Why it matters: Denying an insurer's request for reimbursement, a judge in Idaho ruled that findings in an underlying lawsuit that the policyholder obtained "bargaining leverage" were insufficient to trigger an exclusion for financial gain. The coverage dispute began with a competitor's lawsuit alleging a policyholder engaged in anticompetitive behavior by purchasing a new entity. The insured tendered defense to its insurer, which provided almost $8 million in defense costs. When the underlying suit concluded with a determination that the policyholder violated the Clayton Act and parallel state law, the insurer sought reimbursement pursuant to a policy exclusion prohibiting coverage for alleged monetary and financial gain of an insured, such as "profit, financial advantage, or remuneration." Rejecting the insurer's position, the court held that the added bargaining power did not fall within the scope of any of the three terms, all of which "pertain to various types of monetary or financial gain." There was no finding that the policyholder obtained any monetary or financial gain from its bargaining leverage, the court said, and the exclusion was not applicable.

Detailed discussion: With the purchase of Saltzer Group, Idaho-based St. Luke's Health System faced a competitor's lawsuit alleging violations of the Clayton Act and an ancillary Idaho law. A federal court judge held that St. Luke's violated both laws, a decision largely affirmed by the Ninth Circuit Court of Appeals.

Both opinions focused on the bargaining leverage that St. Luke's obtained by purchasing Saltzer, predicting that the leverage would result in higher prices in the future. Importantly for the subsequent coverage dispute, neither opinion included a finding that St. Luke's had actually used its bargaining leverage to obtain monetary or other financial gain.

St. Luke's tendered a claim to Allied World National Assurance Company for the cost of defending the lawsuit. The insurer agreed to pay subject to a reservation of rights and partially reimbursed the policyholder for almost $8 million in defense costs. But a few months later, Allied sent St. Luke's a letter denying coverage, refusing to pay any further defense costs, and demanding repayment of the $8 million.

Allied relied upon Exclusion A of the policy for its refusal. The provision barred coverage for any loss in connection with any claim "arising out of, based upon or attributable to the gaining of any profit or financial advantage or improper or illegal remuneration by [St. Luke's,] if a final judgment or adjudication establishes that [St. Luke's] was not legally entitled to such profit or advantage or that such remuneration was improper or illegal[.]"

St. Luke's filed suit arguing that Allied was in breach of the policy, while the insurer counterclaimed seeking to recover the monies it had paid. U.S. District Court Judge B. Lynn Winmill found the exclusion inapplicable, granting summary judgment in favor of the insured.

"In this case, the Court held that St. Luke's was not legally entitled to the bargaining leverage it obtained by purchasing Saltzer, and the Ninth Circuit affirmed that decision," he wrote. "The Court made no finding that St. Luke's used that bargaining leverage to actually obtain any monetary or financial gain. The Court did not award any damages or order St. Luke's to disgorge any profits or financial gain. Thus, there was no 'final judgment or adjudication' that St. Luke's 'was not legally entitled to such profit or advantage or that such remuneration was improper or illegal.'"

The language of the policy was clear, the court said. "Each of the three terms in Exclusion A—profit, financial advantage, improper/illegal remuneration—pertain to various types of monetary or financial gain," the judge wrote. "Yet there was no finding that St. Luke's obtained any monetary or financial gain from its bargaining leverage."

Judge Winmill proffered an analogy to explain the distinction. "Bargaining leverage is to financial advantage what education is to employment—a means to an end," he wrote. "Just as education is a means of obtaining employment, so is bargaining leverage a means of obtaining a financial advantage. Allied conflates the means with the ends. Just as the word education cannot be used interchangeably with the word employment, so too financial advantage is not interchangeable with bargaining leverage."

The court declined Allied's invitation to interpret "financial advantage" to include bargaining leverage. "Of course, it would have been easy for Allied as the drafter to define financial advantage to include bargaining leverage," the court said. "But it did not do so. Allied urges this Court to 'interpret' the term financial advantage to include bargaining leverage, but it is really asking the Court to add the definition that it failed to write into the policy. This Court cannot 'add words to … avoid liability.'"

Ruling in favor of St. Luke's, the court ordered Allied to reimburse all defense costs incurred by the insured prior to and during the appeal of the underlying litigation. In addition, the court held that Allied breached its duties to St. Luke's under the policy, that Exclusion A did not bar coverage for the claim, and Allied was not entitled to reimbursement of defense costs previously paid to the insured.

To read the decision in St. Luke's Health System v. Allied World National Assurance Company, click here.