The Eighth Circuit Court of Appeals held that a D&O liability insurer could not rely on ambiguous endorsements as a basis to deny coverage for claims brought by investors against its insured company and its CEO. Reversing the Eastern District of Missouri, the appellate court in Verto Medical Solutions LLC, et al. v. Allied World Specialty Insurance Co., No.19-3511 (8th Cir.), found the policy ambiguous as to whether a contractual liability exclusion had been deleted by endorsement and thus, the insurer must provide coverage for the underlying claims.

Background

Allied World issued a D&O policy covering both Verto Medical Solutions, a headphone manufacturer, and its CEO, Seth Burgett. The policy had a contractual-liability exclusion identified as exclusion “D.” The policy also had two key endorsements:

• Endorsement 11 deleted Exclusion D “in its entirety” and replaced it with another contractual-liability exclusion—also labeled “D.” The replacement Exclusion D was almost identical to the original exclusion.

• Endorsement 13 said “Exclusions A., B., C. and D. . . . are deleted in their entirety and replaced” with a new list of exclusions labeled “A,” “B,” and “C.” None of these replacements contained a contractual-liability exclusion, and none referenced the “new” Exclusion “D.”

If your head is spinning, you are in good company with the panel of Eighth Circuit judges charged with analyzing the policy in connection with a contractual dispute between Verto and a third party.

Verto and Burgett asked Allied World for indemnity and defense coverage under the policy. Allied World declined on both counts, and Verto and Burgett incurred more than $600,000 in attorneys’ fees and expenses in the underlying suit before reaching a settlement. Verto and Burgett then filed a breach of contract action against Allied World seeking reimbursement. The insurer moved to dismiss, arguing that the D&O policy excluded contractual liability claims because Endorsement 11—the endorsement that deleted and replaced the contractual-liability exclusion “D”—unambiguously excluded coverage. In response, Verto and Burgett argued that the policy was ambiguous on this point because Endorsements 11 and 13 each purported to replace an exclusion “D” without specifying which one—original “D” or replacement “D.” The district court agreed with Allied World’s interpretation and dismissed Verto and Burgett’s complaint. It held that Endorsements 11 and 13 together replaced the original contractual-liability exclusion, leaving the new contractual liability exclusion from Endorsement 11 in its place.

Decision and Analysis

On appeal, the Eighth Circuit reversed and ruled in favor of Verto and Burgett. The panel opened its discussion with a statement most coverage attorneys can agree on: “[l]ike many insurance policies, this one is complicated.” The court found that Endorsement 13 injected “uncertainty” by deleting exclusion “D” without specifying which version—the original exclusion or the new exclusion inserted by Endorsement 11—was deleted. The court found the “possibility” that the endorsements deleted and replaced both the original exclusion “D” and the new “D” that replaced it, which would leave the policy without the contractual-liability exclusion at all. This would mean that the contractual liability exclusion on which Allied World relied in denying coverage was stricken from the policy completely.

“If the insurance policy seems unclear,” the court remarked, “it is.” Because Allied World’s policy was reasonably open to two constructions, one followed by Allied World and another presented by the policyholder, the policy was ambiguous as to whether the contractual-liability exclusion remained in force. As such, Missouri law required that the court adopt the policyholders’ reading in favor of coverage. The court instructed that, on remand, Allied World could not argue that the policy contained a contractual-liability exclusion.

The Eighth Circuit correctly followed black letter insurance principles, holding the insurer to a high burden of proving that an exclusion unambiguously applies to a particular claim and is not subject to any other reasonable interpretation. When faced with a lack of clarity, the court also correctly resolved the ambiguity in favor of coverage and against the insurer that drafted the policy.

The combined effect of these principles on insurers is plain: if an endorsement is meant to delete a provision, it must be clear about it. Otherwise, the insurer may lose the benefit of the exclusionary language in both the policy form and its endorsements. As for policyholders, the Verto decision underscores the importance of paying close attention to endorsements purporting to modify, amend, or completely delete key insuring agreements, definitions, and exclusions. Policyholder should not assume that insurer’s interpretations are unassailable or, if the insurer’s view is reasonable, that the insurer’s interpretation is the only one. After all, as the Eastern District of Pennsylvania aptly noted in analogizing Alice in Wonderland and the Minotaur’s labyrinth to an insurance policy:

The over-100-page Policy at issue here can only be described as a labyrinth of pages, paragraphs, and pronouncements. The terms of the Policy require the insured to fall down a rabbit hole and wander through a vast thicket of verbiage that would leave even the most careful reader mystified by the mazes of pages to be pieced together and deciphered in order to determine if there is coverage on the other side.

Susan Spath Hegedus, Inc., v. Ace Fire Underwriters Ins. Co., No. 20-2832 (E.D. Pa. May 7, 2021) (denying an insurer’s motion to dismiss a COVID-19 business income claim).

The court gamely admitted, “interpretation of this Policy is not a task for the faint of heart.” Indeed, both cases highlight the importance of retaining experienced brokers and coverage counsel, not only once a claim arises but also in connection with any policy placement or renewal.