American Cas. Co. v. Bank of Montana System

• Decision Date: 10 December 1987
• Docket Number: Civ. No. 4-87-48.
• Citation: 675 F. Supp. 538
• Parties: AMERICAN CASUALTY CO. OF READING, PENNSYLVANIA, Plaintiff, v. BANK OF MONTANA SYSTEM, Stephen Adams, Lloyd A. Amundson, Alfred T. Burke, Thomas R. Zorr, Joseph Friend, C. Robert Paciotti and Ester M. Devault, Defendants, v. CNA FINANCIAL CORPORATION, Counterclaim Defendant.
• Court: U.S. District Court — District of Minnesota

675 F. Supp. 538

AMERICAN CASUALTY CO. OF READING, PENNSYLVANIA, Plaintiff, v. BANK OF MONTANA SYSTEM, Stephen Adams, Lloyd A. Amundson, Alfred T. Burke, Thomas R. Zorr, Joseph Friend, C. Robert Paciotti and Ester M. Devault, Defendants, v. CNA FINANCIAL CORPORATION, Counterclaim Defendant.

Civ. No. 4-87-48.

United States District Court, D. Minnesota, Fourth Division.

December 10, 1987.

Charles E. Spevacek, John J. McDonald, Jr., Meagher, Geer, Markham, Anderson, Adamson, Flaskamp, Brennan, Minneapolis, Minn., for plaintiff.

Timothy D. Kelly, Stephen P. Kelley, Mackall, Crounse & Moore, Minneapolis, Minn., for defendants.

MEMORANDUM AND ORDER

MacLAUGHLIN, District Judge.

This matter is before the Court on plaintiff's and defendants' cross-motions for summary judgment, plaintiff's motion to dismiss defendants' counterclaims and plaintiff's appeal from an order of the United States Magistrate. Plaintiff's motion for summary judgment will be denied and its motion to dismiss defendants' counterclaims will be denied. Its appeal from the Magistrate's order will be dismissed as moot. Defendants' motion for summary judgment will be granted.

FACTS

This is a contractual dispute involving the interpretation of the fine print in a directors and officers liability insurance policy (D & O policy) issued by plaintiff American Casualty Co. (American) to defendants Bank of Montana System (BMS) and its directors and officers. The coverage of the policy has been called into question as a result of a shareholders' derivative suit filed against BMS and its directors and officers which is currently pending before the Court: Walter v. Bank of Montana System, CIVIL 4-86-412. American has brought a motion for a declaration that under the terms of the policy it is not obligated to reimburse BMS for the legal fees incurred in the Walter litigation which BMS advanced to its directors and officers. American is a Pennsylvania corporation organized with its principal place of business in Pennsylvania. BMS is a Montana multibank holding corporation with its principal place of business in Montana. The individual directors and officers are either Minnesota or Montana residents. CNA Financial Corporation (CNA) is a corporation which operates in part as a holding company for wholly-owned insurance corporations that issue insurance. It is the parent corporation of plaintiff American.¹ Jurisdiction exists under the diversity provisions of 28 U.S.C. § 1332. Plaintiff requests declaratory relief pursuant to 28 U.S.C. § 2201.

In February 1985 American issued a D & O policy to BMS which provided insurance coverage for specified losses arising from claims against the directors and officers of BMS. In April of 1985 BMS notified its shareholders via proxy statement of its intention to go private by means of a 125 to 1 reverse stock split. On May 31, 1985 the BMS shareholders approved the reverse stock split by a vote of 97 percent for, 2.1 percent against and .9 percent abstaining. On May 16, 1986 the dissenting shareholders commenced the derivative suit currently pending before the Court against defendants alleging the reverse split was fraudulent and unfair. BMS had received notice of the suit prior to this time and notified American of the potential claim on March 6, 1986. Affidavit of Philip Walker at 2, par. 3. On March 28, 1986 American had notified the president of BMS that pursuant to the terms of the D & O policy it was not required and did not intend to undertake the defense of any of BMS' directors and officers who were defendants in the derivative suit. Walker Aff. at 2, par 3.

Pursuant to its bylaws BMS has advanced to defendant directors and officers the legal fees incurred by them in defending against the Walter derivative suit. On November 13, 1986 defendants' counsel made demand on American for payment of those fees pursuant to the terms of the D & O policy. American refused, asserting that under the terms of the policy it was under no obligation to advance legal fees prior to the final disposition or settlement of the action. American subsequently filed this action for a declaration that under the policy it did not have to advance legal fees to defendants. Defendants have filed a counterclaim alleging breach of contract, bad faith, and unfair insurance practices. Resolution of this dispute requires the Court to construe the language of the D & O policy and applicable law.

DISCUSSION

I. American's Motion for Declaratory Relief

A. Applicable Law

As a threshold matter the Court must first decide whether Minnesota or Montana law applies in construing the language in the D & O policy. A federal court sitting in diversity must apply the choice of law provisions of the forum state in which it sits to determine the substantive law to be applied in the case before it. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). However, before resorting to a choice of law analysis, the Court must first determine that a conflict exists. Surgidev Corp. v. Eye Technology, Inc., 648 F.Supp. 661, 679 (D.Minn.1986), aff'd, 828 F.2d 452 (8th Cir.1987). Here both Minnesota and Montana have identical rules of construction with respect to insurance policies. In each state ambiguities in an insurance policy must be construed strictly against the insurer and in favor of the insured. Nordby v. Atlantic Mutual Insurance Co., 329 N.W.2d 820, 822 (Minn. 1983); Bauer Ranch v. Mountain W. Farm Bureau Mutual Insurance, 695 P.2d 1307, 1309 (Mont.1985). Language is deemed ambiguous when it is susceptible to conflicting reasonable interpretations. Columbia Heights Motors Inc. v. Allstate Insurance Co., 275 N.W.2d 32, 34 (Minn. 1979); Bauer, 695 P.2d at 1309. In determining whether particular language is ambiguous the words are to be interpreted in their ordinary sense as understood by a reasonable person standing in the insured's shoes. Farmers Home Mutual Insurance Co. v. Lill, 332 N.W.2d 635, 638 (Minn. 1983); Bauer, 695 P.2d at 1309. Accordingly, the Court will apply these principles in construing the contract.

B. The Policy Language

The parties' dispute concerns the meaning of three key provisions of the policy. The first concerns paragraph (b) of the scope section which provides in relevant part that "subject to the terms, conditions, and limitations of the policy" American agrees:

(b) With the Bank that if ... any claim or claims are made against the Directors and Officers, individually or collectively, for a Wrongful Act, the Insurer will pay, in accordance with the terms of this policy, on behalf of the Bank, all Loss ... which the Bank has, to the extent permitted by law, indemnified the Directors and Officers.

Policy at 2, par. (b) (emphasis added).

The policy defines "loss," the second disputed provision, as:

any amount which the Directors and Officers are legally obligated to pay or for which the Bank has, to the extent permitted by law, indemnified the Directors and Officers, for a claim or claims made against the Directors and Officers for Wrongful Acts and shall include but not be limited to damages, judgments, settlements, costs (exclusive of salaries of officers or employees), and defense of legal actions, claims or proceedings and appeals therefrom....

Policy at 1, par. 1(d) (emphasis added).

"Wrongful act" is defined as:

any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the Directors or Officers in the discharge of their duty solely in their capacity as Directors or Officers of the Bank....

Policy at 1, par. 1(e).

Finally, the third key disputed section entitled "Costs, Charges and Expenses" provides:

(a) No costs, charges and expenses shall be incurred or settlements made without the Insurer's consent which consent shall not be unreasonably withheld: however, in the event such consent is given, the Insurer shall pay, subject to the provisions of Clause 4, such costs, settlements, charges and expenses.

(c) The Insurer may at its option and upon request, advance on behalf of the Directors or Officers, or any of them, expenses which they have incurred in connection with claims made against them, prior to disposition of such claims, provided always that in the event it is finally established the Insurer has no liability hereunder, such Directors and Officers agree to repay to the Insurer, upon demand, all monies advanced by virtue of this provision.

Policy at 3, par. 5(a), (c).

The policy also contains five exclusions, two of which are relevant to this dispute. Under the policy American is not liable for loss in connection with any claim against the directors and officers:

(2) based upon or attributable to their gaining in fact of any personal profit or advantage to which they were not legally entitled;

....

(5) brought about or contributed to by the dishonesty of the Directors or Officers. However, notwithstanding the foregoing, the Directors or Officers shall be protected under the terms of this policy as to any claims upon which suit may be brought against them, by reason of any alleged dishonesty on the part of the Directors or Officers, unless a judgment or other final adjudication thereof adverse to the Directors or Officers shall establish that acts of active and deliberate dishonesty committed by the Directors or Officers with actual dishonest purpose and intent were material to the cause of action so adjudicated.

Policy Par. 3(a)(2), (5).

It is undisputed that BMS has advanced to the defendant directors and officers the legal fees that they have incurred to date in defending the derivative suit. Simply put, BMS argues that it is entitled to reimbursement from American because:

1. The derivative suit concerns claims against BMS' directors and officers alleging wrongful acts, as defined by the policy.

2. BMS is permitted by law to advance the legal fees of its directors and officers in the

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