Office Depot, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., Case No. 09-80554-CIV

• Court: United States District Courts. 11th Circuit. United States District Courts. 11th Circuit. Southern District of Florida
• Writing for the Court: KENNETH A. MARRA
• Citation: 734 F.Supp.2d 1304
• Parties: OFFICE DEPOT, INC., Plaintiff, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant, American Casualty Insurance Company of Reading, PA., Intervenor Defendant.
• Docket Number: Case No. 09-80554-CIV
• Decision Date: 27 October 2010

734 F.Supp.2d 1304

OFFICE DEPOT, INC., Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant,
American Casualty Insurance Company of Reading, PA., Intervenor Defendant.

Case No. 09-80554-CIV.

United States District Court,
S.D. Florida.

Oct. 15, 2010.
Order Granting Clarification and Amending Oct. 27, 2010.

734 F.Supp.2d 1307

Edmund M. Kneisel, Brent W. Brougher, Kilpatrick Stockton, Atlanta, GA, Joanne M. O'Connor, Sidney Alton Stubbs, Jr., Jones Foster Johnston & Stubbs, West Palm Beach, FL, for Plaintiff.

Kevin P. McCoy, Sylvia H. Walbolt, Carlton Fields, Tampa, FL, Steven Jeffrey Brodie, Carlton & Fields PA, Miami, FL, for Defendant.

Gwynne Alice Young, Carlton Fields, Tampa, FL.

MEMORANDUM OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

KENNETH A. MARRA, District Judge.

In this diversity case, Office Depot, Inc. ("Office Depot") sues National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union") and American Casualty Insurance Company of Reading, Pa. ("American Casualty") (cumulatively "the carriers") for declaratory judgment and breach of contract. The plaintiff and the defendants have cross-moved for summary judgment under Fed.R.Civ.P. 56 [DE 87, 101, 102].

The competing motions present the question of whether a corporation can recover under an organization and executive liability insurance policy for costs incurred in voluntarily responding to a Securities and Exchange Commission ("SEC") investigation that did not culminate in filing of a judicial or administrative complaint by the SEC against the company or any of its officers or directors, or for costs incurred

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in conducting an internal investigation and audit triggered by a whistleblower complaint over alleged accounting improprieties. For reasons which follow, the court has determined that the disputed investigatory costs do not fall within the subject policy's definition of loss "arising from" a covered "Securities Claim" made against Office Depot, or a covered "Claim" made against one of its officers, directors or employees, and shall accordingly enter final summary judgment on coverage in favor of the carriers.

I. FACTS

National Union issued a "claims made" Executive and Organization Liability Policy to Office Depot ("Policy" or "Primary Policy") providing coverage for claims made during the policy period of November 30, 2006 to November 30, 2007.¹ The Policy provides three types of coverage: executive liability insurance (Coverage A), organization insurance (Coverage B) and outside entity executive liability insurance (Coverage C). The Policy carries an aggregate limit of liability of $25 million, subject to a $2.5 million retention (similar to a deductible), and a 20% coinsurance provision.

American Casualty issued an Excess Insurance Policy to Office Depot ("Excess Policy") for the same period providing $15 million in coverage that applies in excess of the $25 million limits of liability provided under the National Union policy. The Excess Policy "follows form," i.e. it provides coverage in conformance with the same terms, conditions and exclusions as those set forth in the National Union Policy.

A. The Policy

At issue here, under the National Union Policy "Insuring Agreements" [Policy, Section 1], is the "Organization Insurance" extended under Coverage B. Coverage B provides two types of insurance relevant to the current claims. First, Coverage B(i) insures Office Depot for certain "Securities Claims" made directly against it for any "Wrongful Act" as an "Organization," and second, Coverage B(ii) extends executive indemnity insurance, providing reimbursement to Office Depot to the extent it indemnifies its individual officers, directors and employees for damages that they would otherwise be obligated to pay for "Claims" made against them for any "Wrongful Act" performed in their capacity as directors, officers and employees of the company.

The Policy at Section 1, "Coverage B" provides:

COVERAGE B: ORGANIZATION INSURANCE

(i) Organization Liability: This Policy shall pay the Loss of any Organization arising from a Securities Claim made against such Organization for any Wrongful Act of such Organization.

(ii) Indemnification of an Insured Person: This policy shall pay the Loss of an Organization arising from a Claim made against an Insured Person (including an Outside Entity Executive) for any Wrongful Act of such Insured Person, but only to the extent that such Organization has indemnified such Insured Person.

At Section 8, captioned "Defense Costs, Settlements, Judgments," the Policy reiterates

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this dichotomy in B(i) and B(ii) coverages, providing in pertinent part:

An Organization is covered, subject to the policy's terms, conditions and limitations only with respect to: (1) its indemnification of its Insured Persons under Coverage B(ii) as respects a Claim against such Insured Persons; and (2) under Coverage B(i) for a Securities Claim. Accordingly, the Insurer has no obligation under this policy for covered Defense Costs incurred by, judgments against or settlements by an Organization arising out of a Claim made against an Organization other than a covered Securities Claim, or any obligation to pay Loss arising out of any legal liability that an Organization has to a claimant, except as respects a covered Securities Claim against such Organization.

(Emphasis supplied)

A "Wrongful Act" is defined at Section 2(aa)(2), with respect to Office Depot as the "Organization," as "any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by such Organization, but solely in regard to a Securities Claim." With respect to any "Executive" or "Employee" ² of the Organization, a "Wrongful Act" is defined at Section 2(aa)(1) in pertinent part to mean "any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act or any actual or alleged Employment Practices Violation, in regard to either a Securities Claim or other Claim."

In turn, the Policy defines a "Securities Claim," at Section 2(y) as follows:

(y) "Securities Claim" means a Claim, other than an administrative or regulatory proceeding against, or investigation of an Organization, made against any insured:

(1) alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities) which is:

(a) brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an organization; or

(b) brought by a security holder of an organization with respect to such security holder's interest in securities of such Organization; or

(2) brought derivatively on the behalf of an Organization by a security holder of such Organization.

Notwithstanding the foregoing, the term "Securities Claim" shall include an administrative or regulatory proceeding against an Organization, but only if and only during the time that such proceeding is also commenced and continuously maintained against an Insured Person.

(Emphasis supplied).

At Section 2(b), the Policy defines a "Claim" to mean:

(1) a written demand for monetary, non-monetary or injunctive relief;

(2) a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, non-monetary or injunctive relief which is commenced by: (i) service of a complaint or similar pleading; (ii) return of an indictment, information or similar document (in the case of a

734 F.Supp.2d 1310

criminal proceeding); or (iii) receipt or filing of a notice of charges; or

(3) a civil, criminal or administrative or regulatory investigation of an Insured Person:

(i) once such insured Person is identified in writing by such investigating authority as a person against whom a proceeding described in Definition (b)(2) may be commenced; or

(ii) in the case of an investigation by the SEC or a similar state or foreign government authority, after service of a subpoena on such Insured Person.

The term "Claim" shall include any Securities Claim and any Employment Practices Claim.

(Emphasis supplied)

Section 2(p) of the Policy defines "Loss" to include "Defense Costs" (in addition to "damages, settlement, judgments"). "Defense Costs," in turn, are defined in pertinent part at Section 2(f) as "reasonable and necessary fees, costs and expenses consented to by the Insurer ... resulting solely from the investigation, adjustment, defense and /or appeal of a Claim against an Insured."

Section 2(n) defines "Insured" to mean any "Insured Person," or "the Organization, but only with respect to a Securities Claim."

Section 2(t) defines "Organization" to mean Office Depot and its subsidiaries. Section 2( o ) defines "Insured Person" to include any "Executive" or "Employee" of Office Depot or its subsidiaries.

B. Chronology of Material Events

1. The Dow Jones Newswire Article

On June 29, 2007, a "Dow Jones Newswire" article reported that Office Depot may have improperly disclosed material information regarding projected profits and sales to certain financial analysts, potentially implicating SEC Regulation FD (Fair Disclosure) which precludes issuers of securities from selectively disclosing material nonpublic information. On July 11, 2007, Office Depot forwarded a copy of this article, denominated as a "Notice of Circumstances," by email to National Union and American Casualty.

2. The SEC Informal Inquiry

On July 17, 2007, the SEC issued a letter to Office Depot advising that it was "conducting an inquiry into Office Depot, Inc....to determine whether there have been any violations of the federal securities laws." The inquiry letter requested "certain information from Office Depot on a voluntary basis," including various documents relating to Office Depot's contacts and communications with...