Sphinx Intern. v. National Union Fire Ins. Co.

• Decision Date: 14 June 2005
• Docket Number: No. 03-13214.,03-13214.
• Citation: 412 F.3d 1224
• Parties: SPHINX INTERNATIONAL, INC., Bahram Yusefzadeh, Raju Shivdasani, Plaintiffs-Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, a New York Corporation, Defendant, Genesis Indemnity Insurance Company, a Connecticut Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1224

412 F.3d 1224

SPHINX INTERNATIONAL, INC., Bahram Yusefzadeh, Raju Shivdasani, Plaintiffs-Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, a New York Corporation, Defendant, Genesis Indemnity Insurance Company, a Connecticut Corporation, Defendant-Appellee.

No. 03-13214.

United States Court of Appeals, Eleventh Circuit.

June 14, 2005.

David H. Simmons, Bart R. Valdes, Drage, DeBeaubien, Knight, Simmons, Mantzaris & Neal, LLP, Orlando, FL, for Plaintiffs-Appellants.

Jeffry W. Duffy, Lewis K. Loss, Jennifer L. Gates, Thompson, Loss & Judge, LLP, Jeffrey J. Ward, Ross, Dixon & Bell, LLP, Washington, DC, for Defendant-Appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before TJOFLAT and HILL, Circuit Judges, and GRANADE^*, Chief District Judge.

TJOFLAT, Circuit Judge:

This case is about a directors' and officers' liability policy (D&O policy). More specifically, it's about that D&O policy's "insured vs. insured" exclusion, which acts to bar coverage for claims brought by directors and officers. The district court held on summary judgment that this exclusion bars coverage for claims brought by a former director and officer. We agree and thus affirm.

We divide our opinion in three parts. In Part I, we explain the case's factual and procedural history. In Part II, we apply the law to this history. In Part III, we briefly conclude.

I.

Sphinx International, Inc. was formerly known as Phoenix International Ltd., Inc. Both Sphinx and its predecessor, which we refer to exclusively as Sphinx, design and implement computer software and systems for financial institutions. When Sphinx incorporated in January 1993, Bahram Yusefzadeh became CEO and Chairman of the Board at Sphinx. Prior to incorporation, Yusefzadeh met George Taylor. Soon after their meeting, Yusefzadeh offered Taylor a job as a director and an officer (along with ten percent of the shares of Sphinx). Taylor accepted. Taylor served in these two positions until his employment was terminated in July 1994. Sphinx states that it terminated Taylor's employment because he did not disclose a covenant not to compete from his former job and he misrepresented his qualifications by falsely claiming that he was an expert in client-server technology for financial institutions.

In July 1996, Sphinx contracted with Genesis Indemnity Insurance Co. for D&O policies. In general, D&O policies indemnify directors and officers from liability for their business decisions. While Sphinx had two D&O policies from Genesis, the particular policy at issue here was to run from July 1, 1996 to July 1, 1999, and it was extended to August 13, 2000. This policy was a claims-made policy, which means that it covered Sphinx for claims made during the policy period, irrespective of when those claims arose. The policy also contained an "insured vs. insured" exclusion that barred claims

By or at the behest of ... any DIRECTOR or OFFICER, or by any security holder of the COMPANY, whether directly or derivatively, unless such CLAIM is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any DIRECTOR or OFFICER or the COMPANY or any affiliate of the COMPANY.

The policy defined "director" and "officer" to mean "all persons who were, now are, shall be duly elected Directors or duly elected or appointed Officers of the COMPANY."

For a few years Sphinx did well. But it missed its earnings projections in 1998 and 1999. As a result, Taylor filed a securities class action against Sphinx on November 23, 1999. On that same day, Taylor published a notice in a national newswire service soliciting other Sphinx shareholders. Taylor then amended his complaint to add as plaintiffs the shareholders that responded to his solicitation.

In response to Taylor's lawsuit, Sphinx sought D&O coverage from Genesis. Genesis denied that claim, justifying its denial on the "insured vs. insured" exclusion. Specifically, Genesis said that because Taylor was a former director and officer, the exclusion barred coverage.

Sphinx then filed suit in Florida state court against Genesis and National Union Fire Insurance Company of Pittsburgh, PA. (another company with which Sphinx had insurance coverage). The case was removed to the Middle District of Florida on the basis of diversity of citizenship under 28 U.S.C. §§ 1332, 1341. To make a long procedural story short, there were essentially two sets of motions and responses that matter on this appeal. The first set began with Genesis's "Motion To Dismiss or, in the Alternative, For Summary Judgment," which focused in large part on the "insured vs. insured" exception.¹ The text of that motion focused on Rule 12(b)(6) of the Federal Rules of Civil Procedure, making Genesis's reference to summary judgment somewhat confusing. Sphinx filed a response, arguing that Genesis's motion to dismiss should be denied on several legal grounds, and that Genesis's motion for summary judgment was inappropriate because discovery would reveal documents that could affect the court's decision. The second set began with Sphinx's motion for partial summary judgment. Genesis responded by filing an opposition to Sphinx's motion, where it "request[ed] that the court deny [Sphinx's] motion for partial summary judgment, and grant summary judgment in favor of Genesis."

The district court addressed all of these motions at the same time. Faced with these motions and responses, and several other issues not germane to this appeal the district court granted summary judgement in favor of Genesis and denied everything else. The court wrote that "[s]ince the parties have filed affidavits in support of their positions, the Court will treat [Genesis]'s submission as a motion summary judgment rather than a motion to dismiss." Sphinx Int'l, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA., 226 F.Supp.2d 1326, 1328 n. 1 (M.D.Fla.2002). Sphinx appealed, but because the district court's order did not dispose of the claims against National Union, we dismissed the appeal. Sphinx then settled with National Union, and the district court dismissed the suit against it, in effect making the court's earlier summary judgment decision now final and appealable.

II.

We review a district court's rulings on motions for summary judgement de novo, and we "apply the same legal standards that bound the district court." Nat'l Fire Ins. Co. of Hartford v. Fortune Constr. Co., 320 F.3d 1260, 1267 (11th Cir.2003). But we "may affirm the district court where the judgment entered is correct on any legal ground regardless of the grounds addressed, adopted or rejected by the district court." Bonanni Ship Supply, Inc. v. United States, 959 F.2d 1558, 1561 (11th Cir.1992).

This case requires us to consider state-law contract claims. "Under the Erie doctrine, a federal court adjudicating state law claims applies the substantive law of the state." Ungaro-Benages v. Dresdner Bank AG, 379 F.3d 1227, 1232 (11th Cir.2004) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)). In particular, "[t]he construction of insurance contracts is governed by substantive state law." Provau v. State Farm Mut. Auto. Ins. Co., 772 F.2d 817, 819 (11th Cir.1985). Thus, we evaluate the insurance policy in this case (i.e., the D&O policy) under Florida law.

Sphinx makes several arguments, three of which deserve discussion. Sphinx's first argument focuses on the D&O policy's language: it argues that Taylor was not a "duly elected" officer or director and therefore not an "insured." Its second argument focuses on the rationale behind the D&O policy: it argues that the "insured vs. insured" exclusion acts only to prevent collusive suits and therefore does not apply because Taylor and Sphinx were adversarial. Sphinx's third argument is its fallback position: it argues that even if the language and rationale act to deny coverage, we should deny coverage only to that percentage of the claim attributed to Taylor. All of these arguments fail. To explain why, we address each argument in turn.

A.

Sphinx's first argument focuses on the meaning of "duly elected." The "insured vs. insured" exclusion bars claims "brought by or at the behest of ... any DIRECTOR OR OFFICER." The policy defines directors and officers as "persons who were, or now are, or shall be duly elected Directors or duly elected or appointed Officers." (Emphasis added). Sphinx contends that Taylor was not a "duly" elected officer or director because he did not disclose a covenant not to compete and misrepresented his qualifications.

Florida courts have said again and again that "insurance contracts must be construed in accordance with the plain language of the policy." Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161, 165 (Fla.2003); see also Hrynkiw v. Allstate Floridian Ins. Co., 844 So.2d 739, 741 (Fla. 5th DCA 2003) (interpreting policy language for its "everyday meaning"). However, "`[i]f the relevant policy language is susceptible to more than one reasonable interpretation, one providing coverage and the [other] limiting coverage, the insurance policy is considered ambiguous.'" Swire Pac. Holdings, 845 So.2d at 165 (quoting Auto-Owners Ins. Co. v. Anderson, 756 So.2d 29, 34 (Fla.2000)). Such ambiguities are "construed in favor of the insured and strictly against the drafter." Swire Pac. Holdings, 845 So.2d at 165. And in cases such as this one that involve exclusions to insurance contracts, the rule is even clearer in favor of strict construction against the insurer: "exclusionary provisions which are ambiguous or otherwise susceptible to more than one meaning must be construed in favor of the insured." State Farm Mut. Auto. Ins. Co. v. Pridgen, 498 So.2d 1245, 1248 (Fla.1986). But courts should not strain to find ambiguity. "Only when a genuine inconsistency, uncertainty, or...