Judge Gary Fenner of the United States District Court recently granted summary judgment to insurance company Liberty Insurance Underwriters.  The case against the company was brought by a sheet metal company’s former President and Executive Vice-President.  Just over the state line, one of these two chaps was found liable for breach of fiduciary duty for this failure.  In short, the company received proceeds of an insurance policy on their two primary fellow shareholders, but they did not forward those proceeds onto the plaintiffs as agreed in a certain key - man stock agreement.

            Faced with a judgment to satisfy of over $800,000, the two men sought to collect for the same under Directors, Officers and company Liability and Fiduciary Liability Coverage under their company policy.  Applying Kansas law, the federal district court noted:

“In Kansas, [i]f the language in an insurance policy is clear and unambiguous, it must be construed in its plain, ordinary, and popular sense and according to the sense and meaning of the terms used.”  Marshall v. Kansas Med. Mut. Ins. Co., 73 P.3d 120, 111 (Kan. 2003).  “The [insured] has the burden of proving that the loss was of a type included in the general coverage provisions of the insurance contract.”  First Nat’l Bank, Abilene Texas v. American States Ins. Co., 134 F3d 282 (Table), 1998 WL 30246, at *2 (10th Cir. 1998); see also Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F. Supp. 2d 1164, 1176 (D. Kan. 2012).  However, when an insurer seeks to deny coverage under a specific provision of the policy, the insurer bears the burden of prove [sic] to show the loss is excluded.  First Fed. Sav. Bank of Newton, Kansas v. Cont’l Cas. Co., 768 F. Supp. 1449, 1453 (D. Kan. 1991).” 

            The court went on to conclude that the stock agreement in question did not fall within the ERISA definitions referenced in the Fiduciary Liability coverage.  Cutting to the chase, the court concluded that the parties to the stock agreement entered the agreement as shareholders rather than employees:

“Here, there is no question this case “arose out of” the conflict surrounding the Stock Agreements between Elizabeth, Russell, J. Carson, and the Company.  Elizabeth’s claims for tortuous interference, breach of contract, breach of fiduciary duty, and conversion in the Underlying Lawsuit all reference the Stock Agreements, and there would likely be no basis for liability in that suit if not but for the Agreements’ existence.  Therefore, the Court finds that the Underlying Lawsuit falls under the scope of the DOC Coverage Part’s Contract Exclusion…The Supreme Court of Kansas has explained that:

[an insurer] is not bound to defend an insured in actions brought wholly outside any coverage obligations assumed in the policy or when the insurer would have no liability if the plaintiff secured a judgment against the insured.  Where there is no coverage, there is no duty to defend.  Patrons Mut. Ins. Ass’n v. Harmon, 732 P.2d 741 (Kan. 1987) (citing Spruill Motors, Inc. v. Universal Underwriters Ins. Co., 512 P.2d 403, 406 (Kan. 1973).”

Food for thought.