Cloudy D&O Policy Language May Force Insurer to Pay for Defense of Investor Suit

Because of “ambiguous” policy language in a complicated insurance contract, a directors and officers insurer may be liable for more than $600,000 in legal fees paid by the founder of a business that was sued by its investors.

A panel of the 8th Circuit Court of Appeals reversed a trial court’s decision to dismiss Verto Medical Solutions’ lawsuit against Allied World Specialty Insurance Co. The appellate court said the wording of the policy was unclear as to whether Allied intended to exclude from coverage damages resulting from contractual disputes.

“If the insurance policy seems unclear, it is,” the ruling says.

Plaintiff’s attorney Cort A. VanOstran, with the Gray Ritter & Graham lawsuit in St. Louis, said the 8th Circuit made the right call.

“Insurance contracts are largely contracts of adhesion,” he said in an email. “Insurance companies and their attorneys write policies and name the premium. Insureds take it or leave it. When an ambiguity exists in a policy, Missouri law is clear: ambiguities are construed against the insurer and in favor of coverage.”

The dispute stems from Seth Burgett’s decision in 2014 to sell the assets of Verto Medical Solutions to Harman International Industries, a Samsung subsidiary. Verto sells the patented Yurbuds brand of sports headphones, or “earbuds.” They are manufactured in St. Louis.

Harman hired Burgett to continue on with Verto as a general manager after the sale. The relationship soured after Harman withheld some of the “earn-out payments” it had agreed to pay Burgett if financial goals were met. The parties eventually agreed to a settlement that required Harman to pay $3.5 million to Verto.

Burgett kept a large portion of the settlement money for himself rather than distributing the funds according to reallocation agreements, the opinion says. In 2016, 60 minority investors filed suit in Iowa state court alleging breach of contract, unjust enrichment and fraud.

A Polk County District judge entered a directed verdict against the investors, but by that time Verto had spent more than $600,000 in legal fees. After Allied denied their claim for reimbursement, Burgett and Verto sued in Missouri state court.

The case was removed to the U.S. District Court in St. Louis. Magistrate Judge Noelle C. Collins granted Allied’s motion to dismiss. She said in her ruling that taken as a whole, the policy clearly excluded coverage for damages caused by disputes over “express contracts or agreements.”

The 8th Circuit panel, however, found that the exclusion wasn’t so clear.

The opinion explains that the policy contained an exclusion labeled as “Exclusion D” that, in short, say the insurer is not liable for contractual disputes. The policy also had two key endorsements, labeled Endorsement 11 and Endorsement 13.

Endorsement 11 states that Exclusion D is deleted entirely and replaced with a new Exclusion D that restated the contractual disputes clause but had different exceptions. Endorsement 13 states that Exclusions A, B, C and D are deleted in their entirety and replaced with three new exclusions labeled A, B and C. None of those three exclusions addressed contractual disputes.

The 8th Circuit panel said that leaves two possible interpretations. Endorsement 13 intended to retain the new Exclusion D as restated in Endorsement 11, or it intended to delete both Exclusion Ds, leaving the policy without a contractual-liability exclusion.

The magistrate judge accepted the insurer’s interpretation that the new Exclusion D remains in the policy, but the opinion says a contrary interpretation is not unreasonable.

“Missouri law tells us what to do next,” the opinion says. “When an ambiguity exists, we must construe it against the insurer, the policy’s drafter, even if extrinsic evidence of the parties’ intent is available.”

The 8th Circuit remanded the case to the U.S. District Court in St. Louis. Allied can continue to argue that other exclusions apply, but not the ones labeled Exclusion D, the opinion says.

About the photo: Harman introduced this Yurbud Signature Sound product in 2015. The photo is taken from the manufacturer’s website.