International Surplus Lines Ins. Co. v. Manufacturers & Merchants Mut. Ins. Co.

• Decision Date: 19 July 1995
• Docket Number: No. 94-133,94-133
• Citation: 140 N.H. 15,661 A.2d 1192
• Parties: INTERNATIONAL SURPLUS LINES INSURANCE COMPANY v. MANUFACTURERS & MERCHANTS MUTUAL INSURANCE COMPANY and another.
• Court: New Hampshire Supreme Court

Page 1192

661 A.2d 1192

140 N.H. 15

INTERNATIONAL SURPLUS LINES INSURANCE COMPANY v. MANUFACTURERS & MERCHANTS MUTUAL INSURANCE COMPANY and another.

No. 94-133.

Supreme Court of New Hampshire.

July 19, 1995.

Wiggin & Nourie, P.A., Manchester (Gary M. Burt on the brief and orally), for plaintiff.

McLane, Graf, Raulerson & Middleton, P.A., Manchester (Jack B. Middleton on the brief, and Mr. Middleton orally), for defendants.

JOHNSON, Justice.

The defendants, Manufacturers & Merchants Mutual Insurance Company (MMMIC) and its president, Charles J. Gesen, appeal the Superior Court's (Arnold, J.) ruling that the plaintiff, International Surplus Lines Insurance Company (ISLIC), need not defend and indemnify them under a professional liability policy in suits brought against the defendants by some of MMMIC's former shareholders. We affirm based on an exclusion in the policy barring coverage for claims arising from "any act, error or omission occurring prior to the effective date of this policy if ... the insured at the effective date of this policy knew or could have reasonably foreseen that such act, error or omission might be the basis for claim or suit." ISLIC filed a cross-appeal, but our holding obviates the need to address the issue raised therein.

The trial court made the following findings of facts. For many years, MMMIC operated as a hybrid mutual/stock company. At some point, the New Hampshire Insurance Department (the department) questioned the nature of MMMIC's corporate form. After holding hearings on the issue, the department ordered MMMIC in 1986 to begin operating solely as a mutual company. MMMIC, accordingly, developed a plan to redeem all of its outstanding stock. Eight and one half million dollars were to be paid to MMMIC's twenty-nine shareholders in exchange for their stock, two million dollars placed in escrow to pay for the costs of transacting the redemption, and six million dollars retained in MMMIC's surplus. In addition, the shareholders were to be held liable for any transaction costs in excess of the escrow amount, including State and federal taxes. The shareholders approved the plan in December 1986, and the stock was redeemed later that month.

The transaction costs exceeded the escrow amount by $131,167. In December 1987, MMMIC requested payment of the excess from the former shareholders. A group of these former shareholders did not pay and hired an attorney, Russell Hilliard, to represent their interests. In early 1988, Hilliard asked MMMIC's then-attorney, Sherilyn Burnett Young, for documents relating to the department hearings and the approval of the redemption plan.

In July 1988, Hilliard wrote to Young:

For a variety of reasons, my clients ... remain unwilling to make any payments for the so-called excess transaction costs, or to acknowledge any liability with respect to the business profits tax contingency. As you know, these reasons include questions with respect to the asset valuation, the tax treatment of the redemption, and the lack of notification as to the business profits tax matter.

(Emphasis added.) "[A]sset valuation" referred to the valuation of MMMIC's assets for purposes of determining the redemption price of its stock. At a meeting in August 1988 attended by Gesen, Hilliard, and some of the protesting shareholders, Hilliard described his clients' grievances concerning the stock redemption, including their complaints about the asset valuation; one of the shareholders told Gesen he was "inept."

In December 1988, Young sought "to confirm that the remaining issues outstanding to resolve the stock redemption questions with your clients are the Business Profits Tax (BPT) liability and this tax issue." Hilliard replied in January 1989 that, in addition, "my clients have other concerns about the manner in which the redemption plan was accomplished, and the substance of it." Hilliard had explained earlier that his clients felt that the asset valuation had been performed incorrectly, resulting in their stock being undervalued.

On May 3, 1989, the ISLIC policy at issue here became effective. In this one-year policy, ISLIC promises:

To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as money damages as a result of claims first made against the insured and reported to the company during the policy period by reason of any act, error or omission in ... directing or managing the named insured.

Exclusion (i) of the policy bars coverage for claims based on "any act, error or omission occurring prior to the effective date of this policy if ... the insured at the effective date of this policy knew or could have reasonably foreseen that such act, error or omission might be the basis for claim or suit."

On December 21, 1989, Hilliard, on behalf of his clients, made a formal demand that MMMIC pay each protesting shareholder $100,000 "in full satisfaction of any and all claims each may have with respect to the valuation and redemption process." MMMIC promptly notified ISLIC of a possible claim against the company and in August 1990 sued the protesting shareholders for payment of the excess transaction costs. The shareholders then sued MMMIC and Gesen for rescission of the redemption plan and damages for undervaluation of the stock they had held.

ISLIC petitioned the superior court for a declaratory judgment that it was not obligated to defend or indemnify MMMIC and Gesen in the lawsuits brought by the protesting shareholders. After hearing testimony from Young, Hilliard, and Gesen, the court ruled in ISLIC's favor based on exclusion (i). It found that "prior to May 3, 1989, MMMIC and Charles Gesen ... knew or reasonably could have foreseen that their acts, errors or omissions might be the basis for claim or suit." The defendants appealed.

The parties agree that claims were first made against the defendants during the May 3, 1989--May 3, 1990 policy period, but disagree over the application of exclusion (i). The defendants argue first that exclusion (i) is overly broad and harsh, leaving the policyholder at the mercy of the insurer. See Thiem v. Thomas, 119 N.H. 598, 604, 406 A.2d 115, 119 (1979). As stated, the exclusion bars coverage for claims based on "any act, error or omission occurring prior to the effective date of this policy if ... the insured at the effective date of this policy knew or could have reasonably foreseen that such act, error or omission might be the basis for claim or suit." Focusing on the word "might," the defendants state in their brief that "an insured in our litigious society could reasonably foresee that its every 'act' 'might be the basis for claim or suit.' "

Although the word "might" could be stretched to achieve such a construction, the context in which it appears does not support this interpretation. If "might" were so all-encompassing, no coverage would exist for any claims arising from prior acts, and that part of the exclusion which relates to foreseeability and the insured's knowledge would be rendered surplusage. We will not presume language in a policy to be mere surplus. Commercial Union Assurance Co. v. Brown Co., 120 N.H. 620, 623, 419 A.2d 1111, 1113 (1980).

Moreover, we do not believe that the trial court interpreted the exclusion in such a broad manner. The court did not rule in ISLIC's favor simply because the shareholders' claims were based on prior acts. Rather, it found exclusion (i) applicable because, it concluded, the defendants could have reasonably foreseen before May 3, 1989--the effective date of the policy--that these acts might be the basis for a claim or suit. The shareholders' suits were based on a claim that MMMIC undervalued its assets...