(Article from Insurance Law Alert, September 2020)
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Addressing a matter of first impression under New York law, a New York appellate court ruled that a bankruptcy exception to an “insured v. insured” exclusion applied to claims brought by a creditor trust against the bankrupt company’s director and officers. Westchester Fire Ins. Co. v. Schorsch, 2020 WL 4905056 (N.Y. App. Div. 1st Dep’t Aug. 20, 2020).
In the wake of a financial scandal and a stock price plummet, RCS Capital Corp. negotiated a restructuring support agreement (“RSA”) with its unsecured creditors and thereafter filed for bankruptcy. The RSA provided for the creation of a Creditor Trust to pursue the bankruptcy estate’s legal claims on behalf of the unsecured creditors. When the Creditor Trust initiated claims against RCS Capital’s directors and officers, Westchester Fire denied coverage on the basis of an insured v. insured exclusion, which bars coverage for “any Claim made against an Insured Person . . . by, on behalf of, or at the direction of the Company or Insured Person.” The policy defines “Insured Person” as “any past, present, or future director or officer.” The defendant insureds argued that coverage was restored by an exception to the exclusion, which applies to claims “brought by the Bankruptcy Trustee or Examiner of the Company or any assignee of such Trustee or Examiner, or any Receiver, Conservator, Rehabilitator, or Liquidator or comparable authority of the Company.” A New York trial court deemed the language ambiguous and construed it in favor of coverage. See May 2019 Alert. The appellate court affirmed.
The appellate court held that the policy was ambiguous as to whether the Creditor Trust was a “comparable authority” under the exception to the exclusion. The court reasoned that
by including the undefined and open-ended phrase “comparable authority” into the D&O policy’s bankruptcy exception, the parties created a broadly applicable exception with no clear limiting principles other than that there should be no coverage where the D&O claims are prosecuted by the DIP or by individuals acting as proxies for the board or the company.
However, the appellate court vacated the lower court’s grant of summary judgment to the defendant insureds on their claim for breach of contract as to coverage and its issuance of a declaration of coverage. The appellate court ruled that, although Westchester Fire was obligated to advance defense costs, material issues of fact remain as to the ultimate issue of coverage, including whether the individual defendant insureds engaged in wrongdoing in their personal, rather than official capacities, and whether the remedy sought in the Creditor Trust action constitutes uninsurable disgorgement payments.