Eighth Circuit Finds that $56 Million Stipulated Judgment Did Not Constitute “Loss” Under D&O Policy
On December 13, 2011, in U.S. Bank National Ass’n v. Federal Insurance Co., et al., the United States Court of Appeals for the Eighth Circuit held that coverage was not available under a D&O policy for a $56 million stipulated judgment entered against an insured D&O. The court found that because the insured had been absolved from liability for the stipulated judgment pursuant to an assignment agreement between the insured and the claimant, the stipulated judgment did not constitute “Loss” under the policy’s definition. The court also rejected the argument that the insurers were estopped from asserting this coverage defense. This advisory explains what the court concluded in that decision.
The $56 million stipulated judgment arose out of Interstate Bakeries Corporation’s (“IBC”) voluntary Chapter 11 bankruptcy reorganization. The bankruptcy creditor’s trust obtained an assignment of the right to bring an action against the former CEO for misdeeds that allegedly caused IBC to lose $170 million. In exchange for this assignment of rights, the trust agreed that it would execute any judgment it obtained solely against potentially liable insurers, rather than the former CEO’s personal assets.
After the parties entered into these agreements, the trust sued IBC’s former CEO. The primary D&O insurer denied coverage because, among other things, it contended that the suit did not seek any covered “Loss” under the policy.
The policy defined “Loss” to mean “the total amount which any Insured Person becomes legally obligated to pay on account of each Claim….” The policy also provided that “Loss” shall not include “any amount not indemnified by the Insured Organization for which the Insured Person is absolved from payment by reason of any covenant, agreement, or court order.”
After the primary insurer denied coverage, the CEO entered into a settlement with the trust that resulted in the stipulated judgment. The trust then filed suit against the primary and excess insurers, seeking to recover the $56 million stipulated judgment. The insurers moved to dismiss the trust’s complaint, arguing among other things that the stipulated judgment was not “Loss” as defined by the policy. The District Court agreed and granted the insurers’ motion to dismiss.
On appeal, the Eighth Circuit declined to decide whether the insured was “legally obligated to pay” the amount covered by the assignment agreement, noting a split of authority and the absence of Missouri law on the issue. However, it concluded that because the CEO had been “absolved from payment” by the assignment agreement, the stipulated judgment did not constitute “Loss” within the meaning of the policy, and so affirmed the dismissal of the coverage action.
The court also rejected the trust’s argument that the insurers were estopped from denying coverage on the theory that they had “abandoned” the insured in refusing to defend him. The court held that, under Missouri law, estoppel cannot be used to expand coverage under a policy to otherwise uncovered claims. Accordingly, the court enforced the policy’s definition of “Loss” as written.