News & Events

Skarzynski Black Wins Judgment on Insured Capacity and Contract Exclusion

December 3, 2018
Skarzynski Black attorneys John Black and Joel Vander Vliet, representing Twin City Fire Insurance Company, obtained judgment on the pleadings in coverage litigation in the Eastern District of Michigan. United States District Judge Sean F. Cox’s opinion, issued under seal last August and unsealed (in redacted form) in December, addresses two significant issues under a private company D&O policy: an owner-officer’s insured capacity and an exclusion for claims arising out of contractual liability.
The underlying claim was brought by the purchaser of Computerized Facility Integration, Inc. (CFI), which was wholly owned and sold by CFI’s CEO and another company he wholly owned. Twin City insured both CFI and the selling company, as well as the CEO, under a private company D&O policy. The purchaser alleged that the sellers—the CEO and the selling company wholly owned by him—breached representations and warranties in the purchase agreement by making various misrepresentations about CFI’s business and financials. The CEO and the selling company he owned settled the claim for various consideration, including $1 million in cash, before any litigation.
Twin City denied coverage, and the insureds filed a declaratory judgment action. Twin City moved for judgment on the pleadings, arguing that: (1) the CEO was not covered because the claim was made against him only in his capacity as owner and seller of the company, not his insured capacity as CEO; (2) coverage for the selling company was barred by a contractual liability exclusion; and (3) the settlement was uninsurable disgorgement. The insureds filed a cross-motion for summary judgment on the same and additional issues, arguing that: (1) the CEO entered into the purchase agreement and made the alleged misrepresentations in his capacity as CEO; (2) the claim sounded in fraud and not contract, as the misrepresentations were allegedly made during due diligence prior to the purchase agreement; and (3) the settlement was not disgorgement, and disgorgement is insurable under Michigan law in any event.
In the opinion, available here, the court adopted Twin City’s first two arguments and entered judgment on the pleadings, denying the insureds’ cross-motions and declining to rule whether the settlement constituted uninsurable disgorgement. The opinion resolved close questions regarding coverage for claims arising from the sale of a privately-held company where an insured officer also owned the company and where alleged misrepresentations and omissions during due diligence were incorporated into a purchase agreement as representations and warranties.