Straz v. Kansas Bankers Surety Co.
| Decision Date | 18 August 1998 |
| Docket Number | No. 97-4245,97-4245 |
| Parties | NOTICE: Seventh Circuit Rule 53(b)(2) states unpublished orders shall not be cited or used as precedent except to support a claim of res judicata, collateral estoppel or law of the case in any federal court within the circuit. David A. STRAZ, Jr., Plaintiff-Appellant, v. THE KANSAS BANKERS SURETY CO., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States District Court for the Eastern District of Wisconsin. No. 96 C 855. Charles N. Clevert, Judge.
Before Hon. JOEL M. FLAUM, Hon. DANIEL A. MANION, Hon. DIANE P. WOOD, Circuit Judges.
The First Bank trust department improperly invested St. Catherine's Hospital's money in volatile derivative securities. To say the least, the risky investment did not pan out. In fact, St. Catherine's lost over a million dollars. First Bank settled with St. Catherine's, and then assigned its insurance claim to the plaintiff, who wanted First Bank's insurer, Kansas Bankers Surety Company, to pick up the tab. The district court granted summary judgment in favor of Kansas Bankers. We conclude that because the insurance policy excluded losses related directly or indirectly to trading securities, the insurer had no obligation to defend or indemnify First Bank, and thus affirm.
In 1992, St. Catherine's Hospital, Inc. of Kenosha, Wisconsin invested about $7 million with the First Bank Southeast N.A. trust department. In February 1994, the bank began aggressively investing this money in volatile derivative securities. These securities involved pooled mortgage funds, and were highly sensitive to changes in the market interest rate. Buying the high risk securities violated St. Catherine's instructions, which were to invest the securities in "safe" government securities, where the principal would not be at risk. Unfortunately, as soon as First Bank bought the volatile securities, interest rates began to climb, thus driving down the value of the securities. Within five months, the hospital's account at First Bank had lost $1.1 million. Eventually, St. Catherine's sued First Bank for breach of fiduciary duty. First Bank sought defense and coverage from Kansas Bankers Surety Company, its insurer, under an insurance policy covering directors' and officers' errors and omissions (which also covered the bank's liability for errors involving written trusts). This policy covered wrongful acts, including breaches of fiduciary duty, but excluded "losses resulting directly or indirectly from trading" securities. Kansas Bankers concluded that the $1.1 million loss was the result of trading securities, and therefore refused to defend or cover First Bank.
First Bank settled with St. Catherine's for $1.4 million ($1.1 million loss plus $300,000 in attorneys' fees and costs). Then First Bank (or more accurately, its successor, Firstar Bank) assigned its possible insurance claim against Kansas Bankers to David Straz, Jr., chairman of First Bank's board of directors. Straz had previously agreed to personally indemnify certain liabilities, including this one, as part of the Firstar-First Bank merger; Straz is the real party-in-interest. Straz sued Kansas Bankers on the policy, seeking recovery of the $1.4 million settlement and the cost of defense. Kansas Bankers eventually removed this lawsuit to the Eastern District of Wisconsin as a diversity action. After discovery, the district court granted Kansas Bankers summary judgment. It found that the insurance policy excluded liability for losses sustained "directly or indirectly from the trading of securities."
Straz appeals. He contends that the trading loss exclusion did not apply to all of the claims raised by St. Catherine's Hospital and that therefore, Kansas Bankers had the duty to defend First Bank because of the nature of some of the allegations in St. Catherine's complaint. Straz acknowledges that if all of the damages St. Catherine's sought were sustained directly or indirectly from the trading in securities, Kansas Bankers has no obligation to provide coverage. However, to the extent that St. Catherine's sought losses unrelated to the trading of securities, Kansas Bankers would have breached its duty to defend First Bank from suit (and would be estopped from contesting coverage).
Wisconsin law governs this diversity suit. The interpretation of an insurance policy is a question of law, which, like a grant of summary judgment, is reviewed de novo. Davis v. Allied Processors, Inc., 214 Wis.2d 294, 571 N.W.2d 692, 694 (Wis.Ct.App.1997). Insurance policies are construed just like other contracts. Donaldson v. Urban Land Interests, Inc., 211 Wis.2d 224, 564 N.W.2d 728, 731 (Wis.1997). In the absence of an ambiguity, we apply the plain meaning of the contract terms in accordance with the reasonable expectations of the insured. See, e .g., Davis, 571 N.W.2d at 694 () (citing Brown v. Maxey, 124 Wis.2d 426, 369 N.W.2d 677, 686 (1985)). To resolve the issue of coverage, "we look only at the allegations of the complaint." Atlantic Mut. Ins. v. Badger Medical Supply, 191 Wis.2d 229, 528 N.W.2d 486, 491 (Wis.Ct.App.1995). But the duty to defend is broader than the duty to provide coverage. 1 The insurer must defend its insured if it is at least "arguable" that coverage exists under the policy, even if the claim eventually proves to be meritless. General Casualty Co. of Wisconsin v. Hills, 209 Wis.2d 167, 561 N.W.2d 718, 722 n. 11 (Wis.1997).
Thus, both coverage and the duty to defend will depend on whether the allegations in St. Catherine's complaint are arguably covered by Kansas Banker's insurance policy. St. Catherine's Hospital alleged that First Bank breached its fiduciary duty in several ways: by purchasing securities inappropriate for St. Catherine's investment purposes, by concealing the purchase of the derivative securities, and by failing to disclose the true nature of the investment after its purchase. [R.1 Complaint, exhibit b] St. Catherine's sought $1.1 million in damages, equal to the diminution of the principal invested with First Bank, plus attorneys' fees and lost interest. Given these allegations, we must review the terms of the insurance policy to determine whether coverage was "fairly debatable." Elliott v. Donahue, 169 Wis.2d 310, 485 N.W.2d 403, 406 (Wis.1992).
The insurance policy covers wrongful acts, including breaches of duty. However, the trading loss exclusion clause provides that
The Underwriter [Kansas Bankers] shall not be liable to make any payment or provide any defense in connection with any claim made against the Directors or Officers ... for loss resulting directly or indirectly from trading, with or without the knowledge of the Directors or Officers, ... and notwithstanding any act or omission on the part of...
To continue reading
Request your trial