Caterpillar, Inc. v. Great American Ins. Co., s. 94-3707

• Decision Date: 15 September 1995
• Docket Number: 94-3708,Nos. 94-3707,s. 94-3707
• Citation: 62 F.3d 955
• Parties: CATERPILLAR, INC., Plaintiff-Appellee, Cross-Appellant, v. GREAT AMERICAN INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 955

62 F.3d 955

CATERPILLAR, INC., Plaintiff-Appellee, Cross-Appellant, v. GREAT AMERICAN INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.

Nos. 94-3707, 94-3708.

United States Court of Appeals Seventh Circuit.

Argued April 3, 1995.

Decided Aug. 10, 1995.

Rehearing and Suggestion for

Rehearing En Banc Denied

Sept. 15, 1995.

William R. Jentes (argued), Chaim T. Kiffel, Kirkland & Ellis, Chicago, IL, Theodore R. Johnson, Caterpillar, Inc., Peoria, IL, for plaintiff-appellant.

Michael P. Comiskey (argued), Lyle W. Sparks, William P. Bila, Lord, Bissell & Brook, Chicago, IL, for defendant-appellee.

Gary V. Dixon, Merril Jay Hirsh, David M. Gische, Wallace A. Christensen, Ross, Dixon & Masback, Washington, DC, Robert M. Pozin, Ross, Dixon & Masback, Irvine, CA, for amici curiae.

Before RONEY, ^* FLAUM, and KANNE, Circuit Judges.

FLAUM, Circuit Judge.

Caterpillar, Inc. and Great American Insurance Company both appeal from a decision of the district court granting in part and denying in part Caterpillar's motion for summary judgment regarding the coverage afforded Caterpillar's directors and officers under a directors' and officers' liability insurance policy with respect to claims made against them in a federal class action securities suit. The district court determined that Caterpillar had not breached any conditions precedent in the policy in settling the suit but that Great American was entitled to attempt to allocate a portion of the settlement to uncovered claims or parties. We now affirm that decision but do so with modifications.

I.

This insurance dispute derives from the Brazilian economic crises of the Spring of 1990. These crises substantially injured the Brazilian operations of Caterpillar, Inc., which in turn substantially reduced Caterpillar's profits. The disclosure of that decline in profits caused Caterpillar stock to lose 20% of its value over two days in June, 1990. That price drop subsequently inspired Caterpillar shareholders to sue Caterpillar and five of its directors. See Kas v. Caterpillar, Inc., et al., No. 90-1238, and Margolis v. Caterpillar, Inc., et al., No. 90-1242 (later consolidated as a class action as the Kas litigation).

The Kas complaint alleged several federal securities law (Sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78j(b), 78t and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5) and state law violations based on the defendants' failure to disclose the significance of Caterpillar's Brazilian operations, as well as the costs of a January, 1990 reorganization. Specifically, the Kas plaintiffs asserted that Caterpillar and its officers had indicated that the Brazilian plants accounted for only 5% of overall sales but had neglected to mention that these same plants generated 20% of Caterpillar's profits in 1989 and 30% in the first quarter of 1990. Thus, the plaintiffs argued, investors could not fully appreciate the potential impact of Brazil's economic woes on Caterpillar's bottom line.

At the time the Kas case was filed, Caterpillar held a directors' and officers' liability ("D & O") insurance policy purchased from Great American Insurance Company. ¹ The policy in the present case requires Great American to reimburse Caterpillar's directors and officers (or Caterpillar itself if it had already indemnified the directors and officers) under certain circumstances:

I.A. With the Directors or Officers of the Company that if, during the Policy Period or the Discovery Period, any Claim is first made against the Directors or Officers, individually or collectively, for a Wrongful Act the Insurer will pay on behalf of the Directors or Officers all Loss which the Directors or Officers shall be legally obligated to pay, except for such Loss which the Company actually pays as indemnification.

I.B. With the Company that if, during the Policy Period or the Discovery Period, any Claim is first made against the Directors or Officers, individually or collectively, for a Wrongful Act the Insurer will reimburse the Company for all Loss which the Company has to the extent permitted by law indemnified the Directors or Officers.

The policy also provides for payment of defense costs as well as indemnification above a $10 million retention but does not impose on Great American a duty to defend Caterpillar or its directors or officers against any claims.

The policy further includes a number of duties on the part of Caterpillar, of which two are relevant:

VI.A. The Directors or Officers shall not admit liability for, or settle, any Claim or incur Costs of Defense in connection with any Claim, without the Insurer's prior written consent, which consent shall not be unreasonably withheld. The Insurer shall be entitled to full information and all particulars it may request in order to reach a decision as to such consent. Any Costs of Defense incurred, and/or settlements agreed to prior to the Insurer consent thereto shall not be covered.

VI.C. The Insurer shall at all times have the right, but not the duty, to associate with the Directors or Officers in the investigation, defense or settlement of any Claim, to which this Policy may apply.

Another provision made Caterpillar's "full compliance ... with all of the terms of this Policy" a condition precedent to any indemnification action against Great American.

On July 25, 1990, less than a week after the two Kas complaints were filed, Caterpillar informed Great American of the suits. Great American's counsel acknowledged the litigation and in an October 12, 1990 letter notified Caterpillar in regard to the pending litigation:

In order that we may proceed with our investigation of the facts and circumstances which have given rise to the class actions, we ask that you and counsel furnish us with copies of reports, investigations, pleadings, dispositive motions, briefs court orders and other pertinent documents on a current basis, and provide us with periodic reports on the status of the litigation, as provided in Section VII.C. We would also like copies of defense counsel's invoices as they are generated.

Both before and after this letter, Caterpillar, through its in-house and outside counsel, promised to keep Great American "informed of developments as they occur." Letters from Caterpillar and its lawyers indicate that they provided Great American with notice of numerous motions and memoranda filed with the court and of accumulating defense costs. An October 10, 1991 letter sent to another of Caterpillar's insurers but copied to Great American stated that:

[t]he possibility of settlement prior to finalization of the plaintiffs' complaint is being explored. No definitive offer has been made to, or received from, the plaintiffs. Whether or not an acceptable settlement can be reached will depend on a variety of factors, including the cooperation of Caterpillar's insurers. Needless to say we will keep you advised of developments in this area.

On March 30, 1992, the district court denied Caterpillar's motion to dismiss the Kas complaint for failure to allege scienter adequately. Kas v. Caterpillar, Inc., et al., 815 F.Supp. 1158, 1165 (C.D.Ill.1992). The next day, pursuant to a settlement between it and Caterpillar, the SEC issued an order concluding that Caterpillar had failed to comply with Section 13(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78m(a), as well as with certain rules promulgated thereunder.

During this same time period, Caterpillar, through its initial outside counsel, Orrick, Herrington & Sutcliffe, had discussed a settlement with the Kas plaintiffs that called for a cash payment of $5 million and stock warrants with a minimum value of $15 million and a maximum of $45 million. ² Orrick, Herrington apparently mentioned the offer for the first time in November or December, 1991 and renewed it with reservations in a May 27, 1992 letter. ³ The offer apparently was made again on March 18, 1993, by Kirkland & Ellis, which by then had replaced Orrick, Herrington. ⁴

Great American claims it received no notice of these negotiations until the Spring of 1993. A May 4, 1993 letter from Great American's attorneys to Caterpillar's in-house counsel reflected surprise and dismay that Caterpillar had made any previous settlement offers and professed a lack of prior knowledge of those negotiations. In that same letter, which foresaw many of the arguments Great American raises in the current litigation, Great American complained that Caterpillar was making offers well above what it should have and that these offers unreasonably raised the plaintiffs' expectations of settlement. The letter continued:

We recognize that your decision to proceed without Great American's input was probably based on your conclusion that after allocating the settlement between the liability of the Company (uninsured) and the individual defendants, and applying the $10 million retention to the covered portion, Caterpillar would not be seeking reimbursement from Great American. However, given the magnitude of the plaintiffs' demands, we feel that all settlement proposals should be presented first to Great American, whether or not they are anticipated to involve the coverage.

Great American also responded to the news by engaging a settlement consultant, who issued a report on June 2, 1993, predicting that the Kas litigation should settle for approximately $10.6 million. Caterpillar's next settlement offer, made at a June 29, 1993 meeting, dropped to $4.5. After further negotiations, the parties agreed to a settlement worth between $17.25 and $23 million. Great American approved the settlement subject to certain reservations, and the district court entered the settlement on February 14, 1994.

Prior to the finalization of the settlement, Caterpillar filed the instant suit against Great American seeking a declaration that Great American was liable for the entire settlement amount and defense expenses in excess of the...