In a recent decision of the United States Court of Appeals for the Eighth Circuit, the court reversed a ruling against a D&O insurer in a coverage action arising from a bankruptcy case. In re: SRC Holding Corp., Nos. 07-1327/1335 (8th Cir. Oct. 27, 2008). Click here to read the Eighth Circuit's decision.

Miller & Schroeder, Inc. (“M&S”) was a securities underwriter and broker, conducting business primarily in Minnesota, that was acquired in 1997 by MI Acquisition Corporation (“MI”). In connection with that transaction, MI bought a three-year policy “Directors and Officers Liability Insurance Policy Including Employer’s Liability Coverage” (the “Policy”) from Executive Risk Indemnity, Inc. (“ERII”). The Policy was later renewed for an additional three years. Between 1996 and 1999, M&S underwrote $140,000,000 worth of “Heritage Bonds”, all of which eventually defaulted. Purchasers of the bonds sued M&S and its directors and officers, alleging a number of theories of liability including violations of federal securities laws. In 2001, M&S tendered the claims to ERII, which denied coverage on the grounds that coverage was precluded by an endorsement to the Policy, providing that coverage did not apply to any claims arising out of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 or other federal or state laws, rules or regulations with respect to the regulation of securities. M&S defended itself against the claims, which resulted in millions of dollars in damages and ultimately caused M&S to file for bankruptcy protection under Chapter 7.

The trustee of M&S’s bankruptcy estate initiated adversary proceedings against ERII in October 2003 in the United States Bankruptcy Court for the District of Minnesota, alleging that ERII breached its contract with M&S by failing to defend and indemnify it for claims made in the Heritage Bond litigation. The bankruptcy court granted the trustee’s motion for partial summary judgment, concluding that the insurance policy did not preclude coverage of some of the claims, and ERII was obligated to defend M&S against all of the claims brought in the Heritage Bond litigation. ERII appealed the judgment to the United States District Court for the District of Minnesota, which affirmed the bankruptcy court’s judgment. ERII appealed that judgment to the Eighth Circuit. The Eighth Circuit found that the language of the endorsement was unambiguous and that the bankruptcy court erred by relying on extrinsic evidence--the deposition testimony of the insurance broker who sold the Policy who testified that the securities exclusion was intended to exclude coverage for liability resulting from M&S’s sales of its own stock. Further, because certain non-excluded claims arose out of the same operative set of facts as the claims explicitly excluded by the endorsement, the court ruled that those claims were “related claims” that would be treated as a single claim under the language of the policy and coverage was likewise precluded.