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CATERPILLAR INC. v. GREAT AM. INS. CO.

September 6, 1994

CATERPILLAR INC., PLAINTIFF,
v.
GREAT AMERICAN INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Mihm, Chief Judge.

ORDER

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).

RELEVANT BACKGROUND

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 agrees:

    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 to $25,000,000.

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.

DISCUSSION

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 202 (1986).

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
    Corporation Law.
    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 ...

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