3. Following the acquisition of CHSI by 

TBG, Inc. in the late summer and fall of, 

1986, I represented Schreier in negotiations 

with TBG, Inc. and its attorney concerning the 

termination of Schreier's employment by TBG, 

Inc. 

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Appellate Case: 90-3057 Document: 010110128159 Date Filed: 06/20/1991 Page: 4 
"4. During said negotiations, in late 

1986, Richard Cutler, attorney for TBG, stated 

to me that TBG, Inc. believed it had a strong 

case against Schreier and Richard Bendis, 

former president of CHSI, and possibly others, 

including other directors, attorney and 

accountants, for fraud and/or negligent 

misrepresentation. Cutler further stated that 

TBG, Inc. was not going to pursue these claims 

against Schreier and Bendis alone since they 

did not believe either gentleman had 'a deep 

enough pocket'." 

(Doc. 17, Exhibit 3) (emphasis added). Appellants contend that 

because the Federal policy does not contain a definition of what 

constitutes a "claim", the term "claim" should be construed in 

light of what a reasonable person in the position of the insured 

would understand the term to mean. Appellants believe that such a 

reasonable person would define a claim as "an assertion", "a 

demand", "a challenge", or "a pretense" first made against the 

insured during this policy period. Appellants' Reply brief at 5, 

6 (quoting Home Life Ins. Co. v. Clay, 773 P.2d 666 (Kan. App.)). 

Appellants' argument must fail. The specific language of the 

Van Dyke affidavit states that in late 1986 TBG was not going to 

pursue claims it may have had against Schreier and Bendis because 

they did not have "a deep enough pocket". This language is 

identical to the language cited in Home Life by the Kansas Court 

of Appeals to uphold the trial court's finding that an insured did 

not have notice of a potential claim of liability. The relevant 

finding of the trial court quoted in Home Life stated: 

"13 .... At the second meeting in the 

bank with Bert Blackard, Tom Coughlin the 

attorney for Home Life Insurance Company told 

[Bert] Blackard that Home Life would not sue 

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Appellate Case: 90-3057 Document: 010110128159 Date Filed: 06/20/1991 Page: 5 
the bank because there was not enough money 

involved, and that Home Life wanted to avoid 

adverse publicity." 

Home Life, 773 P.2d at 676 (emphasis added). Although it was 

implied that the insurance company could have sued the bank, the 

Kansas court was unwilling to assume the bank had notice from Home 

Life's statement that it would not sue. 

Similarly, in the present case Bendis and Schreier were told 

that TBG was not going to sue them. Although one could imply from 

this statement that such a suit was possible, a reasonable person 

would not assume from this negative statement that a claim was 

being made. Therefore, we find that Van Dyke's affidavit by 

itself does not establish that a claim was made during the policy 

period. See also Winkler v. National Union Fire Insurance Company 

of Pittsburgh, 930 F.2d 1364, 1367 (9th Cir.) (threat of legal 

action is a potential claim not an actual claim made); MGIC Indem. 

Corp. v. Home State Sav. Ass'n, 797 F.2d 285, 288 (6th Cir.) (the 

potential for demands cannot be equated with claims being made). 

Moreover, even assuming appellants satisfied the threshold 

issue of whether a claim was made, appellants' argument that 

policy exclusion (h) does not apply to counts X and XI is 

incorrect. After thoroughly reviewing the record, we agree with 

the finding of the district court that the common law tort claims 

forming the basis of counts X and XI rely on the same factual 

allegations that form the basis of the securities violations 

alleged in the other counts. 

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. . 

Accordingly, the judgment of the United States District Court 

for the District of Kansas is AFFIRMED. 

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Entered for the Court 

Oliver Seth 

Circuit Judge 

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