In an unpublished opinion released earlier this year, the U.S. Court of Appeals for the Third Circuit emphasized the primacy of the actual words used in a D&O insurance policy. The decision is notable because it reflects a continued emphasis by courts on the language used in the policy that the insured actually bought, and because the court unflinchingly employs a plain-language analysis to reach its conclusions as to coverage. Foodtown, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa., No. 08-3940 (3d. Cir. Jan. 6, 2011). A copy of the decision is available here.

The insured was a closely-held grocery cooperative whose members operated supermarkets in New York and New Jersey. The insured cooperative bought a D&O policy that provided for reimbursement of defense costs and indemnity. One of the cooperative’s members (Member 1) decided that it would sell its store, triggering a right of first refusal by the cooperative itself. In the event that the cooperative did not exercise its right, the member assigned a springing right of first refusal to another member (Member 2). When the sale was presented to the cooperative for approval, the cooperative allegedly allowed Member 1 to renege on its deal with Member 2 and sell its store to a non-member. Member 2 sued in 2004, and this insurance coverage action was filed in 2005. It was ultimately removed to federal district court in New Jersey, though the federal court continued to apply the substantive law of New Jersey to the dispute.

The underlying lawsuit asserted four causes of action: (i) misuse of trade names and trademarks by the cooperative’s board, (ii) breach of fiduciary duty on the part of the cooperative’s board, (iii) misallocation of settlement proceeds by the cooperative’s board, and (iv) intentional misrepresentation by the cooperative’s board. The district court found that policy exclusions barred coverage for Counts One and Three, but that Counts Two and Four fell within the scope of coverage.

The Third Circuit affirmed. The unpublished decision noted that New Jersey law requires courts to enforce clear and unambiguous policy provisions according to their plain and ordinary meaning, and also noted the doctrine that ambiguities in an insurance policy are to be construed in favor of coverage. Since the plaintiffs included former insureds, the policy’s “insured versus organization” exclusion barred coverage for Count One; and a separate exclusion barring coverage for any claims “in connection with” the settlement barred coverage for Count Three. The court had little problem concluding that the plain language of the exclusions fit the circumstances of this case.

The appellate court affirmed the lower court’s holding that Counts Two and Four fell within the scope of coverage and were not otherwise excluded. The analysis that the court undertook closely examines the words used in the exclusionary clauses, and then looks to the injury suffered (rather than to the type of relief sought) to reach its conclusions.

The decision is notable because it applies New Jersey law to enforce exclusions, as written. Policyholders and carriers alike should be mindful of the court’s analytical method, particularly if they will litigate in New Jersey.