Opinion ID: 177020
Heading Depth: 1
Heading Rank: 1

Heading: The I & O Policy

Text: In its I & O Policy, National Union agreed to pay on behalf of the [Foundation] Loss arising from a Claim ... against the [Foundation] ... for any actual or alleged Wrongful Act [defined in relevant part as] any breach of duty, neglect, error, misstatement, misleading statement, omission or act by or on behalf of the [Foundation as well as] libel, slander, defamation or publication or utterance in violation of an individual's right of privacy. Unlike typical liability insurance, the I & O Policy explicitly stated that National Union d[id] not assume any duty to defend unless defense of the case was tendered in writing by the policyholder. The Foundation does not contend that National Union was asked or required to assume the defense of the Lorillard litigation. [3] Rather, the Foundation's coverage claim is based on another provision of the I & O Policy, which obligated National Union to advance ... at the written request of the [Foundation], Defense Costs prior to the final disposition of a Claim. Such advanced payments by [National Union] shall be repaid to [National Union] by [the Foundation] ... in the event and to the extent that [the Foundation] shall not be entitled under the terms and conditions of this policy to payment of such Loss. National Union's undertaking to advance costs was not open-ended, however. The policy further stipulated that the Foundation shall not ... incur any Defense Costs without the prior written consent of [National Union]. Only those ... Defense Costs which have been consented to by [National Union] shall be recoverable as Loss under the terms of this policy. Another limitation was detailed in the I & O Policy's Exclusion (k), which denied coverage for claims alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of [the Foundation] under any express contract or agreement. Nevertheless, this exclusion would not apply, and coverage would be provided, if liability ... would have attached in the absence of such express contract. 1. The District Court concurred with the Chancery Court's conclusion that the Foundation had an explicit relationship to the MSA. Am. Legacy Found. v. Nat'l Union Fire Ins. of Pittsburgh, Pa., 640 F.Supp.2d 524, 538 (D.Del.2009). Alternatively, the District Court observed, the MSA can be held to be an implied in fact contract as it relate[d] to [the Foundation], which implied in fact contract ha[d] the legal equivalency of an express contract. Id. n. 33. Finding that Lorillard's claims in the underlying suit were based upon breach of that express contract, the District Court held that Exclusion (k) of the I & O Policy precluded coverage. Id. at 537-38. Furthermore, the District Court decided that because Lorillard had not alleged libel or slander in the underlying cases, Exclusion (k)'s escape clause, restoring insurance for those contractual claims that would have attached in the absence of [an] express contract, did not apply. Id. at 538-39. No basis therefore existed to invoke National Union's duty to defend. [4] Id. at 539. 2. The Foundation's request for relief in the case before us is not based on a refusal to assume the defense but rather the failure to advance the costs of the defense. These are discrete concepts. When an insurance company assumes a defense, it retains and remunerates counsel; ordinarily no reimbursement of legal fees is required, even if the underlying claim proves false, fraudulent, or unfounded. In contrast, if an insurer agrees to advance the costs of a defense, as stated earlier, the insured must request in writing the insurer's consent before incurring defense costs and may be required to repay the insurer for advanced payments. The starting point of the coverage analysis is whether the duty to advance costs was activated, and if so, when. National Union's policy does not state when the advance payments were due other than prior to the final disposition of a Claim. The record reveals no explicit requests for National Union's prior approval of particular, designated defense expenses, nor any demands by the Foundation for payment of accrued defense costs, at any time before final resolution of the Lorillard suit. Nor did the Foundation challenge National Union's denial of coverage, based on Exclusion (k), until the filing of this suit. Both parties, in short, seemed content to await the ultimate disposition of the Lorillard claims before turning to the insurance coverage issues. Policyholders in other cases were more forceful in asserting their positions. In Little v. MGIC Indemnity Corp., 836 F.2d 789 (3d Cir.1987) (applying Pennsylvania law), it was undisputed that [the policyholder] ha[d] obtained from [the insurer] whatever consent was required as to the defense costs incurred. Id. at 795. The dispute there involved when the advance payments were to be made. In a declaratory judgment action filed before resolution of the underlying suit, this Court held that the insurer had the duty to advance costs as they came due rather than wait for termination of the underlying claim. Id. at 793-95. [5] Brown v. American International Group, 339 F.Supp.2d 336 (D.Mass.2004), was likewise a declaratory judgment action. There, the court concluded that the duty to advance costs was in effect so long as the underlying complaint suggested a reasonable potential for coverage. [6] Id. at 346-47. The court also held that an exclusion cited by the insurance company to deny all coverage did not control. Accordingly, the duty to advance costs remained viable. Id. Like Little, Brown was filed after the underlying litigation began but before any determination on liability had been made there. And, as with Little, Brown did not result in a monetary judgment. Id. at 347. The Foundation argues that the duty to advance payment of defense costs was triggered by Lorillard's allegations in the counterclaims, the same criterion for determining when the obligation to defend arises in most liability policies. Although that argument may have some weight when an I & O policyholder seeks an interim determination of coverage, it does not win the day here. At no point before suit was filed in the District Court did the Foundation seek a declaratory judgment contesting the application of Exclusion (k), nor did it demand payment of expenses as they came due. A free-floating obligation must be tied to something of substance to be enforceable, in this case, a demand for specific sums of defense costs. Nor was a written request for National Union's consent sought by the Foundation at any time before it brought this suit. Instead, the Foundation's complaint in the District Court sought a monetary judgment of at least $16,828,946.41. [7] This legal action did not commence until after the Delaware Supreme Court had resolved the underlying dispute, holding that the Foundation had not committed any wrongful act against Lorillard. At that point, final determination of the issues arising under the I & O Policy as to the Lorillard claim had been reached. Speculation at an earlier stage in the Delaware suit as to what might have been the outcome of that litigation should not now be the basis for a monetary judgment. The case before us is akin to American Insurance Group v. Risk Enterprise Management Ltd., supra, 761 A.2d 826. There, a personal injury proceeding had settled after many months of discovery. At that point, the insurer denied a putative additional insured's request for reimbursement of the cost of defending the tort action along with the amounts paid in settlement. Id. at 827. The Delaware Supreme Court, commenting on the purported insured's delay in demanding a defense, observed that the determination of whether a duty to defend existed is being made after the underlying litigation has already been settled. For th[is] reason[ ], the urgency that often exists at the outset of litigation is not present. Id. at 829. Accordingly, the Court ruled that determination of coverage must be based on the whole record, including the evidence developed through discovery. Id. at 829-30. The same rationale is pertinent under the I & O Policy dispute here. The legal and factual basis for resolution of the Lorillard suit had been finally adjudicated before the Foundation filed this action to recover defense expenditures. Whatever might have been an obligation to advance moneys during early stages of the Lorillard litigation we need not decide. Reality, not conjecture, establishes that the Foundation is not now entitled to recovery of unadvanced costs of defense under the I & O Policy. 3. Even if this were not the case, we agree with the District Court that coverage under the I & O Policy for the Lorillard claims was barred by Exclusion (k), which provided that National Union would not be liable to make any payment for Loss ... alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of an insured under any express contract or agreement; provided, however, that this exclusion shall not apply to liability which would have attached in the absence of such express contract or agreement[.] According to the Foundation, Lorillard's North Carolina complaint and Delaware counterclaims alleged violations of an implied contract as well as an express one. The Foundation argues that the Chancery Court found that it had adopted the MSA implicitly as well as expressly and, therefore, Exclusion (k) was not operative. We reject that argument. The discussion in the Chancery Court opinion upon which the Foundation relies involved the question of standingspecifically, whether the Foundation had adopted the MSA and could be held liable for breach of that agreement. That court held, and the Delaware Supreme Court affirmed, that the Foundation had adopted the MSA and was bound to its terms and conditions. Lorillard alleged breaches of the MSA, not of any implied obligation to adopt or adhere to that agreement. As the Chancery Court summarized the litigation, [B]oth [parties] agree that the matter presented is a straightforward contractual issue that turns on the legal interpretation of the words of the [MSA]. 886 A.2d at 8. [8] Additionally, the Foundation asserts that Lorillard's allegationsthat the Foundation's ads breaching the MSA's proscriptions against vilification of and personal attacks against the tobacco companieswere, in effect, tort claims and therefore not affected by Exclusion (k). We disagree. The opinions of the Delaware courts make clear that the rulings against Lorillard were not founded on torts of libel, slander, or disparagement. See, e.g., Barry R. Ostrager & Thomas R. Newman, Handbook on Ins. Coverage Disputes, § 20.02[h][3] (15th ed.) (where same or similar exclusion was present, coverage for claims was excluded, whether such claims sounded in tort or contract, so long as they were undeniably linked to contractual claims). We are persuaded that Exclusion (k) remained in effect and, for this additional reason, the I & O Policy did not provide insurance for any part of the Lorillard claims.