Caterpillar Inc. v. Great American Ins. Co.

• Decision Date: 15 September 1994
• Docket Number: No. 94-1060.,94-1060.
• Citation: 864 F. Supp. 849
• Parties: CATERPILLAR INC., Plaintiff, v. GREAT AMERICAN INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Central District of Illinois

864 F. Supp. 849

CATERPILLAR INC., Plaintiff, v. GREAT AMERICAN INSURANCE COMPANY, Defendant.

No. 94-1060.

United States District Court, C.D. Illinois, Peoria Division.

September 6, 1994.

As Amended September 15, 1994.

William R. Jentes, Chicago, IL, Theodore R. Johnson, Peoria, IL, for plaintiff.

Michael P. Comiskey, Chicago, IL, for defendant.

ORDER

MIHM, Chief Judge.

This matter is before the Court on Caterpillar's Motion for Partial Summary Judgment on Count I of its Complaint. For the reasons set forth herein, Caterpillar's Motion is GRANTED IN PART and DENIED IN PART. The Court certifies certain rulings for an immediate appeal under 28 U.S.C. § 1292(b).

RELEVANT BACKGROUND

This case raises the issues of (1) the proper allocation of a "Loss" between an insured and insurer under a directors and officers liability insurance policy and (2) the proper construction of certain terms in that policy.

On May 11, 1994, the Court approved a settlement valued between $17,250,000 and $23,000,000 in the cases of Kas v. Caterpillar Inc., et al., 815 F.Supp. 1158 (C.D.Ill.1992), and Margolis v. Caterpillar Inc., et al., 815 F.Supp. 1150 (C.D.Ill.1991) ("Kas shareholder litigation"). Those actions involved claims against Caterpillar ("CAT") and five of its directors and officers, alleging violations of federal securities laws and common law fraud. This action involves Caterpillar's claims against Great American Insurance, CAT's directors and officers ("D & O") liability insurer for the relevant period, for reimbursement of 100% of the settlement amount in the Kas shareholder litigation in excess of the applicable retention.

Section I of the Insurance Policy states that Great American agrees:

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.

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 is required to indemnify, or for which the Company has to the extent permitted by law indemnified the Directors or Officers.

The "Wrongful Acts" covered by the policy include:

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 duties solely in their capacity as Directors or Officers of the Company, individually or collectively.

Section III.D. Section II.E defines "Loss" as "compensatory damages, settlements, and Costs of Defense...." Section VA provides that Great American would pay 100% of a "Loss" in excess of the applicable retention amount, $10,000,000 in this case, up to $25,000,000.

The parties do not dispute that CAT must pay the initial $10,000,000 of the Kas settlement. CAT's motion for partial summary judgment on Count I seeks a declaratory judgment that Great American must pay the full amount of the settlement and defense costs, after deducting the $10,000,000 retention. Although CAT's pleadings argue that it should be reimbursed for 100% of the settlement amount and defense expenses, at oral argument, Mr. Jentes, CAT's attorney, indicated that CAT was willing to negotiate with Great American regarding defense expenses and was not asking the court to rule on the amount of defense expenses. Mr. Jentes stated:

We're not asking Your Honor to decide on the amounts of the defense costs.... I might emphasize that that's not something which we necessarily stand pat on what was submitted to the insurance company. That is a negotiable item. I will be very candid with you.

Transcript of May 16, 1994, pp. 49-50. Therefore, this order is limited to the issue of a possible allocation of the settlement amount and not defense costs. The Court will rule on a possible allocation of defense costs later if the parties are unable to reach an agreement on their own.

DISCUSSION

Summary Judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). In considering a motion for summary judgment, the Court views the record and all inferences drawn from it in the light most favorable to the nonmovant. Griffin v. Thomas, 929 F.2d 1210, 1212 (7th Cir.1991). A genuine issue of material fact exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

Great American argues that a dispute of material fact exists regarding whether and by what means CAT "has undertaken to indemnify" the defendant directors and officers for 100% of the settlement payment. According to CAT:

CAT has undertaken to indemnify the Directors and Officers against the full amount of this loss and any costs of defense, as it is specifically authorized to do under the Delaware General Corporation Law.

CAT Memorandum in Support of Partial Motion for Summary Judgment on Count 1, p. 6. Article V of CAT's By-Laws provides for indemnification of its Directors and Officers as follows:

The corporation shall indemnify to the full extent permitted by, and in the manner permissible under, the laws of the State of Delaware any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator of intestate is or was a director or officer of the corporation or any predecessor of the corporation, or served any other enterprise as a director or officer at the request of the corporation or any predecessor of the corporation.

The foregoing provisions of this Article V shall be deemed to be a contract between the corporation and each director and officer who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts.

Affidavit of Gail M. Blades in Support of Partial Summary Judgment, p. 5-6.

Although CAT's by-laws provide for indemnification of its directors and officers, Great American contends that CAT has not offered any evidence to support its claim that it "has undertaken to indemnify" its directors and officers. CAT has not yet indemnified the defendant directors and officers because the administration of the Kas settlement is still ongoing. For example, all settling plaintiffs' proofs of claim were due by July 26, 1994, with 30 days thereafter to cure any deficiencies of which the claimant is advised. See Kas Stipulated Order Amending Order Preliminarily Approving the Settlement, Directing Notice, Providing for Exclusion, and Fixing Hearing Date; Stipulation and Agreement of Settlement; and Order and Final Judgment. Great American contends, and the Court agrees, that it is entitled to discovery regarding whether CAT "has undertaken to indemnify" its directors and officers, by what means, and for what specific amount.

I. Allocation of Kas Settlement Amount

Initially, the Court looks to the parties' insurance policy and finds that, unlike the policies at issue in Safeway Inc. v. National Union Fire Insurance Co., 805 F.Supp. 1484 (N.D.Cal.1992), and First Fidelity Bancorporation and Financial Institutions v. National Union Fire Insurance Company, No. 90-1866, 1994 WL 111363 (E.D.Pa. March 30, 1994), it does not contain a clause explicitly requiring an allocation between the corporation and the insureds. In Safeway, the policy provided:

With respect to the settlement of any claim made against the Company and the Insured, the Company and the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of the settlement amount as between the Company and Insureds.

Safeway, 805 F.Supp. at 1490. Similarly, the policy at issue in First Fidelity provided that in the event of a settlement of a claim where First Fidelity and the directors and officers were both named, the insurance company and First Fidelity were required to "use their best efforts to determine a fair and proper allocation of the settlement amount as between the Company and the Insureds." First Fidelity, 1994 WL 111363, *2. However, the lack of such a provision in this case does not dispose of the allocation issue because the policy clearly provides that only claims made against the directors and officers, not the corporation or other employees, are covered. The policy provides for reimbursement to CAT only for the amount it indemnifies the defendant directors and officers. Moreover, other decisions, including one from the Seventh Circuit, have allowed an insurer to allocate settlement amounts between covered and uncovered claims in the underlying dispute despite the absence of an express allocation provision in the insurance policy. See Harbor Insurance Co. v. Continental Bank Corp., 922 F.2d 357 (7th Cir. 1990); Nodaway Valley Bank v. Continental Cas. Co., 715 F.Supp. 1458 (W.D.Mo.1989), aff'd, 916 F.2d 1362 (8th Cir.1990).

Both parties rely on the Seventh Circuit's decision in Harbor Insurance Co. for guidance on the proper allocation of the Kas...