Insurance – D&O policy – Known circumstances exclusion

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Where a school, in settlement of state court litigation, agreed to repay part of a $500,000 gift from donors who claimed that the gift had been induced by misrepresentations, the school is not entitled to defense costs and indemnity under a directors and officers (D&O) liability insurance policy.

“The district court granted summary judgment for [Philadelphia Indemnity Insurance Company (PIIC)] based on the court’s construction of an exclusion entitled ‘KNOWN CIRCUMSTANCES REVEALED IN FINANCIAL STATEMENT EXCLUSION.’ This clause excluded from coverage any losses ‘in any way involving any matter, fact, or circumstance disclosed in connection with Note 8 of the [School’s] Financial Statement.’ … Note 8 of the Financial Statement set forth a description of the gift and referred to Note 7, which described the gift in more detail.

“The [Clark] School appeals, primarily arguing that the plain language of the policy must give way to what it says were its reasonable expectations of coverage. We affirm. …

“The parties agree that the losses here would be covered losses save for the Known Circumstances Exclusion and it is the interpretation of that exclusion which is at issue. … The parties do not dispute that Massachusetts law applies here. …

“The Known Circumstances Exclusion here in its reference to Note 8 of the Financial Statement is both clear and broad in its language. It excludes losses ‘based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any matter, fact, or circumstance disclosed in connection with Note 8 of the Financial Statement.’ We reach only the term excluding losses ‘in any way involving’ the matters, facts, or circumstances disclosed.

“One matter, fact, or circumstance disclosed in Note 8 is the Valentis’ gift, along with other information about the School’s troubled finances. And the loss and defense costs for which coverage is sought certainly ‘involv[es]’ that gift, since the loss and costs were incurred in defending and settling litigation about the gift. The plain language of the Known Circumstances Exclusion excludes from coverage the losses from the suit brought by the Valentis about their gift. …

“[T]he reasonable expectations doctrine has no application here. To be sure, ‘what an objectively reasonable insured, reading the relevant policy language, would expect to be covered’ is a valid consideration in construing insurance contracts when there is doubt over the contract’s meaning. … However, when a contract is not ambiguous, a party can have no reasonable expectation of coverage when that expectation would run counter to the unambiguous language of an insurance policy. … There is no uncertainty as to the meaning of the terms here. Because the language of this policy clearly excludes coverage ‘in any way involving’ the Valentis’ gift, the School had no reasonable expectation of coverage.”

The Clark School for Creative Learning, Inc. v. Philadelphia Indemnity Insurance Company (Lawyers Weekly No. 01-270-13) (12 pages) (Lynch, C.J.) (1st Circuit) Appealed from a decision by Casper, J., in the U.S. District Court for the District of Massachusetts. Margaret H. Paget, with whom Sherin and Lodgen was on brief, for the plaintiff-appellant; Richard L. Burpee, with whom Edwin F. Landers Jr. and Morrison Mahoney were on brief, for the defendant-appellee (Docket No. 13-1171) (Oct. 23, 2013).

 Click here for the full-text opinion.