UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

NORTHERN DIVISION

GREAT AMERICAN INSURANCE COMPANY, 

Plaintiff,

Case Number 09-12488-BC

v. Honorable Thomas L. Ludington

GEOSTAR CORPORATION , TONY P. 

FERGUSON, THOM E. ROBINSON, JOHN 

W. PARROTT, S. DAVID PLUMMER, 

SPENCER D. PLUMMER, CLASSICSTAR 

FARMS, INC., CLASSICSTAR FARMS, 

LLC, FIRST SOURCE WYOMING, INC., 

GEOSTAR EQUINE ENERGY, INC., 

GEOSTAR FINANCIAL CORPORATION, 

GEOSTAR FINANCIAL SERVICES

CORPORATION, AND DOES 1–100,

Defendants,

and

AXIS REINSURANCE COMPANY, 

Plaintiff,

Case Number 09-12608-BC

v. Honorable Thomas L. Ludington

GEOSTAR CORPORATION , TONY P. 

FERGUSON, THOM E. ROBINSON, JOHN 

W. PARROTT, S. DAVID PLUMMER, 

SPENCER D. PLUMMER, CLASSICSTAR 

FARMS, INC., CLASSICSTAR FARMS, 

LLC, FIRST SOURCE WYOMING, INC., 

GEOSTAR EQUINE ENERGY, INC., 

GEOSTAR FINANCIAL CORPORATION, 

GEOSTAR FINANCIAL SERVICES

CORPORATION, AND DOES 1–100,

Defendants, 

and
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GEOSTAR CORPORATION, TONY P. 

FERGUSON, THOM E. ROBINSON, JOHN 

W. PARROTT, CLASSICSTAR FARMS, INC.,

FIRST SOURCE WYOMING, INC., GEOSTAR

FINANCIAL CORPORATION, AND GEOSTAR 

FINANCIAL SERVICES CORPORATION, 

Plaintiffs, 

Case Number 09-14306-BC

v. Honorable Thomas L. Ludington

AXIS REINSURANCE COMPANY, 

Defendant, 

v. 

S. DAVID PLUMMER AND SPENCER D.

PLUMMER, 

Movants.

______________________________________/

ORDER RESOLVING MOTIONS TO DISMISS, FOR SUMMARY JUDGMENT,

FOR DECLARATORY RELIEF, AND TO TAKE JUDICIAL NOTICE

Plaintiffs Axis Reinsurance Company and Great American Insurance Company each contend

that directors and officers (“D&O”) insurance policies they issued in 2004 do not cover claims

related to a “mare-lease program” and related investments administered by Defendants GeoStar

Corporation, Tony P. Ferguson, Thom E. Robinson, John W. Parrott, S. David Plummer, Spencer

D. Plummer, ClassicStar Farms, Inc., First Source Wyoming, Inc., GeoStar Equine Energy, Inc.,

GeoStar Financial Corporation, GeoStar Financial Services Corporation, and other unnamed persons

or entities (collectively “GeoStar” or “Defendants”). The primary D&O policy consisted of $5

million in coverage provided by Travelers Casualty and Surety Company of America (“Travelers”),
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the $5 million Axis Policy provided a second tier of excess coverage, and the $10 million Great

American Policy provided a third tier of excess coverage. In July of 2009, the $5 million Travelers

policy was exhausted by defense costs associated with defending claims arising from the mare-lease

program litigation. Axis and Great American then filed suit seeking declarations that their policies

do not cover those claims. The first case, Axis Reinsurance Co. v. GeoStar, includes two

consolidated cases—one originally filed in this district by Axis on July 2, 2009 (Case No. 09-

12608), and the other originally filed in the Eastern District of Kentucky by GeoStar on November

2, 2009 (Case No. 09-14306). The second case, Great American Insurance Co. v. GeoStar, was

originally filed in this Court by Great American on June 24, 2009 (Case No. 09-12488). 

The current motions raise questions concerning the pleading standard for rescission of

insurance contracts under Michigan law; whether exclusions in the Great American and Axis

policies for errors or omissions in rendering or failing to render professional services apply; whether

and to what extent this Court may take judicial notice of guilty pleas entered by certain defendants

in another jurisdiction; and whether GeoStar is entitled to a declaratory judgment, requiring Axis

to advance litigation costs pending resolution of this case. 

I

The facts underlying these cases are not particularly well developed, considering that

GeoStar has already exhausted a $5 million insurance policy defending the company, its

subsidiaries, and its principals in lawsuits arising out of the mare-lease litigation. Moreover,

because GeoStar has not answered the complaints in either of the cases filed by the insurance

companies, it is sometimes difficult to determine the facts that are in dispute and the facts that are

not. What follows is a brief outline of the pertinent facts as they can be understood from the
1

Now called NYSE Amex Equities. 

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pleadings and papers filed with the Court. 

GeoStar is a privately held company based at the time the mare-lease program was ongoing

in Mt. Pleasant, Michigan. It was incorporated in 1996 and had more than 100 shareholders and 125

employees in 2004 when the insurance policies were issued. Defendant Robinson was GeoStar’s

president, CEO, and principal shareholder. He was also a director. Defendants Ferguson and Parrott

were also officers and directors of GeoStar. Together, the three principals owned the majority of

GeoStar shares. GeoStar organized ClassicStar in about 2001, as a Kentucky-based limited liability

company, to operate a newly-acquired or newly-developed mare-lease business. Defendants David

and Spencer Plummer managed ClassicStar, and as such, were potentially covered by the D&O

policies. 

Before acquiring ClassicStar, GeoStar was primarily involved in the energy business.

Through a subsidiary called Gastar, GeoStar owned many undeveloped oil and gas properties in the

western United States and Canada. Although Gastar was traded on the American Stock Exchange,1

the majority of Gastar’s shares were held by GeoStar. GeoStar, through Gastar, owned the

undeveloped properties and mineral rights, but it did not have the liquidity it needed to develop the

properties. In 2000, the GeoStar principals became acquainted with the Plummers, who allegedly

suggested the mare-lease program as a vehicle to raise cash to advance the energy business. 

With the Plummers assistance, GeoStar organized ClassicStar and began leasing mares to

investors. Through the program, investors leased thoroughbred mares for one year, breeding the

mare and taking ownership of any living foal that resulted. The purported tax advantages associated

with the business made it popular with investors, raising as much as $600 million. Lease expenses,
2

The policies were renewed for an additional year in 2005, and by endorsement for another

year in 2006. Apparently, all the contested claims, if they are covered, would be covered by the

2004 policy. 

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including the lease fee paid to the mare owner, the breeding fee to the stallion owner, insurance

costs, and boarding costs, were deductible from ordinary income in the year they were accrued, even

though net income would not be realized until the foal was sold, often four or five years after the

majority of expenditures had been paid. Moreover, income from the sale of the foals was

characterized as a capital gain and taxed at a lower rate than ordinary income. 

Substantial problems with the mare lease program soon developed. First, GeoStar had fewer

mares than the program interests it sold. To remedy the problem, GeoStar attempted to persuade

investors to trade their mare-lease interests for energy interests or interests in other properties.

Second, much of the cash-flow from the mare-lease business was apparently diverted from the

equine program to the energy business, compounding problems caused by the oversold mare-lease

program. Third, in approximately 2003, the IRS began to audit mare-lease clients, disallowing the

tax deductions the program was intended to afford. As of this date, the program has spawned

criminal charges against the Plummers in the District of Oregon, and at least thirty civil suits filed

by program clients against GeoStar, its subsidiaries, and its officers, directors and employees. Many

of the civil suits have been consolidated in the Eastern District of Kentucky in MDL 1877. See In

re ClassicStar Mare Lease Litigation, MDL 1877, No. 5:07-cv-353 (E.D. Ky.).

The Travelers, Axis, and Great American D&O policies were issued in September 2004.2

The timing and degree to which the mare-lease program was oversold, and the extent to which

GeoStar and its principals knew about the problem remain contested matters. All three policies were

“wasting” policies, meaning payments from the policy, whether for defense costs, judgments, or
3

The mare-lease matters at issue in this case are West Hill Farms v. ClassicStar, LLC, No.

06-243-JMH (E.D. Ky. Feb. 2, 2009); Ginaldi v. ClassicStar, LLC, No. 5:08-cv-00109-JMH (E.D.

Ky. Apr. 18, 2008); Premiere Thoroughbreds, LLC v. ClassicStar, LLC, No. 5:07-cv-348 (E.D. Ky.

Nov. 16, 2009); Raifman v. ClassicStar, LLC, No. 3:07-cv-2552-MJJ (N.D. Cal. Feb. 2, 2009);

Baker v. Plummer, No. 08-cv-1215 (D. Colo. June 6, 2008); Lyon v. Ferguson, No. 5:09-215-JMH

(E.D. Ky. Aug. 7, 2009); United States v. S. David Plummer, No. CR-09-391-1 (HA) (D. Or. Oct.

26, 2009); United States v. Spencer D. Plummer, No. CR-09-391-2 (HA) (D. Or. Oct. 26, 2009);

J&L Canterbury Farms, LLC v. ClassicStar, LLC, No. 5:07-cv-349-JMH (E.D. Ky. Dec. 27, 2007);

Goyak v. ClassicStar Racing Stable, LLC, No. 1:07-cv-15260 (E.D. Mich. Dec. 10, 2007);

Bissmeyer Properties, LP v. ClassicStar, LLC, No. 5:07-cv-351-JMH (E.D. Ky. Dec. 21, 2007);

Spongberg v. GeoStar Corp., No. VC046736 (Super. Ct. Cal. May 22, 2007); Skinner v. ClassicStar,

LLC, No. 5:07-cv-419-JMH (E.D. Ky. May 30, 2008); Hamrick v. Ferguson, No. A581409 (Dist.

Ct. Nev. Jan. 30, 2009); Tillotson v. Plummer, No. 080412334 (3d Dist. Ct. Utah July 15, 2008);

Stanwyck Glenn Farms, LLC v. Wilmington Trust of Pennsylvania, No. 1:08-CV-05866-RMB-AMD

(D.N.J. Dec. 1, 2008); Fortenbaugh v. ClassicStar Financial Services, Inc., No. 5:07-cv-00353-JMH

(E.D. Ky. Jan. 30, 2009). There are also two matters that were apparently settled. GeoStar contends

that settlements in those matter may also be covered by the excess D&O policies. 

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settlements, are deducted from the policy limits and reduce the amount available to pay future

expenses. Travelers covered all costs associated with defending the disputed mare-lease claims

involved in this case. Travelers informed GeoStar on June 16, 2009 that only $96,762.64 remained

available under the policy. On June 24, 2009 and July 2, 2009, respectively, Great American and

Axis filed the instant cases. On July 9, 2009 Travelers informed GeoStar, Axis, and Great American

that its policy was exhausted. Counsel for GeoStar represented to the Court at oral argument that

the entire $5 million policy was exhausted defending the mare-lease claims, no settlements or

judgments were paid from the Travelers policy. 

The parties agree that the Axis and Great American policies “follow form” to the Travelers

Policy, meaning Axis and Great American provided insurance to GeoStar pursuant to the terms of

the Travelers Policy. Axis and Great American did, however, require their own application forms

and modified certain provisions of the Travelers Policy. Axis and Great American contend that the

seventeen mare-lease claims3

 at issue in these cases are not covered by the excess D&O policies. 
4

All parties agree that Michigan law applies to the interpretation of the insurance policies.

The policies were underwritten in Michigan for the protection of a Michigan company. 

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II

GeoStar filed a similar motion to dismiss in both the Axis and Great American cases,

contending the first two counts of both complaints should be dismissed under Federal Rule of Civil

Procedure 12(b)(6). The counts at issue allege that the Axis and Great American policies are void

under Michigan law because GeoStar and its principals misrepresented certain information in the

applications for insurance coverage. The motions to dismiss contend that these counts should be

dismissed because Axis and Great American have not alleged that a GeoStar executive or an insured

officer or director knew about the alleged misrepresentations. 

A

Michigan law4

 provides that a material misrepresentation in an application for insurance

entitles the insurer to rescind the policy, even if an individual insured did not know of the material

misrepresentation. Am. Guar. & Liab. Ins. Co. v. Jaques Admiralty Law Firm, 121 Fed. App’x 573,

575–76 (6th Cir. 2005); see also Lake States Ins. Co. v. Wilson, 231 Mich. App. 327, 331 (1998) (“It

is the well-settled law of this state that where an insured makes a material misrepresentation in the

application for insurance, . . . the insurer is entitled to rescind the policy and declare it void ab

initio.”); Lash v. Allstate Ins. Co., 210 Mich. App. 98, 103 (1995) (“Rescission is justified in cases

of innocent misrepresentation if a party relies upon the misstatement.”). 

In Jaques Admiralty Law Firm, for example, the president and majority shareholder of a

Michigan-based law firm with eleven attorneys misappropriated more than $15 million in settlement

funds from clients over the course of ten years. Id. at 574. During the time that the fraud was
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occurring, the firm applied for professional liability insurance from American Guarantee & Liability

Insurance Company, answering “no” to questions concerning whether “any lawyer” at the firm knew

of circumstances which could give rise to a claim against an attorney or the firm for professional

liability. Id. The fraud was perpetrated solely by the president of the firm, and was not discovered

until after his death. At the time the application for insurance was submitted, no other attorney at

the firm, including the vice president who submitted the application, knew of the fraud.

Nevertheless, the court held that the policy could be rescinded solely because of the firm president’s

misconduct. Id. at 575–76. 

Parties are free, however, to alter the default rule furnished by Michigan law. Id. at 576; see

also Wedtech Corp. v. Fed. Ins. Co., 740 F. Supp. 214, 218–19 (S.D.N.Y. 1990); Shapiro v. Am.

Home Assurance Co., 616 F. Supp. 900, 903–05 (D. Mass. 1984). Indeed, that is precisely what

GeoStar contends the parties did in this instance. According to GeoStar, a severability provision in

the underlying Travelers policy and a similar provision in the Great American policy clarify that a

misrepresentation in the application will render the policy void, but only with respect to certain

insureds. 

In lieu of an answer, GeoStar moved to dismiss the rescission counts of the Axis and Great

American complaints for failure to state a claim upon which relief can be granted. Fed. R. Civ. P.

12(b)(6). In most circumstances, a pleading will survive a Rule 12(b)(6) motion if it contains “a

short and plain statement of the claim showing that the pleader is entitled to relief . . . .” Fed. R.

Civ. P. 8(a)(2). GeoStar emphasizes that when pleading fraud, however, “a party must state with

particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “While a

complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations,
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a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than

labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted). “Factual allegations must

be enough to raise a right to relief above a speculative level, on the assumption that all the

allegations in the complaint are true . . . .” Id. at 555–56 (citations omitted). 

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted

as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 129 S. Ct. 1937,

1949 (2009) (quoting Twombly, 550 U.S. at 570). “Facial plausibility” requires the plaintiff to

include sufficient “factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” 

If the complaints plead fraud claims, even more particularized facts are required. Cf. Fed

R. Civ. P. 8(a) & 9(b). The allegations at issue in the first two counts—that GeoStar included

material misrepresentations on its insurance applications—are not necessarily allegations of fraud

because there is no “intent” element. See Hanover Exch. v. Metro Equity Group LLC, No. 2:08-cv14897, 2009 WL 2143866 (E.D. Mich. July 14, 2009) (noting that Rule 9(b) applies to fraud claims,

but Rule 8(a) applies to negligent misrepresentation claims); see also Black’s Law Dictionary 670

(7th ed. 1999) (“A knowing misrepresentation of the truth or concealment of a material fact to

induce another to act to his or her detriment.”). If, however, the insurance companies are required

to plead intentional misstatements to prove rescission, Rule 9 would apply. 

Ultimately, the determination of whether Rule 8 or 9 applies to the complaints has little

effect on the Court’s analysis because “the degree of detail required to satisfy [Rule 9(b)] often turns

on the substantive context in which the fraud is alleged to have occurred . . . .” 5A Charles Alan
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Wright & Arthur R. Miller, Federal Practice and Procedure § 1298 (3d ed. 2004 & Supp. 2009).

The pleading requirements, as discussed below, turn on the requirements of the insurance contracts

themselves. The insurers are required to plead sufficient facts to demonstrate that they are entitled

to rescind the insurance contracts pursuant to the terms of the applicable severability clauses. 

Moreover, “Rule 9(b)’s particularity requirement does not mute the general principles set

out in Rule 8; rather, the two rules must be read in harmony.” Michaels Bldg. Co. v. Ameritrust Co.,

848 F.2d 674, 679 (6th Cir. 1988). The overriding purpose of Rule 9(b) “is to provide a defendant

fair notice of the substance of a plaintiff’s claim in order that the defendant may prepare a responsive

pleading.” Id. Consequently, to comply with rule 9(b), the complaint must allege “the time, place,

and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the

fraudulent intent of the defendants; and the injury resulting from the fraud.” Coffey v. Foamex LP,

2 F.3d 157, 161–62 (6th Cir. 1993) (citations and internal quotations omitted). The only element

potentially missing from the plaintiffs’ complaints in these cases, is an allegation that the alleged

fraud was intentional, i.e., that the alleged misrepresentation was knowingly made. In both the Great

American and Axis cases, the plaintiff insurance companies will have an opportunity to amend their

complaints to allege that the misrepresentations were knowingly made, and to include sufficient

factual background to provide GeoStar with fair notice of the claims. 

B

In the Axis case (09-12608), the key “severability” provision is found in the underlying

Travelers Policy at section III.P. on page thirteen. The provision, labeled “Representations,”

provides in pertinent part: 

By acceptance of this Policy, each Insured represents that the statements contained

in The Wrap Application, any Coverage Part Application, or any other application
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completed for the proposed Policy, all of which are deemed to be attached to,

incorporated into, and form a part of, this policy, are said Insured’s agreements and

representations, that such representations are material to the Company’s acceptance

of this risk, that this policy is issued in reliance upon the truth of such

representations, and that this policy embodies all agreements existing between said

Insured and the Company or any of its agents relating to this insurance.

In the event that any statement or representation in The Wrap Application or

Liability Coverage Part Application is untrue, the Policy or such Liability Coverage

Part(s), respectively shall be void and of no effect whatsoever, but only with respect

to: 

1. any Insured Person who knew, as of the Policy Inception Date, that the statement

or representation was untrue; 

2. the Insured Organization, to the extent it indemnifies any such Insured Person,

under any Liability Coverage Part; and 

3. the Insured Organization, under any Liability Coverage Part, if any Executive

Officer knew, as of the Policy Inception Date, that the statement or representation

was untrue.

Whether an Insured Person or Executive Officer had such knowledge shall be

determined without regard to whether the Insured Person or Executive Officer

actually knew The Wrap Application or applicable Coverage Part Application

contained such untrue statement or representation. 

Travelers Policy, No. 104192135 at 13. 

The severability provision in the underlying Travelers Policy applies equally to the Axis

Policy because it is an excess insurance policy that “follows form” to the primary policy. Indeed,

by its own terms, “[e]xcept as specifically set forth in the provisions of the [Axis Policy], the

insurance afforded [under the Axis Policy] shall apply in conformance with the provisions of the

applicable Primary Policy . . . .” Axis Policy I. at 6. The Axis Policy does not contain a separate

severability clause, nor does it specifically disclaim the applicability of the severability clause in the

underlying Travelers Policy. Consequently, the severability clause applies to the Axis Policy. 

Axis contends that the severability clause in the Travelers Policy cannot apply to the Axis
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Policy because the severability provision is limited to misrepresentations in “The Wrap Application

or Liability Coverage Part Application.” Travelers Policy III.P. at 17. “The Wrap” is a proper

name—indeed it is a registered trademark belonging to Travelers—used by the company to refer to

a specific insurance product offered to privately held companies. “The Wrap Application,”

therefore, refers to the specific application that Travelers used to evaluate applicants for the

insurance product that GeoStar ultimately purchased. Neither policy indicates that the references

to “The Wrap Application” in the Travelers Policy were intended to refer specifically to the

application for the primary policy, to the exclusion of the other policy applications. “Except as

specifically set forth” in the Axis Policy, the terms of the Travelers Policy apply equally to the Axis

Policy. Axis’s reading of the Travelers Policy demands too much of the severability provision’s

specific reference to “The Wrap Application.” The reference to “The Wrap Application” in the

severability provision should be read generally as “the application for insurance.” See also In re

Healthsouth Corp. Ins. Litig., 308 F. Supp. 2d 1253, 1259, 1288–89 (N.D. Ala. 2004) (applying a

severability clause in a primary policy which referred to “the Application” to an excess policy). 

However, Axis’s contentions with regard to the applicability of the severability provision

are not without merit and dismissing the Counts I and II in their entirety would be unreasonably

harsh as well as unnecessary. Axis requested, in the alternative, an opportunity to amend its

complaint to allege that individual insureds knew of the misrepresentations at the time the policy

took effect. The request is reasonable, particularly in light of the fact that GeoStar has not yet

answered the Axis complaint. GeoStar would not be unreasonably prejudiced by providing Axis

with an opportunity to amend its complaint. 

Although the prudent course for Axis would have been to seek leave to amend its complaint
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immediately upon review of the GeoStar motion to dismiss, which was filed several months ago,

both the Federal Rules of Civil Procedure and Sixth Circuit precedent suggest leave to amend a

complaint should be “freely give[n]” in these circumstances. Fed. R. Civ. P. 15(a)(2) (“The court

should freely give leave [to amend pleadings] when justice so requires.”); see also United States ex

rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 644 (6th Cir. 2003) (noting that “where a more

carefully drafted complaint might state a claim, a plaintiff must be given at least one chance to

amend” before the case is dismissed with prejudice) (citations and internal quotations omitted). 

C

Moving to the motion to dismiss in the Great American case (09-12488), there is a specific

severability provision in the Great American Policy which provides: 

The undersigned Officer of the Company declares that to the best of his or her

knowledge the statements set forth herein are true and correct and that reasonable

efforts have been made to obtain sufficient information from each and every Director

and Officer proposed for this insurance to facilitate the proper and accurate

completion of this Proposal Form. The undersigned further agrees that if any

significant adverse change in condition of the applicant is discovered between the

date of this Proposal Form and the effective date of the Policy, which would render

this Proposal Form inaccurate or incomplete, notice of such change will be reported

in writing to the Insurer immediately. The signing of this Proposal Form does not

bind the undersigned to purchase the insurance.

It is agreed by the Company and the Insured Persons that the particulars and

statements contained in this proposal form and any information provided herewith

(which shall be on file with the Insurer and be deemed attached hereto as if

physically attached hereto) are the basis of this Policy and are to be considered as

incorporated in and constituting a part of this Policy. It is further understood and

agreed by the Company and the Directors and Officers that the statements in this

Proposal Form or any information provided herewith are their representations, that

they are material and that this Policy is issued in reliance upon the truth of such

representations; provided, however, that except for material facts or circumstances

known to the person who subscribed this Proposal Form, any misstatement or

omission in the Proposal Form or information provided herewith in respect of a

Wrongful Act by a particular Director or Officer or his or her cognizance of any

matter which he or she has reason to believe might afford grounds for a future Claim
5

Neither party contends that the severability provision in the underlying Travelers Policy

applies to the Great American Policy. 

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against him or her shall not be imputed to any other Director or Officer for purposes

of determining the validity of this Policy as to such other Director of Officer.

Great American Policy No. DFX0009868 at 17.

The Great American severability provision similarly alters the presumption under Michigan

law that any material misrepresentation on the application for insurance voids the policy as to all

insureds, whether they knew of the misrepresentation or not.5

 But the Great American severability

provision is more limited than the Travelers provision. Pursuant to the Great American severability

provision, if Thom Robinson—the president of GeoStar and the signatory to the Great American

insurance application—knew that there were material misrepresentations on the Great American

application it is void as to all insureds. Moreover, the severability provision provides no protection

for the company; the policy is void as to GeoStar, ClassicStar, and other subsidiaries if Axis can

demonstrate that there was a material misrepresentation on the application for insurance. However,

if some individual directors and officers other than Thom Robinson knew of certain types of

misrepresentations and others did not, the insurance policy is void only as to those individual

directors and officers who knew of the relevant misrepresentations at the time the policy took effect.

The provision, however, is ambiguous as to precisely which representations may be imputed to

innocent officers and directors and which may not. 

The severability provision provides, in pertinent part, that “any misstatement or omission in

the Proposal Form or information provided herewith in respect of a Wrongful Act by a particular

Director or Officer or his or her cognizance of any mater which he or she has reason to believe might

afford grounds for a future Claim against him or her shall not be imputed to any other Director or
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Officer . . . .” Great American Policy at 17. The severability provision is ambiguous because it is

not clear whether the phrase “in respect of a Wrongful Act by a particular Director or Officer”

modifies only the phrase “information provided herewith” or both that phrase and the phrase

“misstatement or omission in the Proposal Form.” Nor is it clear whether the phrase “his or her

cognizance of any matter which he or she has reason to believe might afford grounds for a future

Claim against him or her” is intended to modify an earlier phrase or stand alone. 

In the face of ambiguity, Michigan law requires the Court to construe the policy in favor of

the insureds. Henderson v. State Farm Fire & Cas. Co., 460 Mich. 348, 354 (1999). But this rule

“does not mean that the plain meaning of a word or phrase should be perverted, or that a word or

phrase, the meaning of which is specific and well recognized, should be given some alien

construction merely for the purpose of benefitting an insured.” Id. Accordingly, the ambiguity will

be construed in favor of the insureds. The “misstatements” phrase, the “information provided”

phrase, and the “cognizance” phrase will be interpreted as separate provisions, each standing apart

from the others. Consequently, (1) “misstatement[s] or omission[s] in the Proposal Form . . . shall

not be imputed to any other Director or Officer”; (2) “information provided herewith in respect of

a Wrongful Act by a particular Director or Officer . . . shall not be imputed to any other Director or

Officer”; and (3) a Director or Officer’s “cognizance of any matter which he or she has reason to

believe might afford ground for a future Claim against him or her shall not be imputed to any other

Director of Officer.” This interpretation of the provision gives meaning to each separate phrase,

whereas Great American’s proposed interpretation—that the words “in respect of a Wrongful Act”

modifies both earlier phrases—renders the “misstatements” and “information provided” phrases

duplicative. 
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It is worth emphasizing that this interpretation of the clause should be characterized as

limited. The provision clearly and unambiguously provides that any misstatement or omission that

was known to Robinson at the time the policy took effect will be imputed to every other officer,

director, and entity, whether they knew of the misrepresentation or not. It is also clear that the

provision provides no protection for the covered entities, only covered officers and directors. Any

misstatement or omission known to any covered officer or director will be imputed to the covered

entities for the purposes of determining coverage. The clear import of the provision is that it

protects innocent officers and directors from the harsh effect of rescission, but it does nothing more.

Notwithstanding the Court’s interpretation of the provision to benefit the insured, GeoStar’s

motion to dismiss Counts I and II of the Great American complaint will be denied because Great

American alleged in its complaint that the person who “subscribed” the policy proposal, GeoStar

president Thom E. Robinson, knew at the time the policy took effect that at least one of the

representations on the application for insurance was false. Great American alleged that Robinson,

the GeoStar president, answered “No” to a question concerning whether he or any other officer or

director was “aware” of any fact that might give rise to a claim against the company, its subsidiaries,

or its officers and directors. Pursuant to the severability provision, “material facts and omissions

known to the person who subscribed the Proposal Form” are imputable to every other insured. 

Although the motion will be denied, Great American will still be provided with an

opportunity to amend its complaint in accordance with the interpretation of the severability clause

set forth in this opinion and order. Leave to amend is appropriate, as discussed in subsection III B,

because the severability clause is ambiguous and GeoStar will not be prejudiced because it has not
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yet answered the complaint. 

III

Both Great American and Axis have filed motions for summary judgment as to the counts

of their respective complaints that seek a declaratory judgment that expenses arising from the marelease litigation are not covered by their policies. Axis Cmpl. Count III; Great American Cmpl.

Count VII. Both motions focus on the same provision of the primary Travelers Policy. The

provision is entitled “Broad General Professional Errors and Omissions Exclusion” (“E&O

exclusion”), and is attached to the Travelers Policy as an endorsement. It provides that the D&O

liability portion of the policy “shall not apply to, and the Company shall have no duty to defend or

pay, advance or reimburse Defense Expenses for, any Claim: . . . based upon, alleging, arising out

of, or in any way relating to, directly or indirectly, any actual or alleged act, error or omission by

any insured with respect to the rendering of, or failure to render professional service for any party.”

The exclusion will have some application to this case because it will remove from coverage marelease claims that allege liability for negligent tax or investment advice, but it does not exclude from

coverage the vast majority of mare-lease claims, raising allegations of breach of contract, fraud, and

even racketeering. 

Under Michigan law, an insurance contract is interpreted like any other contract and “must

be enforced in accordance with its terms.” Henderson, 596 N.W.2d at 193. “A court must not hold

an insurance company liable for a risk that it did not assume.” Id. But if the contract is ambiguous,

it should be construed in favor of the insured. Id. “The fact that a policy does not define a relevant

term does not render the policy ambiguous. Rather, reviewing courts must interpret the terms of the

contract in accordance with their commonly used meanings.” Id. at 194.
-18-

Under Michigan law, an “ ‘insured bears the burden of proving coverage, while the insurer

must prove that an exclusion to coverage is applicable.’ ” Heniser v. Frankenmuth Mut. Ins., 449

Mich. 155 n.6 (1995) (quoting Arco Indus. Corp. v. Am. Motorists Ins. Co., 448 Mich. 395, 424–25

(1995)). “Exclusions are to be read with the insuring agreement and independent of other

exclusions. Exclusionary clauses are to be strictly construed against the insurer.” Farm Bureau

Mut. Ins. Co. v. Blood, 230 Mich. App. 58, 62 (1998) (citations omitted). 

The Travelers Policy does not define the term “professionals services,” but similar exclusions

for rendering or failing to render professional services are relatively common in D&O liability

policies. Consequently, Michigan courts have addressed them with some frequency and generally

interpreted them broadly. See, e.g., Am. Fellowship Mut. Ins. Co. v. Ins. Co. of N. Am., 282 N.W.2d

425, 427 (Mich. Ct. App. 1979); Hilderbrandt ex rel. Estate of Hilderbrandt v. Rumsey & Sons

Constr., No. 220340, 2001 WL 624966 at *7 (Mich. Ct. App. June 5, 2001). However, they should

not be interpreted so broadly that the exclusion “swallows” the entire policy. See Food Pro Int’l v.

Farmers Ins. Exch., 169 Cal. App. 4th 976, 986–92 (Cal. Ct. App. 2008); Psychiatric Assocs. v. St.

Paul fire & Marine Ins. Co., 647 So. 2d 134, 138–39 (Fla. Dist. Ct. App. 1994). One commonly

employed definition provides that a “professional service” is “one arising out of a vocation, calling,

occupation, or employment involving specialized knowledge, labor or skill, and the labor or skill

is predominantly mental or intellectual, rather than physical or manual.” Marx v. Hartford Accident

& Indem. Co., 157 N.W.2d 870, 871–72 (Neb. 1968).

Although Michigan Courts have previously held that E&O exclusions should be interpreted

broadly, their primary concern has been with plaintiffs who try to avoid such exclusions by artful

pleading. Cf. Hilderbrandt, No. 220340, 2001 WL 624966 at *6–7 (discussing the potential limits
-19-

of a professional services exclusion in a general liability insurance contract). Courts require a close

connection between the provision of professional services and the underlying claim before they will

deny coverage pursuant to a professional E&O exclusion. Consequently, a claim that alleges an

attorney was negligent in his representation of a client is a professional error or omission claim,

whether it is pled as a traditional tort claim alleging malpractice or a breach of contract claim based

on the representation agreement. Similarly, a claim against an investment advisor for poor

investment advice is a professional services claim, whether it is pled in tort, contract, or pursuant

to the securities and exchange act. See MDL Capital Mgmt., Inc. v. Fed. Ins. Co., 274 Fed. App’x

169, 172–74 (3d Cir. 2008). However, a claim against a dentist or physician for sexual misconduct

is not a professional errors and omissions claim, even if the alleged misconduct occurred during the

time the dentist or physician was supposed to be performing such a service. Sexual misconduct is

not an “error or omission” in providing a professional service; it is outright misconduct that occurred

during the time and place where the dentist or physician should have been providing a professional

service. See Roe v. Fed. Ins. Co., 587 N.E.2d 214 (Mass. 1992) (professional liability insurance

policy does not cover claim by patient against a dentist alleging dentist sexually assaulted patient

during office visits); but see Vigilant Ins. Co. v. Kambly, 114 Mich. App. 683, 685–86 (1982)

(professional liability policy does apply to claim by patient against her psychiatrist for malpractice

where doctor allegedly convinced patient that sexual relationship was part of therapy). Professional

E&O exclusions will apply in situations beyond malpractice suits against professionals, but only in

situations where the particular claim is closely related to the provision of a professional services.

See Kambly, 114 Mich. App. 683. 

Other jurisdictions have also addressed the question with some frequency. The cases cited
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by GeoStar encompass a wide range of circumstances, they include an E&O exclusion in a D&O

policy purchased by an insurance company, Fed. Ins. Co. v. Haw. Elec. Indus., No. 94-00125 HG,

1997 U.S. Dist. LEXIS 24129 at *27–42 (D. Haw. Dec. 23, 1997) (lawsuits arising from business

decisions by board not excluded), an E&O exclusion in a homeowners policy purchased by a pipe

welder, Cincinnati Ins. Co. v. Harding, No. 2:06-CV-205, 2007 WL 3124654 at *6–7 (W.D. Mich.

Oct. 24, 2007) (lawsuit arising from services as welder not excluded), an E&O exclusion in a general

commercial liability policy purchased by a counselor, Finnie v. LeBlanc, 856 So. 2d 208, 212 (La.

Ct. App. 2008) (suit for inappropriate sexual conduct toward patient not excluded), a professional

services policy purchased by a law firm, Am. Nat’l Fire Ins. Co. v. Harold Abrams, P.C., No. 99 C

5807, 2002 U.S. Dist. LEXIS 2577 at *21–26 (N.D. Ill. Feb. 19, 2002) (suit for racketeering and

fraud not covered even though related to practice of law), a professional services policy purchased

by real estate agents, Crum & Forster Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073

(Ill. 1993) (alleged fraud and unfair competition by agents not covered), and a professional and

general liability policies purchased by a veterinarian, Rossoff v. Cincinnati Ins. Co., 26 F. Supp. 2d

1095, 1099–1100 (C.D. Ill. 1998) (neither covered liability arising from decision to sell unapproved

drug in violation of consent decree). 

The cases cited by the insurance companies are similarly broad in scope, including a

declaratory judgment action brought by an insurance company against its general liability insurer

concerning the scope a E&O exclusion in the policy, Am. Fellowship Mut. Ins. Co. v. Ins. Co. of N.

Am., 90 Mich. App. 633 (1979) (policy does not cover negligent operation of underwriting business),

a professional services exclusion in a general commercial liability policy purchased by an

engineering firm, Hilderbrand ex rel. Estate of Hilderbrandt, 2001 WL 624966 (policy did not cover
-21-

wrongful death claim alleging negligent excavation and shoring of a trench), a dispute between a

failed savings and loan company and its general liability insurer concerning the applicability of a

professional E&O exclusion, Aetna Cas. & Sur. Co. v. Dannenfeldt, 778 F. Supp. 484 (D. Ariz.

1991) (E&O exclusion barred coverage for claims arising out of the alleged fraudulent sale of

debentures), a case filed by clients of an accounting firm against the firm and its general liability

insurer alleging negligent tax and investment advice, Ruel v. Fremont Indem., 611 So.2d 171 (La.

Ct. App. 4th Cir. 1992) (professional E&O exclusion barred coverage), a claim by the beneficiaries

of a trust against the trust’s general liability insurer for mismanagement of the trust, Reinhardt v.

Certain Underwriters at Lloyd’s, London, No. A06-949, 2007 WL 900731 (Minn. Ct. App. Mar. 27,

2007) (professional E&O exclusion barred coverage), a claim by the clients of a nonprofit

advertising and public relations firm alleging misconduct related to its advertising and public

relations services, Planet Earth Found. v. Gulf Underwriters Ins. Co., 130 Wash. App. 1040 (2005)

(professional E&O exclusion barred coverage), and a dispute between an investment management

firm and its insurer about the scope of separate policies providing professional E&O coverage and

D&O coverage, MDL Capital Mgmt., 274 Fed. App’x 169 (E&O policy may cover claims for

negligent investment advice but D&O policy did not); see also Piper Jaffray Cos. v. Nat’l Union

Fire Ins. Co., 967 F. Supp. 1148 (D. Minn. 1997) (professional E&O clause in D&O liability policy

limited insurers duty to indemnify directors and officers from claims related to poor investment

advice). 

Although the case law is not always consistent, some general principles can be discerned

from the decisions. First, professional E&O exclusions in general liability policies are often

interpreted more broadly than E&O exclusions in D&O policies. While general liability policies,
-22-

in the absence of exclusions, provide coverage for everything from slip and fall claims to

professional negligence, D&O policies are more narrowly drafted and designed specifically to

protect directors and officers from liability arising from negligence or misconduct in managing a

business. Consequently, professional E&O exclusions in D&O policies must be interpreted more

narrowly to avoid negating the entire coverage scheme through the operation of an overly broad

exclusion. Second, in interpreting the scope of both professional E&O exclusions and professional

E&O policies, courts are conscious of the particular profession involved. Whether the insured is a

physician, lawyer, veterinarian, psychiatrist, counselor, accountant, investment advisor, engineer,

or real estate agent, the insured’s professional E&O coverage only indemnifies against errors and

omissions related to that profession, and professional E&O exclusions in D&O policies are typically

only invoked to bar coverage where the D&O policy was sold to a business engaged in a particular

profession. Third, the inquiry is extremely fact-intensive and varies from case to case and from

claim to claim. As a result, courts interpreting factual scenarios that originally seem quite similar

have often reached contrary results. 

With those considerations in mind, the professional E&O exclusion in this case removes

from coverage claims that allege GeoStar and its directors and officers made errors in rendering or

failing to render “professional services.” It does not remove from coverage every claim against the

company for any error or omission that occurred in the course of its business. Indeed, the D&O

portion of the policy was expressly designed to provide coverage for losses resulting from civil

lawsuits against the company and its officers and directors alleging negligent of intentional

misconduct in the operation of GeoStar’s business. Travelers D&O policy II.A.2. Due to the type

of coverage provided by the Axis and Great American policies, the E&O exclusion must be read
6

 The fact that Michigan law defines the term “equine professional” as part of a statute

limiting liability associated with the “inherent risk[s]” of owning, riding, training, and exhibiting

horses is irrelevant to this dispute. Mich. Comp. Laws § 691.1662(e). Pursuant to the statute, a

person who works with horses for a living—an equine professional—is not liable for harm resulting

to a participant in an equine activity where the cause of the harm was an inherent risk associated

with that activity. Mich. Comp. Laws § 691.1663. The statute does not mean that training, caring

for, breeding, and teaching people about horses are “professional services” as the term is used in the

Travelers Policy. 

-23-

more narrowly to avoid a construction that negates the entire policy. 

This is particularly true where, as here, the covered entities’ business interests are so diverse.

GeoStar is primarily engaged in the energy business, but through its subsidiaries, it was also

engaged in the equine business as a means of raising capital. If the D&O policies do not cover

claims related, even indirectly, to any arguably “professional” service provided by GeoStar and its

subsidiaries, the coverage is illusory. Indeed, it would not cover any claims arising from errors or

omissions in the conduct of its various businesses. If, as the insurance companies contend, selling

interests in a horse business is a professional service,6 so is conducting oil and gas exploration. 

The parties have attached seventeen complaints, complete with exhibits totaling more than

1,000 pages, alleging that all of the claims in the seventeen complaints are excluded by the

professional errors and omissions clause. Most of the claims, however, are of the type that were

designed to be covered by the Axis and Great American D&O policies, notwithstanding the E&O

exclusion. For example, a fraud claim against the officers and directors of GeoStar, alleging

ClassicStar sold more mare-lease interests than there were horses will be covered. The relationship

between the fraud claim and professional tax or investment advice provided by GeoStar and its

subsidiaries is too attenuated to be excluded under the E&O provision. It is a claim for misconduct

that occurred in the course of GeoStar’s business; it is not a claim alleging an error or omission in
-24-

the provision of professional services. On the other hand, a claim alleging GeoStar and its

employees made negligent misrepresentations when providing clients with tax advice or an opinion

letter from an attorney is likely a professional errors and omissions claim—it alleges that GeoStar

erred in providing the professional services it had contracted to provide. 

In sum, the motions for partial summary judgment filed by Axis and Great American will

be denied because the insurance companies have not demonstrated that all claims associated with

the mare-lease program fall under the professional errors and omissions exclusion. Blood, 230

Mich. App. at 62 (noting burden of proving exclusion is on insurer, and exclusions are “strictly

construed” against insurer). Some of those claims may be barred, but they are certainly not all

barred. GeoStar’s cross-motions for summary judgment will be granted in part. Although GeoStar

does not bear the burden of proof concerning the exclusions, a reasonable trier of fact could

conclude that some claims associated with the mare-lease program are excluded from coverage by

the errors and omissions clause. The parties may be able to resolve whether the majority of the

mare-lease claims are excluded from coverage by the E&O clause. To the extent they cannot, future

motions should focus on specific counts of specific complaints and the appropriate standard of

review. 

For example, in the case captioned Ginaldi v. ClassicStar, LLC, and attached as exhibit 3 to

Axis’s motion for partial summary judgment, the Plaintiffs assert, inter alia, claims for common law

fraud, state law securities fraud, and breach of contract that are not professional errors and omissions

claims. Plaintiffs also assert, however, claims against GeoStar employees or agents Karren Hendrix

and Terry Green for negligent misrepresentations in opinion letters concerning the tax consequences

of the mare-lease program. The negligent misrepresentation claim is excluded from coverage by the
-25-

E&O exclusion. 

Finally, there is a specific severability provision in the exclusions portion of the underlying

Travelers D&O policy. The provision provides that “[n]o conduct of any Insured Person shall be

imputed to any other Insured Person to determine the application of any of the Exclusions set forth”

in the exclusions section of the D&O policy. Travelers D&O Policy IV. Consequently, even if the

conduct of one officer, director, or employee amounts to an error or omission in rendering or failing

to render a professional service and is excluded from coverage, the remaining officers and directors

are still covered as long as they did not play a role in rendering or failing to render those

professional services. The severability provision does not, however, protect GeoStar or other

covered entities from liability for the professional errors and omissions of their employees.

IV

GeoStar filed a motion for expedited declaratory relief [Dkt. # 45] in the Axis case on

November 2, 2009, seeking a declaration that Axis has a duty to “advance” litigation defense costs

pending resolution of this case. GeoStar concedes that unlike the underlying Travelers Policy, the

Axis Policy is not a “duty to defend” policy. However, GeoStar contends that the Axis policy still

requires Axis to pay for legal defense costs if the underlying claim is covered by the policy, and that

Axis is required to advance defense costs related to the mare-lease matters at least until this Court

issues an order rescinding the policy or declaring that the mare-lease matters are not covered. Axis

responds that there is a fundamental difference between “duty to defend” policies like the Travelers

Policy, and “reimbursement” policies like the Axis Policy. According to Axis, it has no obligation

to “advance” legal defense costs pursuant to a “reimbursement” policy under Michigan law unless

the terms of the policy specifically require advancement. GeoStar filed its reply [Dkt. # 49] on
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December 4, 2009, emphasizing for the first time a separate provision in the underlying Travelers

Policy that appears to expressly require advancement of defense costs. With the Court’s permission,

Axis filed a response to GeoStar’s reply [Dkt. # 56], contending the underlying provision in the

Travelers Policy does not apply to the Axis Policy.

The Axis Policy “follows form” to the underlying Travelers Policy. “Except as specifically

set forth in the provisions” of the Axis Policy, the policy provides coverage “in conformance with”

the terms of the Travelers Policy. Axis Policy I. The Travelers Policy was designed to provide duty

to defend coverage or reimbursement coverage. By election, GeoStar selected duty to defend

coverage for the Travelers Policy. Travelers Policy Item 5. The Axis Policy specifically changes

that determination, and provides reimbursement coverage instead. Axis Policy VI.C. (“The Insured,

and not the Insurer, has the duty to defend all Claims under this Policy.”). “In contrast to a duty to

pay defense costs, the duty to defend customarily includes an insurer’s right to choose the attorney

and to control the litigation strategy.” In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d 455, 464

n.11 (S.D.N.Y. 2005) (citing Am. Jur. Ins. § 1396). If the mare-lease matters are covered by the

Axis Policy, Axis has a legal duty to pay defense costs associated with those matters, but no duty

to defend. 

Pusuant to the terms of the Travelers D&O policy, the insurer “shall pay on behalf of the

insured persons” and GeoStar “Loss resulting from Claims made during the Policy Period . . . .”

Travelers D&O Policy I. “ ‘Loss’ means Defense Expenses incurred by [GeoStar] or by the Insureds

in the defense of a Claim . . . .” Id. II.D. The definition of “Claim” includes civil lawsuits like the

mare-lease matters. Id. II.A.2. “ ‘Defense Expenses’ means reasonable and necessary legal fees and

expenses incurred in the investigation, defense, settlement and appeal of a Claim . . . .” Travelers
-27-

Policy II.D. 

GeoStar contends that the duty to pay defense expenses “exists whenever a complaint against

the insured alleges claims that may be covered under the Insurer’s policy.” In re WorldCom, Inc.

Sec. Litig., 354 F. Supp. 2d at 464 (internal quotations omitted and emphasis added). Axis admits

that it is required to pay defense expenses for covered matters, but contends that the mare-lease

matters are not covered and that it has no duty to “advance” defense costs until the coverage

determination is final. Valassis Commc’ns, Inc. v. Aetna Cas. & Sur. Co., 97 F.3d 870, 876 (6th Cir.

1996) (citing Bd. of Trs. of Mich. State Univ. v. Cont’l Cas. Co., 730 F. Supp. 1408, 1422, 1414

(W.D. Mich. 1990)). 

GeoStar further contends that the duty to pay defense costs as they are incurred is

specifically incorporated into the Travelers Policy. As discussed earlier, the Travelers Policy was

either a duty to defend policy or a reimbursement policy depending upon GeoStar’s election between

the two provisions. GeoStar elected duty to defend coverage for the $5 million in coverage provided

by Travelers and reimbursement coverage for the $5 million in coverage provided by Axis. The

Travelers Policy provides:

If reimbursement coverage is provided with respect to the Liability Coverage Parts

as indicated in ITEM 5 of the Wrap Declarations: 

a. [Travelers] has no duty to defend any Claim. It shall be the duty of the

Insureds to defend Claims. [Travelers] shall have the right to associate with

the Insureds in the investigation, defense and settlement, including but not

limited to the negotiation of a settlement of any Claim that appears

reasonably likely to be covered in whole or in part by this Policy and the

selection of appropriate defense counsel;

b. Upon written request, [Travelers] will advance Defense Expenses for which

such Liability Coverage Part provides coverage. Such advanced payments

by [Travelers] shall be repaid to [Travelers] by the Insureds severally

according to their respective interests in the event and to the extent that the
-28-

Insureds shall not be entitled to payment of such Loss under the Policy. As

a condition of any payment of Defense Expenses or other Loss under this

subsection, [Travelers] may require a written undertaking on terms and

conditions satisfactory to [Travelers] guaranteeing the repayment of any

Defense Expenses or other Loss paid to or on behalf of any Insured if it is

finally determined that any such Loss incurred by such Insured is not covered

under the Policy.

Travelers Policy III.D.2. Axis contends that the policy provision does not apply because the parties

to the Travelers Policy selected duty to defend coverage in Item 5 of he Wrap Declaration, and part

III.D.2. was therefore never part of the Travelers Policy. 

However, reimbursement coverage is not an optional endorsement to be added to the

Travelers Policy, it is the default provision in the event duty to defend coverage is not purchased.

See Bd. of Trs. of Mich. State Univ., 730 F. Supp. at 1414 (noting that duty to pay insurance is less

expensive than duty to defend coverage because it extricates the insurer from involvement in the

underlying action). Item 5 of the Travelers Policy provides two options: duty to defend or

reimbursement coverage. It further provides that if neither choice is selected, “the Policy will

provide reimbursement coverage for all applicable Liability Coverage Parts.”

Moreover, the Axis Policy specifically disclaims any duty to defend as provided by the

Travelers Policy. Axis Policy VI.C. The Axis Policy does not specifically disclaim the applicability

of the reimbursement provision of the Travelers Policy. Disclaiming duty to defend coverage

permitted Axis to charge a lower premium, Bd. of Trs. of Mich. State Univ., 730 F. Supp. at 1414,

but also maintain some involvement in the litigation and participate in selection of counsel.

Travelers Policy III.D.2. In effect, pursuant to the terms of the policy, Axis has the dual advantage

of exercising some control over the litigation, while also avoiding the duty to provide the defense.

If Axis wished to disclaim the applicability of section III.D.2., it certainly could have done so, but
-29-

it did not. Consequently, the insurance provided pursuant to the Axis Policy “appl[ies] in

conformance with the provisions” of the Travelers Policy. Axis Policy I.

Michigan law also supports GeoStar’s assertion that it is entitled to payments of defense

costs as they are incurred, despite the dispute over coverage. Axis relies principally on three federal

court decisions applying Michigan law to support its assertion that it should not be required to pay

defense costs related to the mare-lease litigation until the coverage dispute is resolved. In Valassis

Communications, the Sixth Circuit held that an insurer providing D&O coverage pursuant to a

reimbursement policy similar to the Axis Policy “had no ‘duty to defend’ Valassis” and its president

in a civil action alleging defamation and tortious interference with a contract. 97 F.3d at 876. After

affirming the district court’s order granting the insurance company’s motion to dismiss for failure

to state a claim, which was based on a specific exclusion in the policy for defamation actions, the

Sixth Circuit discussed Valassis’s claim that trial court erred in concluding that Aetna had no duty

to defend Valassis and its president. The Aetna policy provided that the company “will pay Defense

Expenses on behalf of” theValassis president, whose name was Brandon, but that “[n]othing in this

paragraph is intended, nor shall it be construed, to create any duty to defend . . . .” After noting the

absence of a separate duty to defend clause, the court stated: 

Valassis/Brandon fail to recognize the distinction between a “recovery of defense

costs” and a “duty to defend.” The former includes defense costs as a part of the

losses for which the Aetna policy will reimburse, if covered. A commitment by the

insurance company to reimburse the defense costs of the insured does not create a

duty to defend on the part of the insurance company. See [Bd. of Trs. of Mich. State

Univ., 730 F.Supp 1408]. This is especially true when the policy specifically

declares that “ [n]othing in this paragraph is intended, nor shall it be construed, to

create any duty to defend on the part of ” Aetna. (Emphasis added). Thus, the

district court’s conclusion that Aetna did not undertake the defense of

Valassis/Brandon in the Sullivan lawsuit was not erroneous.

Valassis Commc’ns Inc., 97 F.3d at 876. The court did not hold there is no duty to pay defense costs
-30-

as they are incurred pursuant to a reimbursement policy, it simply held that there is no duty to defend

pursuant to a reimbursement policy. That proposition is not in dispute here. 

Similarly, in Board of Trustees of Michigan State University, 730 F.Supp 1408, and

American Casualty Company of Reading, Pa., 854 F. Supp. 492 (W.D. Mich. 1994), federal courts

in the Western District of Michigan held that there is no duty to advance defense costs if the

underlying claims were “specifically and explicitly excluded [from] coverage with unambiguous

policy language . . . .” Upjohn Co. v. Aetna Cas. & Sur. Co., 768 F. Supp. 1186, 1196 (W.D. Mich.

1990). In Rahn, for example, the D&O policy was a “claims made” policy, requiring that the claims

be made during the coverage period for the policy to apply. The underlying claims were made after

the policy period had expired, consequently, they were “specifically and explicitly” excluded from

coverage and the insurer properly refused to pay defense expenses. Rahn, 854 F. Supp. at 503–04.

This is not a case where the underlying claims are “specifically and explicitly” excluded from

coverage. In fact, the policy “specifically and explicitly” requires Axis to “advance” defense

expenses for claims that may be covered. 

Finally, Axis has not articulated a persuasive reason to treat a duty to pay defense costs in

a substantially different manner from a duty to defend under Michigan law. The duty to defend

attaches under Michigan law if the underlying claims “even arguably come within the policy

coverage . . . .” Am. Bumper and Mfg. Co. v. Hartford Fire Ins. Co., 452 Mich. 440, 450–51 (1996).

While the dispute over coverage of the underlying claims persists, Axis cannot avoid its duty to pay

defense costs associated with those claims any more than Travelers could avoid its duty to defend.

See Hurley v. Columbia Cas. Co., 976 F. Supp. 268, 275 (1997) (suggesting that the only significant

difference between a “duty to defend and the promise to advance defense costs” under Michigan law
7

Axis has made a similar assertion in response to GeoStar’s motion to dismiss, but has not

filed a specific motion asking the Court to take judicial notice. To the extent judicial notice of the

guilty pleas is appropriate, it is equally applicable in both cases.

-31-

is “who will direct the defense”). But see Travelers Indem. Co. of Ill. v. Ins. Co. of N. Am., 886 F.

Supp. 1520, 1529 (S.D. Cal. 1995) (discussing the differences between an insurer’s obligation under

a duty to defend policy and an excess insurer’s obligation under a reimbursement policy and noting

that “the duty to reimburse is triggered only after liability has been conclusively established”). 

Section III.D.2. of the Travelers Policy controls and Axis is obligated to “advance” defense

costs pursuant to the plain language of the policy. This conclusion is supported by Michigan case

law and the absence of a specific provision nullifying section III.D.2. in the Travelers policy. 

V

Great American filed a motion requesting that the Court take judicial notice of the Plummers

guilty pleas to criminal charges in U.S. District Court for the District of Oregon [Dkt. # 31].7

GeoStar agrees that the Court may take judicial notice of the pleas, but contends that the facts the

Court may take notice of are only those actually admitted when entering the plea [Dkt. # 33]. The

Court will take judicial notice of the pleas, as well as other records from the criminal docket in the

District of Oregon. However, the Court will only take notice of those facts that have been

specifically admitted by the Plummers in sworn testimony, and only to the extent those facts

implicate the Plummers as opposed to third parties. 

“A court shall take judicial notice if requested by a party and supplied with the necessary

information.” Fed. R. Evid. 201(d). “A judicially noticed fact must be one not subject to reasonable

dispute in that it is . . . capable of accurate and ready determination by resort to sources whose

accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b)(2). Court records are a typical
-32-

subject of judicial notice under Rule 201(b)(2). See 21B Charles Alan Wright & Arthur R. Miller,

Federal Practice and Procedure § 5106.4 (2d ed. 2005 & Supp. 2009). “Federal courts may take

judicial notice of proceedings in other courts of record.” Rodic v. Thistledown Racing Club, Inc.,

615 F.2d 736, 738 (6th Cir. 1980) (citation omitted). They may also take judicial notice of guilty

pleas, and the factual record associated with those pleas. See Colonial Penn Ins. Co. v. Coil, 887

F.2d 1236, 1239–40 (4th Cir. 1989).

Here, it is undisputed that the Court may take judicial notice of the records of the criminal

proceedings against the Plummers in Oregon. The only question is the extent to which the Court

may take judicial notice of factual information contained within those records. Great American

contends that when the Plummers entered guilty pleas to the charges listed in the information, they

conceded that all of the facts alleged in the information were factually correct. Great American cites

United States v. One Dodge Van for the proposition that a guilty plea “is an admission of all the

material facts in the indictment.” 426 F. Supp. 43, 46 n.1 (E.D. Mich. 1976). The Plummers

respond that pleading guilty is not an admission that all the facts alleged in the information are true;

it is only an admission of those facts which are necessary to satisfy all the elements of the crime

charged. See United States v. Skinner, 25 F.3d 1314, 1316 (6th Cir. 1994). Under Skinner, “[a]

guilty plea serves as an ‘admission of all the elements of a formal criminal charge.’ ” Id. (quoting

McCarthy v. United States, 394 U.S. 459, 466 (1969)). 

The key point is that a guilty plea serves as an admission of the material facts charged in the

information or admitted by the Defendant during the plea colloquy. Not, as Great American

suggests, all the facts charged in the information. In this case, the information is a lengthy document

alleging numerous facts related to a single charge: a conspiracy to defraud the United States by
-33-

impairing and impeding the Internal Revenue Service [Dkt. # 31-3]. See 18 U.S.C. § 371. The only

elements necessary for a conviction pursuant to that charge are “(1) existence of an agreement by

two or more persons to defraud the United States; (2) the defendant’s knowing and voluntary

participation in the conspiracy; and (3) the commission of an overt act in furtherance of the

conspiracy.” [Dkt. # 34-2 & 3]. Consequently, the material facts alleged in the information are

those relating to an agreement between two or more persons to defraud the United States, the

defendant’s voluntary participation in that agreement, and the commission of a single overt act in

furtherance of that conspiracy. 

Every fact stated in the information is not necessary to sustain the conviction pursuant to the

statute, as a result, every fact contained in the information is not “material” or “capable of accurate

and ready determination.” Fed. R. Evid. 201(b)(2). The Court will take judicial notice of the

records of the criminal action, and the facts specifically admitted by the Plummers in their pleas.

However, it is not appropriate to take judicial notice of all the facts alleged by the government in

the information. Moreover, judicial notice of the facts in the guilty pleas only extends to the

Plummers. The extent to which the guilty pleas are evidence of the involvement of other individuals

in the mare-lease fraud remains undecided. 

Accordingly, it is ORDERED the GeoStar’s motion to dismiss in case number 09-12608

[Dkt. # 35] is GRANTED IN PART AND DENIED IN PART. Axis shall have until March 24,

2010 to amend its complaint to comply with the legal standard articulated in this order. GeoStar

shall answer the amended complaint in accordance with Rule 12. 

It is further ORDERED that GeoStar’s motion to expedite declaratory relief in case number

09-12608 [Dkt. #45] is GRANTED. Axis shall advance defense costs for covered matters in
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accordance with paragraph III.D.2.b. of the Travelers’ policy. 

It is further ORDERED that Axis’s motion for summary judgment on Count III in case

number 09-12608 [Dkt. # 50] is DENIED WITHOUT PREJUDICE. Axis has not demonstrated,

as a matter of law, that all of the mare-lease matters are excluded from coverage pursuant to the

professional errors and omissions exclusion.

It is further ORDERED that GeoStar’s cross-motion for summary judgment on Count III

in case number 09-12608 [Dkt. # 64] is GRANTED IN PART. 

It is further ORDERED that GeoStar’s motion to dismiss in case number 09-12488 [Dkt.

# 21] is DENIED. Great American shall have until March 24, 2010 to amend its complaint, if it

chooses, in accordance with the legal standard articulated in this order. GeoStar shall answer the

amended complaint in accordance with Rule 12. 

It is further ORDERED that Great American’s motion for order taking judicial notice in case

number 09-12488 [Dkt. # 31] is GRANTED IN PART AND DENIED IN PART. The Court will

take judicial notice of the guilty pleas and the record of the criminal proceedings in Oregon, but only

those facts that were specifically acknowledged by the Plummers in their “petition[s] to enter guilty

plea[s].” 

It is further ORDERED that Great American’s motion for summary judgment on Count VII

of its complaint in case number 09-12488 [Dkt. # 35] is DENIED WITHOUT PREJUDICE.

Great American has not demonstrated, as a matter of law, that all of the mare-lease matters are

excluded from coverage pursuant to the professional errors and omissions exclusion. 
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It is further ORDERED that GeoStar’s cross-motion for summary judgment on Count VII

in case number 09-12488 [Dkt. # 41] is GRANTED IN PART. 

s/Thomas L. Ludington 

THOMAS L. LUDINGTON

United States District Judge

Dated: March 5, 2010

PROOF OF SERVICE

The undersigned certifies that a copy of the foregoing order was served

upon each attorney or party of record herein by electronic means or first

class U.S. mail on March 5, 2010.

s/Tracy A. Jacobs 

TRACY A. JACOBS