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Great American Insurance Co. v. Bally Total Fitness Holding Corp.

June 22, 2010

GREAT AMERICAN INSURANCE COMPANY, AN OHIO CORPORATION, PLAINTIFF,
v.
BALLY TOTAL FITNESS HOLDING CORPORATION, DEFENDANT AND THIRD-PARTY PLAINTIFF,
v.
RLI INSURANCE COMPANY; TRAVELERS INDEMNITY COMPANY (AS SUCCESSOR-IN-INTEREST BY MERGER TO GULF INSURANCE COMPANY); FIREMAN'S FUND INSURANCE COMPANY; AND ACE AMERICAN INSURANCE COMPANY, THIRD-PARTY DEFENDANTS.
ACE AMERICAN INSURANCE COMPANY, THIRD-PARTY DEFENDANT AND COUNTERCLAIMANT,
v.
GEORGE N. ARONOFF; PAUL TOBACK; JOHN H. DWYER; LEE S. HILLMAN; STEPHEN C. SWID; JAMES MCANALLY; J. KENNETH LOOLOIAN; LIZA M. WALSH; ANNIE P. LEWIS, AS EXECUTOR OF THE ESTATE OF AUBREY C. LEWIS, DECEASED; THEODORE NONCEK; GEOFF SCHEITLIN; JOHN H. WILDMAN; JOHN W. ROGERS, JR.; AND MARTIN E. FRANKLIN, ADDITIONAL DEFENDANTS ON COUNTERCLAIM.



The opinion of the court was delivered by: Wayne R. Andersen District Judge

MEMORANDUM OPINION and ORDER

This matter is before the Court on cross motions for summary judgment [224, 234, 235]. Pursuant to 28 U.S.C. § 2201, both parties seek a judicial declaration regarding the contractual interpretation of certain excess insurance policies and the conditions precedent to coverage defined within those policies. Specifically, Defendants Bally Total Fitness Holding Corp. ("Bally"), Lee Hillman, Paul Toback, and John Dwyer (collectively referred to herein as "Insureds") seek a judicial declaration "confirming their entitlement to coverage under two policies of excess directors' and officers' liability insurance, issued by Third Party Defendants ACE American Insurance Company and Fireman's Fund Insurance Company, for the array of claims asserted against them and others alleging violations of securities law stemming from Bally's financial restatements." Docket No. 224. In opposition, Third Party Defendants ACE and Fireman's Fund seek a judicial declaration that Insureds' below policy limits settlement with certain other excess insurance carriers, no longer parties to this case, does not satisfy the conditions precedent to coverage defined within the excess insurance policies issued by Third Party Defendants. Docket Nos. 234, 235.

The following clause from the excess insurance policy issued by ACE ("Third Layer Excess Carrier") defines conditions precedent to coverage:

It is expressly agreed that liability for any covered Loss shall attach to the Insurer only after the insurers of the Underlying Policies shall have paid, in the applicable legal currency, the full amount of the Underlying Limit and the Insureds shall have paid the full amount of the uninsured retention, if any, applicable to the primary Underlying Policy.

Similarly, the excess insurance policy issued by Fireman's Fund ("Fourth Layer Excess Carrier") contains the following clause defining conditions precedent to coverage:

The insurance coverage afforded by the Policy shall apply (1) only in excess of all Underlying Insurance and (2) only after all Underlying Insurance has been exhausted by payment of the total underlying limit of insurance and (3) only if each and every Underlying Insurance Policy has responded by payment of loss as a result of any wrongful act.

Additionally, the policy clarifies "Exhaustion Of Underlying Insurance" as follows:

In the event of exhaustion of all of the limits of insurance of the Underlying Insurance solely as a result of actual payment of loss or losses thereunder, this Policy shall, subject to the Limit of Insurance, terms and conditions of this Policy, apply as Primary Insurance subject to any retention specified in the Primary Policy.

For the following reasons, the Court denies Insureds' motion for summary judgment and grants Third Party Defendants' motion for summary judgment.

BACKGROUND

Bally is a Delaware Corporation with its principal place of business in Chicago, Illinois and operates fitness centers throughout the United States. Lee Hillman and Paul Toback are Bally's former Chief Executive Officers. John Dwyer is Bally's former Chief Financial Officer.

Insureds have allegedly incurred $33 million in legal costs defending suits arising from Bally's past financial restatements. To cover the alleged legal costs, Insureds sought coverage from their primary directors' and officers' insurance carrier and four excess insurance carriers.

Great American Insurance Company ("Primary Carrier") issued the Primary Policy with a policy limit of $10 million. RLI ("First Layer Excess Carrier") issued the first layer excess directors' and officers' liability insurance policy ("First Layer Excess Policy") with a policy limit of $10 million for claims in excess of $10 million. In other words, the First Layer Excess Carrier is responsible for covered claims between $10 million and $20 million. Gulf ("Second Layer Excess Carrier") issued the second layer excess directors' and officers' liability insurance policy ("Second Layer Excess Policy") with a policy limit of $10 million for claims in excess of $20 million. Third Party Defendant ACE ("Third Layer Excess Carrier") issued the third layer excess directors' and officers' liability insurance policy ("Third Layer Excess Policy") with a policy limit of $10 million for claims in excess of $30 million. Finally, Third Party Defendant Fireman's Fund Insurance Company ("Fourth Layer Excess Carrier") issued the fourth layer excess directors' and officers' liability insurance policy ("Fourth Layer Excess Policy") with a policy limit of $10 million for claims in excess of $40 million.

After initially filing this suit to invalidate coverage, the Primary Carrier and the First and Second Layer Excess Carriers agreed to contribute $19.5 million towards Insureds' alleged legal costs ("The Settlement"). Most notably, the First Layer Excess Carrier settled with Insureds for $8 million, $2 million less than the policy limit of the First Layer Excess Policy. The Second Layer Excess Carrier settled with Insureds for $1.5 million, $8.5 million less than the policy limit of the Second Layer Excess Policy. In accordance with The Settlement's Voluntary Stipulation of Partial Dismissal, this Court dismissed with prejudice the claims and counter-claims between Insureds and the Primary Carrier and ...


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