Opinion ID: 774046
Heading Depth: 2
Heading Rank: 1

Heading: Allocation of Settlement Costs

Text: 13 National Union provided insurance against liabilities of the directors, rather than against those of the company generally. It argues that the costs of the Lavalle settlement should have been allocated among potentially liable parties. This would cause the exposure of the directors (and thus Owens Corning's claim under the Policy) to represent only a fraction of the total paid out. If the fraction of the $9.975 million allocated to the directors resulted in a figure below the $2.5 million deductible, National Union could, hypothetically, avoid payment altogether. 14 The parties agree that the initial question is whether or not to apply the larger settlement rule, as the district court did. The larger settlement rule allows allocation of the costs of a settlement only where that settlement is larger because of the activities of uninsured persons who were sued or persons who were not sued but whose actions may have contributed to the suit. Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 960 (7th Cir. 1995). Hence, if the uninsured corporate defendant made the settlement larger than it otherwise would have been with only the insured directors as defendants, allocation of the excess can be made and coverage partially denied. There is some economic rationale behind the larger settlement rule, related to the likely intent of an entity purchasing insurance. The type of corporate liability involved is premised on indirect responsibility for the risky acts of directors, and the combined effect (and reasonable intent) of an indemnification provision and a D & O policy is to shift the risk of directorial acts first to the corporation, but then on to the insurer. SeeHarbor Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 368 (7th Cir. 1990) (Posner, J.). 2 15 In an opinion later withdrawn for other reasons, a district court in our Circuit also chose the larger settlement rule over its rival, the relative exposure rule. See Ameriwood Industries Int'l. Corp. v. American Cas. Co. of Reading, Pennsylvania, No. 92-CV-658, 1994 WL 396089 (W.D. Mich. July 27,1994) (vacated on stipulation of parties). The relative exposure rule allocates a settlement based on comparing the potential exposure of the uninsured and insured defendants had the litigation proceeded. See Caterpillar, 62 F.3d at 961 (7th Cir. 1995) (choosing larger settlement rule using applicable Illinois law). Because the relative exposure rule envisions a somewhat elaborate inquiry into what happened in a settlement and who really paid for what relief[,] ibid., National Union endorses the rule in its effort to resist summary judgment. 16 Ohio has not spoken to whether it would favor one or the other of these rules, although it will not enforce D & O coverage for settlement costs if the underlying shareholder claims are not premised on the misdeeds of directors acting in their corporate capacity. See Cincinnati Ins. Co. v. Irwin Co., No. C-000107/120, 2000 WL 1867297 at  (Ohio Ct. App. Dec. 22, 2000) (finding competent evidence existed that all claims had been for acts committed by directors in their personal capacities). Nor does the Policy state which method of allocation should be used. Instead it suggests that, post-settlement, the insurer and the policy holder will use their best efforts to determine a fair and proper allocation of the amounts as between the Company and the Insureds, with this latter term referring to the directors and officers. 3 (Policy ¶9). The label fair does not uniquely designate one of a number of rival legal principles. Therefore, although settlement allocation between covered and uncovered claims is clearly contemplated by the Policy, where appropriate, the nature of the method of allocation is ambiguous. 17 Under well-settled Ohio law, when provisions of a contract of insurance are reasonably susceptible of more than one interpretation, they will be construed strictly against the insurer and liberally in favor of the insured. U.S. Fidelity & Guaranty Co. v. Lightning Rod Mut. Ins. Co., 687 N.E.2d 717, 719 (Ohio 1997) (citations and internal quotation marks omitted). The Seventh Circuit in Caterpillar chose the larger settlement rule in part because Illinois disfavors pro rataallocation absent language in the insurance contract that so requires. 62 F.3d at 962. Allocation is in effect a partial exclusion of the insurer's liability, and thus Illinois's policy resembles in this respect the Ohio principle that an exclusion from liability must be clear and exact in order to be given effect. Lightning Rod, 687 N.E.2d at 719 (citations and internal quotation marks omitted). In the absence of clearer language in the policy, we interpret Ohio law as favoring the larger settlement rule in this instance, and supporting coverage of the settlement except to the extent that uninsured claims have actually increased the insurer's liability. See also Stoller v. Fidelity & Guaranty Ins. Underwriters, Inc., No. WD-87-64, 1988 WL 81809 at  5 (Ohio Ct. App. Aug. 5, 1988) (denying allocation of settlement for coverage purposes and noting that where an insurance company wrongfully disclaims coverage and refuses . . . to participate in settlement . . . such disclaimer is made at its peril). If the uninsured claims would not impose a marginal cost on the insurer, their presence in the settled suit should not operate to exclude the policyholder from coverage for the insured claims (unless an allocation method that mandates this is spelled out in the Policy). 18 As the movant for summary judgment, the insured carries the burden of demonstrating that there is no genuine issue of material fact concerning whether allocation is warranted. See Piper Jaffray Co. v. Nat'l Union Fire Ins. Co., 38 F. Supp. 2d 771, 776 (D. Minn. 1999) (interpreting essentially the same contract as in this case). The district court held that Owens Corning carried its burden by showing that insured defendant directors were sued on all claims; there were no separate claims attributable solely to other corporate employees or to the corporation. National Union claims that even under the larger settlement rule, some of the settlement can be attributed to the corporation, which gained an advantage in avoiding bad publicity and loss of morale. Presumably National Union is arguing that this incentive led the corporation to settle for a higher amount, creating circumstances for allocation. The district court rejected these claims, holding any general corporate motives were not distinct from the motives of the directors, and did not rebut the apparent concurrent liability of the corporate defendant and its directors. 19 An inspection of the language of the Lavalle complaint supports the view that the corporate and director defendants were generally used interchangeably. Piper rejected similar claims of special corporate benefit or corporate vulnerability when faced with the same contract as in this case. 38 F. Supp. 2d at 777-80. The Piper court did accept the existence of one genuine issue of material fact, id. at 778, which involved whether uninsured employees might have been acting independently of the directors. However, this was treated as a rebuttal of the insured's evidence, and no such rebuttal evidence has been offered here to show that the acts of uninsured parties had increased liability. 4