The Seventh Circuit recently withdrew its controversial opinion that broadly interpreted an exclusion in Emmis Communications Corporation’s D&O policy, thereby barring coverage for losses in connection with claims of circumstances “as reported” under Emmis’ other insurance policy. The reversal, while very rare, was the correct result that alleviated concerns about the chilling effect the court’s broad reading of the exclusion may have on policyholders’ decisions to provide notice under all potentially applicable insurance policies.
Emmis attempted to go private in 2010, which resulted in several shareholder lawsuits. A company run by Emmis’ CEO later sued a financing entity that it blamed for the failed go-private transaction. The financing company responded by filing a derivative lawsuit against Emmis executives. Both lawsuits were settled in 2011. The settlement resulted in Emmis obtaining the right to vote for 1.5 million shares of company stock. In 2012, after Emmis used its increased voting power to modify the rights of Emmis’ preferred shareholders, one preferred shareholder (Corre Opportunities Funds) sued the company alleging securities violations related to Emmis’ repurchasing of shares.
Emmis gave notice of the 2012 “COF” lawsuit under policies with Illinois National and Chubb. Illinois National denied coverage under an exclusion for any claim “alleging, arising out of, based upon attributable to or in any way related directly or indirectly, in part or in whole” to certain “Events,” which included “[a]ll notices of claim or circumstances as reported” under a prior Chubb insurance policy. Illinois National argued that the exclusion applied broadly to any claims “as reported” to Chubb, which included the claim at issue because it was also reported to Chubb.
The district court entered summary judgment for Emmis, rejecting Illinois National’s broad reading of the exclusion and concluding that the use of “as reported” in the past tense must “refer to events that had already occurred at the time of drafting.” Therefore, even though both parties’ interpretations were reasonable, the provision was unclear and Indiana law requires reading unclear insurance provisions in favor of coverage. In July, the Seventh Circuit reversed and upheld AIG’s denial of coverage. The three-judge panel found that Illinois National’s interpretation of “as reported” was correct because the phrase has “no discernable temporal limitations.” The Seventh Circuit explained that “[o]nce Emmis or one of its agents reports a claim to Chubb, at any time, then that claim is ‘reported’—and so is excluded.” The timing of the report is “irrelevant,” the appellate court found, so where Emmis conceded that “it did in fact report its claim to Chubb,” that resolved the inquiry.
Last week, in a brief, one-page order, the Seventh Circuit granted Emmis’ petition for panel rehearing, vacated the judgment in favor of Illinois National, withdrew its July opinion, and affirmed the district court summary judgment decision, which it attached to the order.
It is rare that any court grants a petition for reconsideration or rehearing, and it is even rarer that the prior decision is vacated and withdrawn by the very same court (as opposed to by an en banc panel with different judges). In Emmis, however, this was clearly the correct result, and the Seventh Circuit should be applauded for vacating its prior ruling, which was clearly wrong under Indiana (and nearly every state’s) law and could have had a chilling effect on the ability of policyholders to get the benefit of their premium dollars by providing notice under all potentially applicable insurance policies.
The original appellate decision conflicted with well-settled law requiring that policy provisions excluding or limiting coverage must be construed narrowly against the insurer and in favor of coverage. If an insurer relies on such a provision to limit coverage, then it is the insurer’s burden to show that the exclusion unambiguously applies to the claim at issue.
It is common for insurance brokers, risk managers, and coverage counsel to recommend that new claims be noticed to multiple insurers under multiple policies, particularly where there are potential questions regarding what policy or policies should provide coverage. In fact, under most types of insurance, a failure to promptly provide notice of a claim or potential claim could jeopardize coverage. The Seventh Circuit’s broad reading of the Illinois National exclusion for “as reported” claims would have forced policyholders in those situations to make a strategic decision and choose only a single insurer to notify or risk a forfeiture of coverage based on an Illinois National-type exclusion. This clearly was not the intent of the exclusion, which the district court properly interpreted to apply only to claims previously “reported” at the time of drafting. Any lack of clarity with respect to the meaning of the exclusion, as was evident by the parties’ competing application of the policy language to the facts of the claim in Emmis, must be construed against the insurer as the drafter of the policy. The court correctly re-evaluated its prior decision, which conflicted with these principles.