Opinion ID: 803381
Heading Depth: 3
Heading Rank: 1

Heading: Level 3 Communications

Text: In Level 3 Communications Inc. v. Federal Insurance Co., 168 F.3d 956 (7th Cir. 1999), the issue was whether a D&O 10 Nos. 10-3839, 10-3856, 10-3883 & 10-3884 policy’s insured vs. insured exclusion barred coverage of a lawsuit by seven non-insured plaintiffs after one insured plaintiff joined the lawsuit six months later. We held that “the insurance contract requires allocation of covered and uncovered losses rather than barring all recovery because of the presence of an insured on the plaintiff’s side of the case.” Id. at 959. We ordered the insurer to pay the insured corporation an amount equal to the amount of the settlement in the fraud case minus the amount that was paid to the insured plaintiff. Id. at 961. We reached this result by applying the allocation clause of the policy to a “Claim,” defined by the policy as “a civil proceeding commenced by the service of a complaint or similar pleading.” Id. at 960. The insured vs. insured exclusion of the policy removed from liability “any ‘Claim made against an Insured Person’ if the Claim [was] ‘brought or maintained by or on behalf of any Insured.’ ” Id. at 957. With respect to allocation, we acknowledged that the presence of just one insured plaintiff in the underlying case “could conceivably contaminate the entire litigation, particularly if the insured were a current officer or director of the defendant and the principal plaintiff.” Id. at 960. “But,” we wrote, “the contract deals with this problem in another way, by requiring allocation of covered and uncovered losses.” Id. Quoting the allocation provision, we explained: “If both sorts of loss occur ‘because a Claim against the Insured Persons includes both covered and uncovered matters, . . . the Insureds and the [Insurance] Company shall use their Nos. 10-3839, 10-3856, 10-3883 & 10-3884 11 best efforts to agree upon a fair and proper allocation of such amount between covered Loss and uncovered loss.’ ” Id. at 960. The definition of the term “Claim” used in the insured vs. insured exclusion did not prevent us from applying the allocation clause to distinguish covered from uncovered loss based on the status of a plaintiff as non-insured and insured: Remember that a “Claim” is defined as a civil pro- ceeding, here the securities fraud suit against Kiewit [the corporation] and one of its directors. The “Claim” so defined was against Insured Persons, but it included uncovered matters because one of the plaintiffs was an Insured, with the result that his part of the Claim was not covered by the insurance contract. The contract may, as Federal argues, primarily contemplate a situation in which the suit for which indemnity is sought charges the insured with some wrongs that are covered by the insurance con- tract and some that are not, and damages are awarded for both sorts of wrong and have then to be allocated between the two groups. But a matter could be “uncovered” not because the policy ex- cluded a particular type of act but because it ex- cluded a particular type of claimant who had joined in the suit with persons whose claims were covered. That would be a suit against an Insured Person that involved uncovered as well as covered matters. 12 Nos. 10-3839, 10-3856, 10-3883 & 10-3884 Id. We also noted the “odd result” that would have followed if we had adopted the insurer’s contrary argument: “that a claim fully covered when made could become fully uncovered when another plaintiff was permitted to join it.” Id. Finally, we explained that the allocation clause would take care of hypothetical cases in which insured plaintiffs play a more prominent role, such as when “an Insured Person is the primary suitor.” Id. We suggested that courts interpreting similar policy language in the context of a more active insured plaintiff (that is, a “primary suitor”) could maintain the integrity of the insured vs. insured exclusion by allocating the “bulk of the judgment or settlement . . . to [the insured’s] part of the suit” and correspondingly reducing the exposure of the insurance company. Id. at 961. The relevant terms of St. Paul’s policy in this case are practically indistinguishable from those in the policy in Level 3 Communications. The insured vs. insured exclusion in Level 3 Communications excluded “liability on account of any ‘Claim made against an Insured Person’ if the Claim is ‘brought or maintained by or on behalf of any Insured.’ ” 168 F.3d at 957. The exclusion here states: “The insurer shall not be liable for Loss on account of any Claim made against any Insured . . . brought or maintained by or on behalf of any Insured or Company in any capacity . . . .” The definition of a “Claim” in Level 3 Communications was “a civil proceeding commenced by the service of a complaint or similar pleading.” 168 F.3d at 960. The definition of a “Claim” in the St. Paul policy is: “a civil proceeding against any Nos. 10-3839, 10-3856, 10-3883 & 10-3884 13 Insured commenced by the service of a complaint or similar proceeding.” The allocation provisions are just as similar.1 The allocation provision of the St. Paul policy offers two avenues for allocating claims between covered and uncovered losses. If either the first or second portion applies, “such amount shall be allocated.” The facts presented by this case fall within the terms of the second portion, italicized for emphasis here: If on account of any Claim the Insureds who are covered for such Claim under this Policy incur Loss jointly with others, including any Insureds who are not covered for such Claim under this Policy, or the Insureds incur an amount consisting of both Loss covered by this Policy and loss not covered by this Policy because the Claim includes both covered and uncovered matters, such amount shall be allocated between covered Loss and uncovered loss based upon the relative legal exposures of the parties to covered and uncovered matters. As in Level 3 Communications, the lawsuit that combines claims by insured and non-insured plaintiffs presents a “Claim” that includes both covered and uncovered matters, depending on the status of the different plaintiffs. 1 In Level 3 Communications: “If both [covered and uncovered losses] occur ‘because a Claim against the Insured Persons includes both covered and uncovered matters, . . . the Insureds and the [Insurance] Company shall use their best efforts to agree upon a fair and proper allocation of such amount between covered Loss and uncovered loss.’ ” 168 F.3d at 960. 14 Nos. 10-3839, 10-3856, 10-3883 & 10-3884 The covered matters are the claims for damages by the non-insured plaintiffs. The uncovered matters are the claims brought by or on behalf of insured plaintiffs. Under the reasoning of Level 3 Communications, St. Paul owes a duty to indemnify its insureds for the claims brought by the non-insured Kings but not those brought by the insured Miller, Anderson, and Lane. 2. Applying or Distinguishing Level 3 Communications To avoid this result, St. Paul argues we should limit our holding in Level 3 Communications based on two factual differences: timing and majority rule. Neither has a basis in the policy language, and we reject both proposed distinctions. First, St. Paul points out that the insured plaintiff in Level 3 Communications did not join the lawsuit until six months after it was filed. Our interpretation of the key policy language did not depend on the timing. Our reasoning was equally applicable to simultaneous claims by insured and non-insured plaintiffs. The late joinder in Level 3 Communications certainly highlighted how arbitrary the rule advocated by the insurer would be, but if we were to distinguish that case from this one based on that timing, we would be adopting an equally arbitrary rule that could be evaded easily by filing separate lawsuits or by having insured plaintiffs join lawsuits a few months (or weeks, or days?) after they were filed. Timing is not a valid distinction between this case and Level 3 Communications. Second, St. Paul argues for a “majority rule” of sorts that would base coverage decisions in mixed cases like Nos. 10-3839, 10-3856, 10-3883 & 10-3884 15 this on either the number of or the proportion of damages claimed by insured plaintiffs as opposed to noninsured plaintiffs. Counting noses, we have three insured plaintiffs and two non-insured plaintiffs in this case. Counting the damages claimed, the three insured plaintiffs seek 81% of the total while the two non-insured plaintiffs seek 19%. This proposed additional requirement for a majority of non-insured claimants or dollars has no basis in the St. Paul policy language. It would also invite similarly arbitrary results, depending again on whether insured and non-insured plaintiffs filed separate or joint complaints.2 What would happen if one or more plaintiffs settled so as to shift the balance one way or the other? And should the relevant majority be the number of claimants or the number of dollars? By contrast, the allocation provision in the St. Paul policy gives us a fairly clear answer: coverage is not all-or-nothing based on one of these (perhaps unstable) majorities. 2 This potential for arbitrary results is apparent in St. Paul’s effort to distinguish Megavail v. Illinois Union Insurance Co., No. 05-1374-AS, 2006 WL 2045862 (D. Or. July 19, 2006), which followed our holding in Level 3 Communications and ordered partial coverage. St. Paul argues there is a bright line between the facts of Megavail and the facts presented here—“in that only two of the six plaintiffs were insured” in Megavail, as compared to three of five plaintiffs in this case. Under St. Paul’s proposed nose-counting standard, a case brought by 99 insured and one non-insured plaintiff would not be covered, but neither would a case brought by 51 insured and 49 non-insured. This “majority rule” is arbitrary and has no basis in the policy language. 16 Nos. 10-3839, 10-3856, 10-3883 & 10-3884 Coverage is allocated based on “the relative legal exposure of the parties to covered and uncovered matters.” In fact, the situation here was one we contemplated in Level 3 Communications, as a case in which the “primary suitor” would be an insured plaintiff whose claims would be excluded from coverage. Courts facing such cases could protect the insurer’s expectations and enforce the insured vs. insured exclusion by allocating the bulk of a judgment or settlement to the insured’s part of the underlying lawsuit. 168 F.3d at 960-61. We reject St. Paul’s proposed majority rule for treating a lawsuit combining covered and uncovered claims as either completely covered or completely uncovered. In proposing these factual distinctions that we reject, St. Paul has relied heavily on Sphinx International Inc. v. National Union Fire Insurance Co., 412 F.3d 1224 (11th Cir. 2005). In that case, the Eleventh Circuit dealt with a lawsuit that combined claims of insured and non- insured plaintiffs similar to this case, but with very different policy terms. In Sphinx International, the primary plaintiff in the underlying suit was a former director of the company and thus an “insured” for purposes of the D&O policy. On the same day that the insured plaintiff filed a securities class action suit against Sphinx, he published a nationwide notice soliciting other Sphinx shareholders to join his suit. The former director then amended his complaint to add as plaintiffs the shareholders who accepted the invitation. Id. at 1225-26. The policy language applied by the court in Sphinx International barred coverage of claims brought: Nos. 10-3839, 10-3856, 10-3883 & 10-3884 17 By or at the behest of . . . any DIRECTOR or OFFICER . . . unless such CLAIM is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any DIRECTOR or OFFICER of the COMPANY or any affiliate of the COMPANY. Id. at 1231 (emphasis added). Because the former director in Sphinx International actively solicited the other plaintiffs, the “plain and clear” language of the insured vs. insured exclusion barred the entire lawsuit. Id. We have no disagreement with that reasoning, but we find no similar language in the St. Paul policy that would defeat coverage for a claim by a non-insured plaintiff depending on whether she acted independently of insured plaintiffs. A proper appreciation of the different policy language in the two cases is more than suf- ficient to support the Eleventh Circuit’s ruling without reading into the decision any arbitrary limit on Level 3 Communications. In fact, the Eleventh Circuit made clear that it was “not saying that Level 3 Communications was wrongly decided,” but that its facts, including the policy language, were “too dissimilar to our own to be decisive.” Id. Finally, St. Paul argues that Level 3 Communications should be distinguished because the St. Paul policy includes seven exceptions to the insured vs. insured exclusion. All seven exceptions provide coverage of certain claims brought entirely by insured plaintiffs. As an example, one of the exceptions extends coverage to a claim brought by a person who was a director or officer of the company more than six years ago (that is, an insured), so 18 Nos. 10-3839, 10-3856, 10-3883 & 10-3884 long as the person brings the claim “without the solicitation, assistance or active participation” of a person who was a director or officer of the company within the last six years. St. Paul attempts to tease from these exceptions a general standard for deciding coverage issues based on the degree of involvement of insured plaintiffs in the suit. St. Paul contends that, by negative implication, the exceptions to the insured vs. insured exclusion bar coverage of an entire claim when it includes the “active” (as opposed to “passive”) participation of any insured plaintiff, regardless of whether the other plaintiffs are insured or not. The flaw in St. Paul’s position is that it has no basis in its policy language. The exceptions to the insured vs. insured exclusion restore coverage for subsets of claims brought by insureds themselves. The exceptions provide no guidance on how to treat claims by non-insured plaintiffs who were never subject to the exclusion. St. Paul’s argument here simply asks the courts to rewrite its policy to read more like the policy in Sphinx International. Our job of course is to interpret the policy language as written, not as a party wishes it had been written in hindsight. For these reasons, we decline St. Paul’s invitation to impose arbitrary limits on the reasoning of Level 3 Communications, whether based on the timing of the insureds’ entry into the lawsuit, the proportion of damages sought by insureds, or the “active” versus “passive” involvement of the insureds. The allocation clause in the St. Paul policy leads to the proper result: claims brought Nos. 10-3839, 10-3856, 10-3883 & 10-3884 19 by or on behalf of insureds are excluded, while those brought by non-insureds are not. St. Paul has a duty to indemnify against losses to the non-insured plaintiffs.