The federal appellate courts dispose of approximately 80 percent of their cases by nonprecedential opinions. Therefore, it comes as a surprise that a decidedly fatuous coverage claim elicited a published opinion from the First Circuit addressing the scope of Side B D&O liability insurance coverage. We trust that this observation will not appear churlish because it is always a delight to read the work of the inimitable prose stylist, Judge Bruce Selya.

In Medical Mutual Insurance Company of Maine v. Indian Harbor Insurance Company, 2009 WL 3210599 (1st Cir. 2009), Medical Mutual sought reimbursement under the Side B coverage of its D&O liability insurance policy for a settlement paid to its former CEO, Patrick Dowling, to resolve an employment discrimination claim. Medical Mutual made this assertion notwithstanding the fact that Dowling asserted his claim solely against Medical Mutual. Not surprisingly, the First Circuit affirmed the district court’s grant of summary judgment to Indian Harbor.

The dispute had its genesis in a garden-variety disability discrimination claim. In April 2005, Dowling suffered a stroke. Medical Mutual then removed Dowling as its CEO. Dowling responded by filing an administrative complaint against Medical Mutual with the Maine Human Rights Commission and the EEOC, charging Medical Mutual with disability discrimination. After receiving his right-to-sue letters, Dowling filed civil suit against Medical Mutual. Medical Mutual eventually settled the case, paying $325,000 to Dowling in consideration for the release of all claims against Medical Mutual and its “officers, agents, employees, attorneys, and members of the Board of Directors.” 

Indian Harbor issued Medical Mutual a D&O liability insurance policy. The policy included a standard Side B insuring agreement that provided: 

The Insurer shall pay on behalf of the Company Loss which the Company is required or permitted to pay as indemnification to any of the Insured Persons resulting from a claim first made against the Insured Persons during the Policy Period … for a Wrongful Act or Employment Practices Wrongful Act.

“Insured person” was defined as “any past, present, or future director or officer, or member of the Board of Managers of the Company.” As is typical, the policy broadly defined the term “claim” to include “any civil proceeding” or an “administrative regulatory proceeding … including any proceeding before the Equal Employment Opportunity Commission.”

Medical Mutual rested its claim for coverage on the expediency that in both his EEOC charge and in his complaint, Dowling made general allegations of misconduct on the part of Medical Mutual’s directors and officers. In rejecting the claim, Judge Selya astringently observed:

D&O policies exist to fund indemnification covenants that protect corporate directors and officers from personal liability, not to protect the corporation by which they are employed. The position advanced by the company in this case—extending coverage to situations in which the directors and officers are not themselves the actual targets of the claims made—would if accepted transmogrify D&O policies into comprehensive corporate liability policies. Because such a transmogrification is contrary to both the letter and spirit of the D&O policy at issue here, we affirm the district court’s entry of summary judgment in favor of the insurer.

2009 WL 3210599, at *1.

Judge Selya was no less dismissive of Medical Mutual’s argument that because Dowling had made general allegations of wrongful acts on the part of Medical Mutual’s directors and officers, Dowling’s complaint constituted a claim against them. “This counter-intuitive proposition depends entirely on the premise that the words ‘made against’ are ambiguous and, therefore, are subject to a broad construction in favor of coverage. We reject this premise.” 2009 WL 3210599, at *4. Rather pointedly, he observed that “both plain meaning and common usage require that, in order for a judicial complaint to be open ‘made against’ a person, that complaint must be filed in court and must identify the person as a defendant in the action.” Id.

Judge Selya also rejected Medical Mutual’s argument that because its settlement with Dowling released any claims that Dowling may have against Medical Mutual’s officers and directors, Dowling’s claims must have been made against the same classes of persons. “This argument is a non sequitur.” 2009 WL 321055, at *6. To the contrary, “[t]he fact that [Medical Mutual], as a condition of settlement, prudently required Dowling to renounce any potential claim that he might have against its directors and officers, does not expand the parameters of the civil action. Nor does the release transform, by some mysterious alchemy, a non-covered allegation of wrongdoing into a covered claim.” Id. “It would make no sense to allow an insured to manufacture coverage by the simple expedient of insisting, as a condition of settlement, that a plaintiff frame a release more broadly than the plaintiff had framed the claim actually made.” Id.