The U.S. Fifth Circuit Court of Appeals recently upheld summary judgment dismissing all claims against an insurer based on a bankruptcy and creditors exclusion in the insured’s directors and officers (“D&O”) policy. Markel Am. Ins. Co. v. Huibert Verbeek, No. 1:15-51099 (5th Cir. Sept. 27, 2016).
The insureds, owners of a wholesale distributor of flowers, refinanced their debt with lenders by entering into credit facility agreements. The insureds later defaulted, and their creditors sued alleging the insureds participated in a scheme to fraudulently induce them into signing the loan agreements by misrepresenting the company’s financial position. The insureds tendered the defense of the creditors’ lawsuit to their D&O insurer. The insurer denied the tender based on a bankruptcy and creditors exclusion that excluded coverage for any claim brought by a creditor of the company whether or not a bankruptcy or insolvency proceeding had been commenced. The insurer filed a declaratory judgment action and filed a motion for summary judgment based on the exclusion, which was granted by the trial court. The insureds appealed.
The Fifth Circuit held that the credit transaction formed the basis of the claims and damages sought in the underlying lawsuit and that the exclusion applies because all of the damages plead in the underlying complaints arise out of the allegedly fraudulently induced loan and because the plaintiffs in the underlying lawsuit were suing in their capacity as creditors. The Fifth Circuit rejected the insured’s position that the exclusion is triggered only when the action involves the creditor trying to recover debt owed by the company. It also upheld the trial court’s sua sponte granting of summary judgment on the insurer’s duty to defend because there cannot be a duty to indemnify where there is no duty to defend.