Northwest Airlines, Inc. v. Federal Ins. Co., 93-2086

• Citation: 32 F.3d 349
• Decision Date: 10 August 1994
• Docket Number: No. 93-2086,93-2086
• Parties: NORTHWEST AIRLINES, INC., Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 349

32 F.3d 349

NORTHWEST AIRLINES, INC., Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.

No. 93-2086.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 13, 1993.

Decided Aug. 10, 1994.

Michael J. Wahoske, Minneapolis, MN, argued (Thomas Tinkham and Christopher J. Riley, on the brief), for appellant.

David L. Hashmall, Minneapolis, MN, argued (Joseph D. O'Brien, Jr., on the brief), for appellee.

Before MORRIS SHEPPARD ARNOLD, Circuit Judge, JOHN R. GIBSON, ^* Senior Circuit Judge, and WOODS, ^** District Judge.

JOHN R. GIBSON, Senior Circuit Judge.

Northwest Airlines appeals from the district court's ¹ entry of summary judgment for Federal Insurance Company in an insurance coverage dispute. Northwest argues that the district court erred in concluding that its claim for insurance coverage from Federal was not covered under the Federal policies because Northwest failed to comply with the policy's reporting requirements. Northwest contends that Federal waived its right to deny coverage on that ground, and that it complied with the policy's reporting requirements. Northwest also argues that the district court erred in holding that the claim at issue was not covered by the policy. Finally, Northwest contends that Federal waived any defense that the claim was not covered. As we conclude the claim was not covered by the policy, we affirm the district court's judgment.

In the early 1980s, Republic Airlines faced a financial crisis. Republic instituted a 15% pay cut for management employees effective September 1, 1983. In December of 1983, Republic instituted several more measures to reduce expenses, including a program called the "Three-Year Partnership Plan for Financial Health and Competitive Strength." Under the Plan, employees agreed to continue the 15% pay cut for three years and work longer hours, and in return, Republic promised to distribute future profits through an employee stock ownership plan.

By 1985, Republic's financial situation began to turn around. Republic created the Employee Stock Ownership Plan for Salaried Employees, ² and allocated 383,013 shares of common stock and 730 shares of preferred stock and warrants to the Plan. The Plan included eligibility criteria conditioning enrollment in the Plan to management employees employed as of June 30, 1985.

In January 1986, Republic merged with Northwest Airlines, and the shares in the Plan increased in value. On August 5, 1986, a class of former Republic salaried employees sued Republic and Northwest in the District of Columbia, alleging that Republic excluded them from the salaried plan as a result of the June 30, 1985, eligibility date, and this exclusion violated the Employee Retirement Income Security Act of 1974, federal securities law, and state common law. ³ Harris v. Republic Airlines, Inc., Civil No. 86-2147 (D.D.C. filed Aug. 5, 1986).

There are three insurance policies relevant to this dispute. In June 1985, Republic added fiduciary liability coverage to its existing Executive Risk Policy, No. 8108 54 35. The policy had a policy period of December 1, 1984, to December 1, 1985. On February 3, 1986, Federal issued Executive Risk Policy, No. 8108 54 35A, to Republic. The policy had a policy period of December 1, 1985, to December 1, 1986. The merger agreement between Republic and Northwest required Northwest to maintain fiduciary liability insurance policies for five years from the date of the merger to cover acts or omissions of Republic's directors and officers occurring on or before that date, and so Federal issued a policy, No. 8108 54 35B, on August 13, 1986. Policy 35B's stated period was August 13, 1986, to August 13, 1987, with a "retroactive date" of December 1, 1984. Policy 35B terminated coverage under Policy 35A.

In a letter dated November 11, 1987, Northwest formally notified Chubb Group of Insurance Companies, the parent company of Federal and underwriter of the policies, of the Harris lawsuit. The letter explained that because of the merger the reporting of the claim had "slipped through the cracks." One of Chubb's claim examiners, Harry Wallace, reviewed the complaint for coverage and discussed the suit with Lowell Osvog from Chubb's Minneapolis office, who had underwritten the policy. Osvog's notes from this conversation include the following:

Had a claim presented to us 11-87 having been filed 8-6-86. Harry was questioning whether we should accept the claim. We finally agreed that we should under current policy provisions, since we were on the coverages over entire period.

Wallace's notes of the same conversation state:

He agrees that technically under 8-13-87/88 policy there is no coverage as suit was filed against insured prior to Policy Period as defined. But we were on policy 8-13-86/87--loss just wasn't reported to us then. Slim denial. Accept under 8-13-87/88--take advantage of $250,000 deductible.

On April 11, 1988, Chubb acknowledged receipt of the Harris complaint and accepted the claim under policy "8108 54 35" without specifying policy 35, 35A or 35B. Chubb agreed to pay 50% of Northwest's share of defense costs and reserved its right to deny coverage based on three policy exclusions. Chubb also stated:

The foregoing statements of Federal's position as to the coverage for this matter are premised upon the allegations in the Complaint and presently known facts and are by necessity subject to change as additional allegations and facts are developed through the course of discovery and further pleading. We expressly reserve all rights under the policy and available at law to deny coverage and/or rescind the policy on additional and alternative bases as other terms, conditions, exclusions, endorsements and provisions of the policy, including representations, statements, declarations and omissions in connection with the application therefor, are found to be applicable.

Northwest protested Chubb's decision to pay only 50% of defense costs, arguing that Chubb should pay all defense costs because the alleged wrongdoing related to Republic's acts before the merger.

After negotiations between Chubb and Northwest, Chubb agreed to pay 85% of Northwest's defense costs incurred in defending the Harris suit. A memo written by Mark Wade of Chubb acknowledges that "[w]hile there was some delay in notice on [Northwest's] part, we did have notice of the other Northwest matters."

Ultimately, Northwest settled the Harris case for a confidential amount, which exceeded the policy limits. Northwest then brought this action against Federal to recover the proceeds under its fiduciary liability policies 35A and 35B. Federal raised several defenses to coverage based on the policy and also for the first time, denied liability based on Northwest's failure "to meet all conditions precedent for coverage." Both sides filed motions for summary judgment.

The district court granted Federal's motion for summary judgment on two grounds. First, the court ruled that Republic failed to comply with the reporting requirements under Policy 35A. Northwest Airlines, Inc. v. Federal Ins. Co., No. 3-91-0228, 1993 WL 729630 at * 3 (D.Minn. Jan. 14, 1993). The court rejected Northwest's arguments that Republic and Northwest's failure to give formal notice did not defeat coverage because Federal was not prejudiced, and that Northwest did supply the requisite notice by reporting a similar claim within the policy period. Id. at * 3-5. The court also denied coverage under Policy 35B, reasoning that the underlying wrongful act occurred before August 13, 1986, the policy's effective date. Id. at * 5. The court rejected Northwest's argument that Federal waived all defenses not explicitly mentioned in its reservation of rights letter, reasoning that Federal's reservation of rights letter and subsequent correspondence showed that "Federal reserved the right to deny coverage on any and all bases, not just those described in detail in its reservation letter." Id. at * 6. Second, the court ruled that even if Northwest had reported the Harris claim in accordance with the policy terms, Federal was not liable under the policies because the alleged wrongdoing was not a "Wrongful Act" as defined by the policies. Id. at * 7. Northwest appeals.

I.

Northwest contends that the district court erred in holding that the claim was not covered by the policies. The district court held that the Partnership Plan did not qualify as a "Sponsored Plan" or a "Benefit Program" as required by the policies, and so, the alleged wrongdoing did not qualify as a "Wrongful Act" as defined by the policies. 1993 WL 729630 at * 6-7. Northwest argues that the claim is covered, and that Federal waived its defense based on lack of coverage by failing to specify the defenses in its April 11, 1988, reservation of rights letter or answer to Federal's complaint.

We review the district court's grant of summary judgment de novo. McKee v. Federal Kemper Life Assurance Co., 927 F.2d 326, 328 (8th Cir.1991). Because this is a diversity case, we also review the district court's determination of state law de novo, giving the district court decision no deference. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991).

A.

Northwest argues that Republic committed a "Wrongful Act" as required for coverage under policies 35A and 35B. The Federal policy provides coverage for a "Wrongful Act," which is defined as:

(A) any breach of the responsibilities, obligations or duties to a Designated Plan imposed upon the fiduciaries of such plan by the Employee Retirement Income Security Act of 1974 or its amendments or by the common or statutory law of the United States of America or any State or jurisdiction therein.

(B) any other matter claimed against an Insured solely by reason of their (sic) serving as fiduciaries of any Designated Plan.

(C) any negligent act, error or omission in the Administration of any Benefit Program,...