AR Capital sued the VEREIT insurers seeking a declaration that it was entitled “to be treated fairly and equitably” and that the VEREIT insurers should not favor VEREIT over AR Capital. Id. at 9. VEREIT intervened to “protect its interest in the finite amount of available insurance proceeds.” Id. at 11. VEREIT sought a ruling that, to the extent that both entities were entitled to coverage, AR Capital must first seek coverage under its own insurance program, and that the insurers should reimburse costs on a “first come first served basis.” Id. at 9-10. AR Capital asserted counterclaims against VEREIT alleging, in part, tortious interference and breach of the obligation of good faith and fair dealing.
VEREIT and AR Capital agreed that the endorsement at issue afforded Side B coverage for amounts that AR Capital paid to indemnify claims against directors, but disputed whether the endorsement also added Side C coverage for claims made directly against AR Capital. The court found that the endorsement was ambiguous and turned to evidence of the parties’ course of performance to interpret the ambiguous provision. Id. at 15-16. The court ultimately held that AR Capital was entitled to both Side B and Side C coverage. Id. at 18.
The court further held that “AR Capital is to be paid for their claims up to the same amount VEREIT has already been paid by the excess insurers. Thereafter, AR Capital and VEREIT shall be paid its defense costs as they are incurred and submitted (first in, first out).” Id. at 18.
The court dismissed AR Capital’s counter-claims against VEREIT, reasoning that its remedy equalized the amount of insurance obtained by the two entities as of the time of the opinion. Id. at 36.
Lessons Learned
As illustrated by AR Capital, D&O policyholders should consider various issues before adding another entity as an additional insured, such as:
Clearly Defined Scope. Any endorsement that adds an additional insured to a policy should be carefully drafted. Here, the court held that the endorsement was ambiguous as to the basic issue of whether there was Side C coverage.
Other Contracts and Other Insurance. When drafting any additional insured provision, the policyholder and the additional insured should consider other contracts governing their relationship. Here, for example, VEREIT argued that AR Capital should be required to seek coverage under its own insurance before seeking coverage under the VEREIT Policies. There is no discussion in the opinion, however, of whether this issue was addressed in the service contract between the parties.
Priority. AR Capital argued that it should be treated “fairly.” VEREIT argued that the VEREIT Insurers should pay claims on a “first come, first served basis.” The court’s remedy equalized the amount of insurance recoveries by the two parties as of the time of the opinion and adopted a “first in, first out” rule going forward. Under the court’s approach, multiple insureds ultimately may not share equally in the policy limits, in particular if one insured settles certain underlying claims and exhausts the policy limits, leaving the other insured with no coverage. Parties should consider whether to address this issue in the policy, such as by adopting the “first-in, first out” rule, requiring some equitable distribution based on potential exposures, including caps for certain insureds or pre-set allocation formulas, or including some other priority scheme.
Insured v. Insured. D&O policies typically include a so-called insured v. insured exclusion, which potentially bars coverage for a claim by one insured against another insured, subject to various carve-outs that restore coverage. Before adding an additional insured, a policyholder should balance the potential benefit of adding the additional insured (given the risk of underlying claims naming both the policyholder and the additional insured) and the risk of disputes arising between the policyholder and the additional insured. The policyholder also may wish to consider other options, such as a provision that insures the policyholder for claims arising from the conduct of the other entity and/or other contracts that require the other entity to maintain its own insurance program.
Severability Provisions / Exclusions. D&O policies typically contain several provisions that refer to the knowledge or conduct of certain identified insureds, such as certain exclusions, severability provisions that limit the scope of exclusions, and/or application provisions. Such knowledge/conduct provisions vary widely, with some referring to “the insured” that is seeking coverage for a particular claim and others referring to “any” insured or “all” insureds. The policyholder should carefully consider whether any additional insured provision potentially impacts the application of such provisions.
In sum, the AR Capital opinion highlights that many factors should be considered before adding an additional insured and care should be taken in drafting clear policy language.
Gregory Wright is with K&L Gates LLP, Washington, DC.