The opinion of the court was delivered by: Mihm, Chief Judge.
This matter is before the Court on Caterpillar's Motion for
Partial Summary Judgment on Count I of its Complaint. For the
reasons set forth herein, Caterpillar's Motion is GRANTED IN PART
and DENIED IN PART. The Court certifies certain rulings for an
immediate appeal under 28 U.S.C. § 1292(b).
This case raises the issues of (1) the proper allocation of
a "Loss" between an insured and insurer under a directors and
officers liability insurance policy and (2) the proper
construction of certain terms in that policy.
On May 11, 1994, the Court approved a settlement valued
between $17,250,000 and $23,000,000 in the cases of Kas v.
Caterpillar Inc., et al., 815 F. Supp. 1158 (C.D.Ill. 1992), and
Margolis v. Caterpillar Inc., et al., 815 F. Supp. 1150 (C.D.Ill.
1991) ("Kas shareholder litigation"). Those actions involved
claims against Caterpillar ("CAT") and five of its directors and
officers, alleging violations of federal securities laws and
common law fraud. This action involves Caterpillar's claims
against Great American Insurance, CAT's directors and officers
("D & O") liability insurer for the relevant period, for
reimbursement of 100% of the settlement amount in the Kas
shareholder litigation in excess of the applicable retention.
Section I of the Insurance Policy states that Great American
With the Directors or Officers of the Company that
if, during the Policy Period or the Discovery
Period, any Claim is first made against the
Directors or Officers, individually or
collectively, for a Wrongful Act the Insurer will
pay on behalf of the Directors or Officers all Loss
which the Directors or Officers shall be legally
obligated to pay, except for such Loss which the
Company actually pays as indemnification.
With the Company that if, during the Policy Period
or the Discovery Period, any Claim is first made
against the Directors or Officers, individually or
collectively, for a Wrongful Act the Insurer will
reimburse the Company for all Loss which the
Company is required to indemnify, or for which the
Company has to the extent permitted by law
indemnified the Directors or Officers.
The "Wrongful Acts" covered by the policy include:
[A]ny actual or alleged error, misstatement,
misleading statement, act or omission, or neglect
or breach of duty by the Directors or Officers in
the discharge of their duties solely in their
capacity as Directors or Officers of the Company,
individually or collectively.
Section III.D. Section II.E defines "Loss" as "compensatory
damages, settlements, and Costs of Defense. . . ." Section V.A
provides that Great American would pay 100% of a "Loss" in excess
of the applicable retention amount, $10,000,000 in this case, up
The parties do not dispute that CAT must pay the initial
$10,000,000 of the Kas settlement. CAT's motion for partial
summary judgment on Count I seeks a declaratory judgment that
Great American must pay the full amount of the settlement and
defense costs, after deducting the $10,000,000 retention.
Although CAT's pleadings argue that it should be reimbursed for
100% of the settlement amount and defense expenses, at oral
argument, Mr. Jentes, CAT's attorney, indicated that CAT was
willing to negotiate with Great American regarding defense
expenses and was not asking the court to rule on the amount of
defense expenses. Mr. Jentes stated:
[W]e're not asking Your Honor to decide on the
amounts of the defense costs. . . . I might
emphasize that that's not something which we
necessarily stand pat on what was submitted to the
insurance company. That is a negotiable item. I
will be very candid with you.
Transcript of May 16, 1994, pp. 49-50. Therefore, this order is
limited to the issue of a possible allocation of the settlement
amount and not defense costs. The Court will rule on a possible
allocation of defense costs later if the parties are unable to
reach an agreement on their own.
Summary Judgment is proper "if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp.
v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d
265 (1986). In considering a motion for summary judgment, the
Court views the record and all inferences drawn from it in the
light most favorable to the nonmovant. Griffin v. Thomas,
929 F.2d 1210, 1212 (7th Cir. 1991). A genuine issue of material fact
exists when "the evidence is such that a reasonable jury could
return a verdict for the nonmoving party." Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d
Great American argues that a dispute of material fact exists
regarding whether and by what means CAT "has undertaken to
indemnify" the defendant directors and officers for 100% of the
settlement payment. According to CAT:
CAT has undertaken to indemnify the Directors and
Officers against the full amount of this loss and
any costs of defense, as it is specifically
authorized to do under the Delaware General
The corporation shall indemnify to the full extent
permitted by, and in the manner permissible under,
the laws of the State of Delaware any person made,
or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative
or investigative, by reason of the fact that he,
his testator of intestate is or was a director or
officer of the corporation or any predecessor of
the corporation, or served any other enterprise as
a director or officer at the request of the
corporation or any predecessor of the corporation.
The foregoing provisions of this Article V shall be
deemed to be a contract between the corporation and
each director and officer who serves in such
capacity at any time while this bylaw is in effect,
and any repeal or modification thereof shall not
affect any rights or obligations then existing with
respect to any state of facts then or theretofore
existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or
in part upon any such state of facts.
Affidavit of Gail M. Blades in Support of Partial Summary
Judgment, p. 5-6.
Although CAT's by-laws provide for indemnification of its
directors and officers, Great American contends that CAT has not
offered any evidence to support its claim that it "has undertaken
to indemnify" its directors and officers. CAT has not yet
indemnified the defendant directors and officers because the
administration of the Kas settlement is still ongoing. For
example, all settling plaintiffs' proofs of claim were due by
July 26, 1994, with 30 days thereafter to cure any deficiencies
of which the claimant is advised. See Kas Stipulated Order
Amending Order Preliminarily Approving the Settlement, Directing
Notice, Providing for Exclusion, and Fixing Hearing Date;
Stipulation and Agreement of Settlement; and Order and Final
Judgment. Great American contends, and the Court agrees, that it
is entitled to discovery regarding whether CAT "has undertaken to
indemnify" its directors and officers, by what means, and for
what specific amount.
I. Allocation of Kas Settlement Amount
Initially, the Court looks to the parties' insurance policy
and finds that, unlike the policies at issue in Safeway Inc. v.
National Union Fire Insurance Co., 805 F. Supp. 1484 (N.D.Cal.
1992), and First Fidelity Bancorporation and Financial
Institutions v. National Union Fire Insurance Company, No.
90-1866, 1994 WL 111363 (E.D.Pa. March 30, 1994), it does not
contain a clause explicitly requiring an allocation between the
corporation and the insureds. In Safeway, the policy provided:
With respect to the settlement of any claim made
against the Company and the Insured, the Company
and the Insureds and the Insurer agree to use their
best efforts to determine a fair and proper
allocation of the settlement amount as between the
Company and Insureds.
Safeway, 805 F. Supp. at 1490. Similarly, the policy at issue in
First Fidelity provided that in the event of a settlement of a
claim where First Fidelity and the directors and officers were
both named, the insurance company and First Fidelity were
required to "use their best efforts to determine a fair and
proper allocation of the settlement amount as between the Company
and the Insureds." First Fidelity, 1994 WL 111363, *2. However,
the lack of such a provision in this case does not dispose of the
allocation issue because the policy clearly provides that only
claims made against the directors and officers, not the
corporation or other employees, are covered. The policy provides
for reimbursement to CAT only for the amount it indemnifies the
defendant directors and officers. Moreover, other decisions,
including one from the Seventh Circuit, have allowed an insurer
to allocate settlement amounts between covered and uncovered
claims in the underlying dispute despite the absence of an
express allocation provision in the insurance policy. See Harbor
Insurance Co. v. Continental Bank Corp., 922 F.2d 357 (7th Cir.
1990); Nodaway Valley Bank v. Continental Cas. Co., 715 F. Supp. 1458
(W.D.Mo. 1989), aff'd, 916 F.2d 1362 (8th Cir. 1990).
Both parties rely on the Seventh Circuit's decision in Harbor
Insurance Co. for guidance on the proper allocation of the Kas
settlement amount between CAT and the insured defendants. In
Harbor, two securities actions had been filed. One action named
Continental and five of its directors as defendants. The other
named Continental and 25 directors, officers and employees
identified only as "John Does." Id. at 359. Continental settled
the two cases and sought reimbursement of $15 million from Harbor
and the remaining $2.5 million from Allstate. Id. The insurers
prevailed at trial on a defense to the policy that is not at
issue in this case. The Seventh Circuit reversed on that issue
and remanded the case for a new trial. Although the jury did not
reach the issue of damages, the court discussed the issue "in the
hope of furnishing guidance for the trial and perhaps also of
facilitating settlement." Id. at 367.
The Seventh Circuit considered the possibility that some
portion of the $17.5 million settlement was attributable to
individuals or activities that were not insured under the D & O
policy. This possibility was "implied" by the suit against the
"John Doe" defendants and the claim that:
[O]ther agents or employees of Continental
contributed materially to the fraud and that
without their activities the settlement would have
been lower because the damage done to the members
of the class would have been less.
Id. The Court then stated:
To the extent that the amount for which Continental
settled was larger than it would have been but for
the misfeasance of these other people — either
noninsured persons or persons against whom no claim
was made — Continental's ...