The opinion of the court was delivered by: Magistrate Judge Morton Denlow
MEMORANDUM OPINION AND ORDER
Plaintiffs Continental Casualty Company, Chicago Insurance Company and Nautilus Insurance Company ("Insurers"), and Defendant Todd A. Duckson ("Duckson") bring cross-motions for judgment on the pleadings to determine whether Insurers have a duty to defend, pay "claim expenses," and/or indemnify Duckson in a pending Securities and Exchange Commission ("SEC") lawsuit under the terms of Lawyers Professional Liability Policy No. 198276838 (the "Policy").
Duckson was employed as a partner in the Minneapolis office of the Chicago-based law firm Hinshaw & Culbertson LLP ("Hinshaw") from 2003 to December 31, 2008. Hinshaw purchased a claims-made lawyers professional liability insurance policy from Insurers which covered all attorneys employed by the firm. Duckson performed legal services on behalf of an investment fund (the "Fund") during 2008.
The SEC filed suit against the Fund and Duckson, among others, on September 21, 2010, in the United States District Court for the District of Minnesota (10 C 3995) (the "SEC action"). The SEC complaint alleges that Duckson, acting as outside counsel to the Fund, made materially false and/or misleading statements about the Fund orally and in writing. SEC Compl. ¶ 51.*fn1 More specifically, the complaint alleges that in the course of his representation, Duckson assisted in the preparation of two private placement memoranda, both of which were materially misleading. Id. ¶¶ 53-62.
Duckson submitted a claim to Insurers under the Policy, which Insurers denied on December 9, 2010. Insurers now seek a declaratory judgment that there is no duty to defend or indemnify Duckson because the SEC action does not seek damages covered by the Policy.
Duckson counterclaims for a declaratory judgment that he is entitled to coverage for defense of the SEC action and that Insurers' owe him indemnity coverage for his "claim expenses" and potential damages. Duckson also seeks damages for breach of contract. Both parties seek costs and attorney's fees related to this case. The case is now before the Court on cross-motions for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c).
The SEC alleges that Duckson and others "misleadingly stated that the Fund would use proceeds raised from investors primarily to make real estate loans and other investments," and made "false and/or misleading statements and/or material omissions to brokers who were involved in selling the Fund to the brokers' customers." SEC Compl. ¶¶ 12, 52. The SEC complaint alleges civil causes of action against Duckson for: (1) violating sections of the Exchange Act and (2) violating sections of the Securities Act; or, in the alternative, (3) aiding and abetting those violations. Id. ¶ 15. The SEC seeks: (1) a declaratory judgment; (2) permanent injunctive relief; (3) disgorgement of ill-gotten gains plus prejudgment interest thereon; (4) civil penalties; and (5) officer-director bars. Id. at pp. 28-30.
C. RELEVANT POLICY PROVISIONS
Although the Policy is over thirty pages long, this litigation centers on a very few provisions relating to the issues of coverage, the duty to defend, and reimbursement for "claim expenses." The first section of the Policy is titled "Insuring Agreement" and includes four paragraphs. The first two paragraphs of the Policy, "coverage" and "defense,"*fn2 read as follows:
The Company agrees to pay on behalf of the Insured all sums in excess of the deductible that the Insured shall become legally obligated to pay as damages and claim expenses because of a claim that is both first made against the Insured and reported in writing to the Company during the policy period by reason of an act or omission in the performance of legal services by the Insured or by any person for whom the Insured is legally liable, provided that:
1. no Insured gave notice to a prior insurer of such claim or a related claim;
2. no Insured gave notice to a prior insurer of any such act or omission or related act or omission;
3. prior to the date an Insured first becomes an Insured under this Policy or became an Insured under the first policy issued by the Company (or its subsidiary or affiliated insurers) to the Named Insured or any predecessor firm, whichever is earlier, of which this Policy is a renewal or replacement, no such Insured had a basis to believe that any such act or omission, or related act or omission, might reasonably be expected to be the basis of such claim;
4. there is no other policy, whether primary, contributory, excess, contingent or otherwise, which provides insurance to any Insured for the claim based on or arising out of an act or omission in the performance of legal services by such Insured or by any person for whom such Insured is legally liable while "affiliated" with a firm other than the Named Insured. As used herein, "affiliated" includes acting as Of Counsel for a firm other than the Named Insured.
Policy at 2 (emphasis in original).
B. Defense (as modified by the Limited Self Defense/Mutual Choice Endorsement)
The Named Insured shall have the right to defend in the Insured's name, and on the Insured's behalf, any Claim and offset any Claims Expenses incurred in the defense of a Claim up to $250,000, of the deductible amount. Once such amount has been incurred by the Named Insured, the Company will have the right and will defend any Claim covered by this Policy, even if any of the allegations of the Claim are groundless, false or fraudulent. The Company and the Named Insured shall mutually agree on the appointment of counsel to investigate and to defend any Claim. In the event that a Claim shall be subject to arbitration or mediation, the Companyand the Named Insuredshall mutually agree on the choice of arbitrators or mediators and in the conduct of any arbitration or mediation proceedings involving a Claim covered by the Policy. Either party's agreement to defense counsel, mediators, or arbitrators shall not be unreasonably withheld.
Policy at 2, 25 ("Limited Self Defense/Mutual Choice") (emphasis in original).
Section III of the Policy defines several key terms:
"Claim" means "a demand, including the service of suit or the institution of any alternative dispute resolution proceeding, received by the Insured for money or services arising out of an act or omission, including personal injury, in the rendering of or failure to render legal services." Policy at 4 (emphasis in original).
A. fees charged by attorneys designated by the Company or by the Insured with the Company's written consent; and
B. all other reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a claim if incurred by the Company, or by the Insured with the written consent of the Company, including, but not limited to, premiums for any appeal bond, attachment bond or similar bond but without any obligation of the Company to apply for or furnish any such bond.
C. all costs taxed against an Insured in defense of a claim; and
D. all interest on the entire amount of any judgment which accrues after entry of the judgment and before the Company has paid that part of the judgment which does not exceed the limits of liability stated in Section II A. above.
Policy at 4-5 (emphasis in original).
"Damages" are defined as any "judgments, awards and settlements (including prejudgment interest), provided any settlements [are] negotiated with the assistance and approval of the Company." Policy at 5 (emphasis in original). The Policy explicitly excludes the following items from the definition of "damages":
A. costs and expenses paid or incurred or charged by any Insured, no matter whether claimed as restitution of specific funds, forfeiture, financial loss, set-off or otherwise, and injuries that are a consequence of any of the foregoing;
B. civil or criminal fines, sanctions, penalties or forfeitures, whether pursuant to law, statute, regulation or court rule, including but not limited to awards under 18 U.S.C. 1961, et. seq., Federal Rules of Civil Procedure 11 or 28 U.S.C. 1927 and state statutes, regulations, rules or law so providing, and injuries that are a consequence of any of the foregoing;
C. punitive or exemplary amounts [is deleted in its entirety but only where the law applicable to the claim mandates such coverage];
D. the multiplied portion of multiplied awards;
E. injunctive or declaratory relief;
F. any amount for which an Insured is absolved from payment by reason of any covenant, ...