First Circuit holds that church group splintering off from church is not covered by church's directors and officers coverage

The definition of the word chutzpah is when a man kills both his parents and then begs for the court's mercy because he is an orphan.

Typically I would not apply a Yiddish word to a church dispute.  And yet . . .

In January, 2017, members of the Newton Presbyterian Church (NPC) voted to withdraw from the national Presbyterian organization.  The withdrawing members called themselves the Newton Covenant Church (NCC).  The schism arose because the withdrawing members disagreed with the progressive stance of the national organization with respect to same-sex marriage and the ordination of gay, lesbian, bisexual, and transgender ministers.

NPC and the Boston affiliate of the national organization sued NCC and its officers, alleging that they had unlawfully exerted control over real property and bank accounts owned by NPC, had rejected the church's authority to resolve an ecclesiastical schism, and had conducted a vote not authorized under the constitution of  national organization. They sought in part a declaratory judgment that NPC owned church property at 75 Vernon Street in Newton, Massachusetts.

The Massachusetts Superior Court granted partial summary judgment to NPC.  It also held that NPC is the sole and exclusive owner of the real property and ordered NCC and its members to vacate the premises.  The parties subsequently settled. 

NCC had requested a defense from Great American Insurance Company (GAIC) under a Directors and Officers policy GAIC had issued to NPC. NCC asserted that it  was the same legal entity as NPC. GAIC denied the claim.

In Newton Covenant Church v. Great Am. Ins. Co., 956 F.3d 32 (1st Cir. 2020), the United States Court of Appeals for the First Circuit held that NCC was not covered by the policy.  The policy defined "Insured" as the "Organization" and "Insured Persons."  The policy defined the "Organization" as the entity named in the declarations, which in this case was the NPC.  The policy defined "Insured Persons" as "persons who were, now are, or shall be directors, trustees [or] officers . . . of the Organization."

The court held that there was no coverage even to the extent that NCC claimed that it was a segment of the original NPC, and therefore within the definition of Insured, because the policy contained an exclusion for claims between insureds.  The same exclusion excluded coverage to the extent that NCC claimed that it was the original NPC and had simply undergone a name change.  "Because insureds would be on both sides of the litigation, the exclusion would apply."

Everything you ever wanted to know about IDL coverage but were afraid to ask

Here's an article on a type of coverage I had never heard of: independent director liability, or IDL coverage.

This supplements directors and officers (D&O) coverage. My first thought was why such supplemental coverage would be necessary; why not just purchase higher policy limits on D&O coverage. The reason is given at the end of the article: IDL coverage provides peace of mind for outside directors. If a D&O policy is depleted by an Enron-type meltdown, the directors will still have coverage.

If I were an insurance agent or a risk manager I would need to take a hard look at both the D&O coverages and the proposed IDL coverage before I would make a recommendation about whether a corporation should buy the IDL coverage. But, as the article points out, if I were an outside director (who wasn't paying for the policy from my own funds), of course I'd want it because, hey, why not.

First Circuit holds that company is entitled to coverage for claim against its directors and officers for unfair stock redistribution

About a year ago I wrote several posts about Genzyme Corp. v. Fed. Ins. Co., 657 F.Supp.2d 282 (D. Mass. 2009) , a case concerning coverage for settlement of a shareholder claim for unfair stock redistribution. Judge Gertner of the U.S. District Court held that there was no coverage.

In Genzyme Corp. v. Fed. Ins. Co., __ F.3d __, 2010 WL 3991739, the First Circuit has reversed in part, and remanded. It disagreed with Judge Gertner's conclusion that coverage for the loss is barred as a matter of public policy. It also held that while the policy's "Bump-Up" clause does not cover the amount paid by the corporation to settle the claims against it, the policy does cover any settlement amounts paid under an indemnification obligation with respect to the directors and officers. Because a portion of the claim may have been paid to settle claims against directors and officers, the First Circuit remanded the case to the District Court to consider the question of allocation.

First Circuit holds that D and O policy does not provide coverage where directors and officers are not defendants

In Medical Mut. Ins. Co. v. Indian Harbor Ins. Co., 583 F.3d 57 (1st Cir. 2009) the United States Court of Appeals held that under Maine law a Director and Officer ("D & O") liability policy did not provide coverage where only a company, and not its officers and directors, was the defendant--even though the allegations included wrongful conduct on the part of the officers and directors.

Judge Selya held:

D & 0 polices exist to fund indemnification covenants that protect corporate directors and officers from personal liability, not to protect the corporation by which they are employed. The position advanced by the company in this case - extending coverage to situations in which the directors and officers are not themselves the actual targets of the claims made - would if accepted transmogrify D & 0 policies into comprehensive corporate general liability policies. Because such a tansmogrification is contrary to both the letter and the spirit of the D & O policy at issue here, we affirm the district court's entry of summary judgment in favor of the insurer.

U.S. District court holds that there is no coverage to indemnify officers and directors where there is no coverage elsewhere in the policy

In my last few posts I've been discussing Genzyme Corp. v. Fed. Ins. Co., 2009 WL 3101025.

The court held that, because there was no coverage elsewhere in the policy, there was also no coverage under a clause covering all loss for which the insured granted indemnification to its officers and directors. The ruling was based on the public policy that allowing coverage in such circumstances would lead to fraud and chicanery:

[I]t makes little sense to allow a corporation to sidestep coverage limitations in its insurance policy through the simple expedient of claiming that a settlement payment was made to indemnify its directors and officers. Since a corporation can only act through its corporate agents, it will often be the case that when a shareholder can bring a claim against the corporation, she can also bring one against its directors and officers. As the court concluded in the New York case of Reliance Group Holdings, Inc. v. National Union Fire Insurance Co., 188 A.D.2d 47, 54, 594 N.Y.S.2d 20 (N.Y.App.Div.1993), the approach supported by Genzyme would encourage fraud by insured corporations:

Under the construction urged by [the insured corporation and its officer], if an officer or director was sued together with the corporation, the corporation could make full or partial restitution of the embezzled or fraudulently obtained funds purportedly on behalf of its officer, adopt a resolution indemnifying the officer, and then successfully make claim against its D & O insurer for the full amount of the settlement.

The Court refuses to construe the Executive Protection Policy in a manner that would encourage such chicanery.