United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
J. Tharp, Jr. United States District Judge.
March 2017, a shareholder derivative lawsuit was filed in
federal court in New Jersey against World Water Works
Holdings, Inc. (“World Water”) and three
individual members of its board of directors. At the time,
World Water was covered by a liability insurance policy
issued by Continental Casualty Co.
(“Continental”). World Water asserts that, under
the policy, Continental has a duty to defend that lawsuit,
while Continental denies that it has any such duty.
Accordingly, World Water brought this action against
Continental, seeking, among other things, a declaratory
judgment that Continental has a duty to defend the
shareholder suit. Both World Water and Continental have moved
for summary judgment. Continental has also filed a motion for
judicial notice, asking this Court to take judicial notice of
various documents relevant to the New Jersey lawsuit. For the
reasons that follow, both of Continental's motions are
granted, and World Water's motion is denied.
1998, World Water Works, Inc. (“WWW, Inc.”) was
founded by Mark Fosshage. See Continental Casualty
Company's Local Rule 56.1 Statement of Undisputed
Material Fact (“DSOF”) ¶ 19, ECF No. 49. The
company is in the business of wastewater treatment.
Fosshage's father, James Fosshage, was a founding
investor in WWW, Inc. and so was given a seat on its board of
directors. See Id. ¶¶ 20-21. Mark Fosshage
served as the initial president and CEO of the company. In
2011, World Water was formed as a separate legal entity and
became the holding company for WWW, Inc. See Id.
¶ 22. Around the same time, three other
individuals-Prashant Mitta, Ravi Reddy, and Ravishankar
Tumuluri-became involved with World Water, and ultimately
became directors on World Water's board. A dispute later
arose between these three individuals and the elder Fosshage
over the direction and management of the company.
Id. ¶ 29. In 2016, these individuals removed
Mark Fosshage from his role as president and CEO of World
Water. Id. ¶ 24. The elder Fosshage, however,
remains a member of the World Water board.
July 21, 2016, to July 21, 2017, World Water was covered by a
liability insurance policy issued by Continental. That policy
had a provision that is known as the insured versus insured
exclusion (“IVI Exclusion”). The language in the
policy setting out the IVI Exclusion contained a general
exclusion from coverage and then provided that “this
exclusion shall not apply” to a series of seven
circumstances. The general exclusion and the first of those
limitations read as follows:
The Insurer shall not be liable to pay any Loss under this
Coverage Part in connection with any Claim made against any
2. Claims by Insureds
by or on behalf of any Insured in any capacity provided,
however that this exclusion shall not apply to:
a. any Claim brought derivatively on behalf of the Insured
Entity provided that such Claim is brought and maintained
solely by persons acting independent of and without the
solicitation, assistance, active participation or
intervention of the Insured Entity or any Executive (unless
such solicitation, assistance, participation or intervention
is Whistleblower Activity)[.]
Ex. A, Directors & Officers Liability Coverage Part 1-2,
ECF No. 64-1. The other six limitations on the applicability
of the exclusion-which are not relevant to this case-were
separately listed in subparagraphs marked with the letters
(b) through (g). See Id. at 2.
March 2, 2017 (i.e., during the policy period),
Anthony Besthoff, a shareholder of World Water, filed a
lawsuit in the U.S. District Court for the District of New
Jersey. The full title of that lawsuit is Anthony W.
Besthoff, Jr., derivatively and on behalf of World Water
Works Holdings, Inc. v. Prashant Mitta, Ravi Reddy,
Ravishankar Tumuluri, and World Water Works Holdings,
Inc., No. 2:17-cv-01449-JMV-MF (D.N.J. Mar. 2, 2017).
The Besthoff lawsuit is a stockholder derivative
action against Mitta, Reddy, and Tumuluri as individual
directors, along with World Water as a nominal defendant.
See Verified Shareholder Compl. and Jury Demand
¶ 1, ECF No. 35-1. The core allegation in the lawsuit is
that the defendants created various corporate entities in
India (the “India Operations”), which were later
spun off as independent companies. According to the
Besthoff complaint, Mitta, Reddy, and Tumuluri
simultaneously held dual roles as members of World
Water's board and owners of the India Operations. See
Id. The complaint further alleges that these defendants
took various actions in their capacity as World Water
directors that were to the detriment of World Water and for
the sole benefit of the India Operations. Besthoff thus
brought claims against all three individual defendants for
breach of fiduciary duty and waste of corporate assets, and
against Mitta for unjust enrichment and tortious interference
with contract. Id. ¶¶ 112-30.
Besthoff filed this complaint, World Water tendered the
Besthoff action to Continental, seeking defense
coverage under the terms of its insurance policy. On May 3,
2017, Continental denied this request for coverage and
refused to defend World Water in the Besthoff
action, on the basis that it fell within the IVI Exclusion.
Ex. C, ECF No. 64-3. A representative of World Water
subsequently spoke with Continental and conveyed that World
Water disagreed with this assessment, leading Continental to
review its coverage obligations. In a letter dated August 25,
2017, Continental concluded, again, that it had no duty to
defend the lawsuit. It nevertheless agreed to defend the
Besthoff suit, but did so subject to a full
reservation of rights, including the right to seek recoupment
of “Defense Costs” as defined by the policy. Ex.
D, ECF No. 64-4. Finally, on October 6, 2017, Continental
revised its position one more time. It withdrew its claim
that it had the right to seek recoupment-but continued to
represent that it reserved all other rights under the policy
and at law. Ex. E, ECF No. 64-5.
Water filed this complaint against Continental in July 2017,
with Besthoff also included as a nominal
defendant. World Water seeks a declaratory judgment
that Continental has a duty to defend the individual
defendants in the Besthoff action and to reimburse
World Water for all amounts it has incurred in defending that
action. In addition, World Water asserts that Continental is
liable for breach of contract and for bad faith. Continental
responded by bringing a counterclaim against World Water,
seeking a declaratory judgment that it has no duty to defend
or indemnify World Water. Both Continental and World Water
have moved for summary judgment. Continental ...