Policyholder Win Highlights Importance of D&O Policies In Mitigating COVID-19-Related Exposures
While policyholders have experienced a wide range of conflicting rulings related to COVID-19 business interruption losses, a recent Northern District of Illinois decision shows that the pandemic continues to present a range of exposures beyond business interruption losses, including for claims under directors and officers liability policies. In Federal Insurance Co. v. Healthcare Information and Management Systems Society, Inc., No. 20 C 6797 (N.D. Ill. Oct. 19, 2021), the court rejected the insurer’s broad reading of a professional services exclusion, contract exclusion, and the insurability of alleged restitution to deny coverage under a D&O policy for losses arising from a cancelled trade show.
Federal Insurance Company sued its insured, Healthcare Information and Management Systems Society, seeking a declaration that it did not have a duty to cover HIMMS’s claim under a D&O policy in connection with the settlement of two underlying lawsuits brought as a result of HIMMS’ cancellation of a 2020 tradeshow due to the COVID-19 pandemic.
The two underlying lawsuits, which included a putative class action, sought return of hundreds of thousands of dollars in fees paid by exhibitors scheduled to appear at HIMMS’ tradeshow. HIMMS settled both lawsuits and sought coverage from Federal.
Federal contended that coverage was barred under two exclusions. The first, a “Professional Services Exclusion,” barred coverage for any claim arising from any actual or alleged wrongful acts committed “in connection with the rendering of, or actual or alleged failure to render, any Professional Services” for others by any insured. The second, a “Contract Exclusion,” provided that Federal was not liable for any claim arising out of any liability under any contract unless HIMMS would have been liable in the absence of such contract.
Federal also argued that HIMMS’ damages did not meet the policy’s definition of “Loss” because the underlying claimants sought the return of amounts wrongfully retained under the trade show contracts and were restitutionary in nature, which was uninsurable under the law.
In response to Federal’s declaratory judgment action, HIMMS filed a six-count counterclaim asserting that the underlying lawsuits were covered by the policy, that Federal had breached the policy by denying coverage, and that Federal had acted in bad faith. Federal moved to dismiss the counterclaims.
The Court agreed with HIMMS on the scope of its covered losses, finding that the Professional Services and Contract exclusions did not apply and that the underlying settlements constituted loss under the policy, but it dismissed HIMMS’ bad faith claims.
With respect to the two exclusions, the Court reiterated that it “must read exclusions narrowly,” that the insurer has the burden of affirmatively demonstrating an exclusion applies, and that an insurer cannot justifiably refuse to defend a claim “absent absolute clarity on the face of the complaint that a particular policy exclusion applies.” In interpreting the Professional Services Exclusion, the Court recognized Illinois’ courts “expansive” definition of the term “professional services,” but nevertheless refused to apply the exclusion where the claims were not “entirely based on defendant’s negligent provision of professional services.”
The underlying complaints sought damages for breach of contract for failing to return fees paid for the trade show, as well as damages for travel and preparation costs. They also failed to allege that HIMMS exercised poor professional judgment in cancelling the conference in response to the pandemic. Therefore, the court held that Federal failed to carry its burden of establishing with absolute clarity that the professional services exclusion applied.
The contract exclusion suffered the same fate, despite the allegations that HIMMS breached its contract by refusing to refund the exhibitors’ fees. The court reasoned that, even if Federal’s position was correct, the exclusion, by its own terms, did not negate the duty to defend where HIMMS would have been liable in the absence of the trade show contracts. The underlying complaints sought more than contract damages and the ultimate settlement resolved all claims, not just contract claims, so the exclusion did not apply.
The court next rejected the insurer’s argument that because the underlying lawsuits sought the recovery or wrongfully retained amounts—namely, unreturned fees—the settlement of those underlying lawsuits was restitutionary in nature, represented ill-gotten gains, and was uninsurable. Citing Seventh Circuit precedent noting the uninsurability of restitution, as distinct from damages, to discourage fraud, the court noted that the underlying lawsuits did not allege fraud and that the settlement of the underlying lawsuits involved the settlement of all claims, not just those claims for return of fees.
On bad faith, however, the court found that HIMMS’ allegations in support of its claim were stated, “in conclusory fashion that plaintiff had acted vexatiously and unreasonably in its denial of coverage” and, as a result, that those conclusory allegations could not plead a plausible basis for relief.
Litigation surrounding COVID-19-related losses has focused mostly on business interruption claims under all-risk commercial property policies. However, that trend has started to change. From securities class actions and government enforcement to supply chain disruption and food contamination, the Healthcare Information decision is just another example of different claims that can come out of the pandemic and other adverse events. D&O policies in particular may be implicated for future pandemic-related losses for government investigation, insolvency-related claims by creditors, trustees, and other company stakeholders involved in bankruptcy, False Claims Act and qui tam claims, and cyber-related claims from shareholders or customers.
The court’s analysis in Healthcare Information also serves as a good reminder of how correct interpretation of insurance policies should benefit policyholders and hold insurers to a very exacting standard to deny coverage based on an exclusion, requiring absolute clarity on the face of the complaint. Furthermore, general characterizations that claims are excluded due to restitution, disgorgement, or return of profits are insufficient where the actual damages sought are compensatory in nature or where the underlying lawsuit seeks more than alleged return of wrongfully withheld funds. Non-specific references to “uninsurability” or coverage for certain losses being against “public policy” should also not prevail absent a clearly-articulated public policy rationale in the relevant state that plainly applies to the loss at issue.