168 F.3d 956 (7th Cir. 1999), 98-2094, Level 3 Communications, Inc. v. Federal Ins. Co.

Docket Nº:98-2094.
Citation:168 F.3d 956
Party Name:LEVEL 3 COMMUNICATIONS, INC., Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY and Pacific Insurance Company, Defendants-Appellees.
Case Date:February 16, 1999
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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168 F.3d 956 (7th Cir. 1999)

LEVEL 3 COMMUNICATIONS, INC., Plaintiff-Appellant,


FEDERAL INSURANCE COMPANY and Pacific Insurance Company,


No. 98-2094.

United States Court of Appeals, Seventh Circuit

February 16, 1999

Argued Nov. 4, 1998.

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Brian D. Sieve (argued), Brett A. Bakke, Kristine L. Anderson, Kirkland & Ellis, Chicago, IL, for Level 3 Commmunications, Inc.

Jonathan A. Constine (argued), Hogan & Hartson, Washington, DC, for Federal Insurance Co.

David L. Koury, Peterson & Ross, Chicago, IL, for Pacific Insurance Co.

Before POSNER, Chief Judge, and BAUER and EVANS, Circuit Judges.

POSNER, Chief Judge.

This diversity suit, governed by Nebraska law (though no peculiarities of that law bear on the case), seeks $14 million in damages for breach of a contract of directors' and officers' liability insurance. Peter Kiewit Sons', Inc. was sued along with one of its directors in 1994 by six (two others joined later, making eight) of its minority shareholders for securities fraud and related torts. Kiewit's successor seeks through the present suit, which is against its primary and excess insurers (but we'll ignore the latter, and pretend there is just one insurance company, Federal, to simplify our opinion further), to recoup the costs that it incurred in defending against and eventually settling the securities case.

One of the plaintiffs in that suit, Pompliano, who joined it six months after it had been filed, had until June 1991 been a director of one of Kiewit's subsidiaries. The insurance contract excludes liability on account of any "Claim made against an Insured Person" if the Claim is "brought or maintained by or on behalf of any Insured." "Insured Person" is defined to include a "person who has been, now is, or shall become a duly elected director or a duly elected or appointed officer of the Insured Organization" (emphasis added), and "Insured Organization" is defined as Kiewit plus its subsidiaries. So Pompliano was an "Insured." The district court held, granting summary judgment for Federal, that the "Insured versus Insured" exclusion (a standard exclusion in D & O

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policies, 2 William E. Knepper & Dan A. Bailey, Liability of Corporate Officers and Directors § 25-7, p. 443 (5th ed.1993); Nicholas E. Chimicles & M. Katherine Meermans, "The Insured vs. Insured Exclusion in D & O Insurance Policies," C938 ALI-ABA 749 (1994)) was therefore applicable. The result was that Kiewit had no coverage. The issue is whether the presence of one "Insured" in a group of plaintiffs was indeed enough to trigger the exclusion.

Read literally, the contract clearly excludes coverage for the part of the settlement, and other expenses of the securities suit, allocable to Pompliano (the significance of this qualification will become clear later), as he was a plaintiff and a former director of one of Kiewit's subsidiaries. But Kiewit asks us to read the "Insured versus Insured" exclusion in light of its purpose, which is to exclude coverage both of collusive suits--such as suits in which a corporation sues its officers or directors in an effort to recoup the consequences of their business mistakes, e.g., Township of Center v. First Mercury Syndicate, Inc., 117 F.3d 115, 119 (3d Cir.1997); Fidelity & Deposit Co. v. Zandstra, 756 F.Supp. 429, 431-32 (N.D.Cal.1990); 2 Knepper & Bailey, supra, § 25-7, p. 443, thus turning liability insurance into business-loss insurance--and of suits arising out of those particularly bitter disputes that erupt when members of a corporate, as of a personal, family have a falling out and fall to quarreling. Township of Center v. First Mercury Syndicate, Inc., supra, 117 F.3d at 119. Kiewit argues that the suit in which Pompliano is a party is of neither sort, and would not be even if he were the only plaintiff.

The fallacy in the argument is in confusing a rule with its rationale, or in turning a rule into a standard by reference to its rationale. There is a tradeoff between clarity and ease of...

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