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Plain Language Rule Still Governs Interpretation of Coverage Exclusion (NJ)

June 28, 2017

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The appellate court interpreted an “insured vs. insured” exclusion in a directors and officers liability policy in <em><a href="http://blog.wcmlaw.com/wp-content/uploads/2017/06/Abboud-v.-National-Union.pdf">Michael Abboud v. National Union Fire Insurance Company of Pittsburgh</a></em>. Generally, such exclusions bar coverage for claims by one insured director or officer against another. Plaintiff Abboud sought indemnity and a defense in connection with counterclaims made against him by fellow officers of Monarch, a company which operates and leases PET/CT equipment. Defendant National Union Fire Insurance Company of Pittsburgh (NUFIC) denied coverage based on the “insured vs. insured” exclusion. Abboud filed a declaratory judgment action against National Union which ended in summary judgment dismissal and a subsequent appeal.
In the underlying litigation, plaintiff Abboud sued four members of the board of managers of Monarch. Abboud alleged the four member-managers tried to remove him from Monarch’s board of managers and his position as its chief executive office. Monarch and the individual defendants asserted various counterclaims against Abboud, alleging that he engaged in self-dealing and exploited Monarch’s opportunities for his personal gain or that of his other companies.
Defendants in Abboud’s underlying suit obtained an acknowledgement of partial coverage from National Union, subject to a reservation of rights, under the Employment Practices Liability (EPL) section of Monarch’s multi-coverage policy which also included a D&amp;O liability section. By contrast, Abboud did not notify National Union of the counterclaims against him until 8 months after suit was initiated. Abboud attempted to excuse his late notice because Monarch and National Union had delayed responding to his requests for information about coverage.
Abboud subsequently filed his declaratory judgment action, expressly invoking and quoting the policy’s D&amp;O section, Abboud sought indemnity and defense costs for the counterclaims in the underlying lawsuit.  National Union denied its policy provided indemnity or defense costs coverage for the counterclaims.  National Union filed a motion for summary judgment, contending the insured vs. insured exclusion within the D&amp;O section precluded coverage. The trial court granted summary judgment in favor of National Union, finding that the insured vs. insured exclusion plainly barred Abboud’s claim for coverage.
The appellate court reviewed the language of the insurance policy and found that there was nothing ambiguous, convoluted, or opaque about the exclusions in the D&amp;O section. The exclusion disallows coverage when the claim is raised by either an executive of the company or the company itself. Abboud sought to avoid the plain interpretation of this provision contending it violates his reasonable expectations and claiming that the exclusion applies only in cases of collusion between the individual insureds.
The appellate court found that insurance contracts should be construed to reflect the reasonable expectations of the insured in the face of ambiguous language and phrasing, and in <em>exceptional circumstances</em> when the literal meaning of the policy is plain. The appellate court found no exceptional circumstances in Abboud’s claim, stating that the record is devoid of competent evidence of Abboud’s expectations of coverage or proof that such expectations would be objectively reasonable. As such, the appellate court affirmed the trial court’s holding.  Thanks to Steve Kim for his contribution to this post.  Please email <a href="mailto:BGibbons@wcmlaw.com">Brian Gibbons</a> with any questions.
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