Troutman Sanders’ Win: Seventh Circuit Issues Significant “No-Loss” Decision and Clarifies the Mend-the-Hold Doctrine
The Seventh Circuit recently affirmed summary judgment in favor of Troutman Sanders’ client, Federal Insurance Company, in a dispute concerning the coverage provided by a directors and officers insurance policy. The Court held that Ryerson Inc. was not entitled to insurance for the settlement of a suit in which it was alleged that Ryerson had defrauded the purchaser into paying an inflated price for one of Ryerson’s subsidiaries.
In 1998, Ryerson sold a group of its subsidiaries to EMC Group, Inc. for $29 million. Shortly after the sale closed, EMC discovered that Ryerson had concealed material information regarding one of the subsidiaries’ largest customer’s plans to stop transacting business with the subsidiary unless it drastically reduced its prices. EMC sued Ryerson for rescission of the contract and for restitution for the inflated purchase price. Ryerson settled the suit by paying $8.5 million in what the parties characterized as “a post-closing price adjustment.”
Ryerson then filed suit against Federal, seeking coverage under an “Executive Protection Policy” for the $8.5 million payment. Federal moved for summary judgment and argued that Ryerson’s $8.5 million settlement did not constitute a “loss” within the meaning of the policy. Ryerson countered by arguing that the settlement was within the definition of “loss” and that Federal was precluded by the “mend the hold” doctrine from raising the “no loss” argument because Federal did not address that issue in pre-litigation correspondence with Ryerson.
The District Court granted Federal’s motion for summary judgment, and the Seventh Circuit affirmed. Writing on behalf of the Court, Judge Richard Posner agreed with Federal and held that having to surrender ill-gotten profits is not a “loss” within the meaning of an insurance policy. By way of illustration, the Court explained that if “disgorging such proceeds is included within the policy’s definition of ‘loss,’ thieves could buy insurance against having to return money they stole. No one writes such insurance.”
The Court also explained that the mend-the-hold doctrine does not apply because the doctrine does not prohibit a defendant from adding a defense after being sued. In other words, Federal’s defenses are not limited by what was stated in its pre-litigation correspondences with Ryerson. The Court stated that “[t]o require a potential defendant to commit irrevocably to defenses before he is sued would be unreasonable to the point of absurdity.”
The Ryerson decision builds on the Seventh Circuit’s earlier opinion in Level 3 Communications, Inc. v. Federal Insurance Company, which held that a “loss” within the meaning of an insurance policy does not include the restoration of an ill-gotten gain. The Court’s opinion also rejected the expansive interpretation of the mend-the-hold doctrine urged by Ryerson, and clarified that an insurer is not estopped from raising a coverage issue simply because it does not reference the issue in a letter to the insured.
Federal is represented by Eileen King Bower, Christopher White, and Seth Erickson from Troutman Sanders’ Chicago office, and by Wallace Christensen from Troutman Sanders’ Washington office.
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