{"id":2698,"date":"2014-12-01T19:26:38","date_gmt":"2014-12-01T19:26:38","guid":{"rendered":"http:\/\/www.joneslemongraham.com\/blog\/?p=2698"},"modified":"2021-12-21T20:03:08","modified_gmt":"2021-12-21T20:03:08","slug":"can-a-policyholder-pick-and-choose-when-an-insurance-contracts-defined-terms-apply","status":"publish","type":"post","link":"https:\/\/www.joneslemongraham.com\/blog\/can-a-policyholder-pick-and-choose-when-an-insurance-contracts-defined-terms-apply\/","title":{"rendered":"Can a policyholder pick and choose when an insurance contract’s defined terms apply?"},"content":{"rendered":"

by Christopher Graham<\/a> and Joseph Kelly<\/a><\/p>\n

<\/p>\n

George Herbert Walker Bush. James Baker. John Major. Frank Carlucci. These are a few of the political figures reportedly associated with the global private equity firm known as the Carlyle Group.<\/p>\n

Carlyle even has been in the movies. Michael Moore\u2019s Fahrenheit 9\/11 claimed that Carlyle was in essence one of the United States\u2019 largest defense contractors, while also having an association with the Bush family and taking investments from Bin Laden family.<\/p>\n

Today\u2019s post isn\u2019t movie worthy. But it\u2019s at least blog worthy.<\/p>\n

Back in 2006, the Carlyle Group, like other private equity companies, set up a company to invest in residential mortgage-backed securities. It seemed like a good idea at the time, right?<\/p>\n

The shares of the company, known as Carlyle Capital Corp., were sold in private placements and then in public offerings and public trading. But, as you know\u2014unless you\u2019ve been living under a rock\u2014the market for those investments collapsed in 2008. Carlyle Capital then bit the dust. And its investors, shareholders, and liquidator sued various \u201cCarlyle\u201d limited liability companies involved with Carlyle Capital, including one working under an investment management contract.<\/p>\n

The LLCs naturally had professional liability insurance, including primary coverage and multiple tiers of excess coverage.<\/p>\n

The LLCs bargained for a broad definition of Professional Services Claim<\/strong> and Professional Services<\/strong> so they\u2019d have the broadest professional liability insurance coverage.<\/p>\n

Professional Services<\/strong> included \u201cthe giving of financial, economic or investment advice regarding [a wide-range of] investments . . . ,\u201d \u201cthe rendering or failure to render investment management services . . . ,\u201d \u201cthe organization or formation of, the purchase or sale or offer or solicitation or for purchase or sale of any interest(s) in, the calling of committed capital to, a Fund<\/strong> or prospective Fund<\/strong>,\u201d and \u201cthe providing of advisory, consulting, management, financial or legal advice or other services for, or the rendering of any advice to, or with respect to an Organization<\/strong> or Fund<\/strong> . . . or a Portfolio Entity<\/strong> . . . .\u201d<\/p>\n

But Carlyle\u2019s professional liability insurers didn\u2019t want anything to do with Carlyle Capital. Maybe they saw the train wreck coming? Maybe they didn\u2019t? But for whatever reason, Carlyle Capital wasn\u2019t an Insured<\/strong> under the professional liability policy for the Carlyle LLCs. And the LLCs’ policy also provided that \u201cthe Insurer<\/strong> shall not be liable to make any payment for Loss<\/strong> in connection with any Professional Services Claim<\/strong> arising from Professional Services<\/strong> provided to the Carlyle Capital Corp.\u201d The exclusion thus incorporated the policy\u2019s broad Professional Services Claim<\/strong> and Professional Services<\/strong> definitions so the Carlyle Capital exclusion was correspondingly broad.<\/p>\n

The policy wasn\u2019t a duty-to-defend policy. But Defense Costs<\/strong> were included in the Loss definition. ‘ The Carlyle LLCs demanded that the insurers advance Defense Costs for the suits relating to Carlyle Capital. The insurers said, \u201cNo.\u201d So the LLCs sued. The insurers moved to dismiss. Who wins?<\/p>\n

\u201cThe insurers,\u201d said the court in Carlyle Investment Mgmt. LLC, et al v. ACE American Ins. Co., et al<\/em>, Case No. 2013 CA 00319 B (D.C. Sup. Ct. May 15, 2014. The insurers had no duty to advance the Carlyle LLCs\u2019 Defense Costs given that the Professional Services exclusion targeted Claims involving Professional Services provided to Carlyle Capital.<\/p>\n

As the court stated, the District of Columbia\u2019s \u201ceight corners rule\u201d\u2014requiring comparison of the 4-corners of the underlying complaint to the 4-corners of the insurance contract\u2014controls whether the insurers must advance Defense Costs<\/strong>, just as it controls when the policy includes a duty-to-defend. Applying that rule, the court explained:<\/p>\n

\n

Each claim in each complaint arises from the provision of Professional Services<\/strong> to [Carlyle Capital], whether it relates to the alleged false marketing of the shares to private investors . . . , the alleged failure to make required disclosures to purchasers of publicly traded shares . . . , [one LLC\u2019s] alleged mismanagement of [Carlyle Capital] under [a management contract] . . . , the alleged misrepresentation or failure to warn investors and failure to take appropriate actions to maintain adequate liquidity when the market was showing signs of collapse and [Carlyle Capital] was over-leveraged . . . , or the operation of [Carlyle Capital] with divided loyalties by acting as \u2018de facto directors\u2019 or \u2018shadow directors,\u2019 allegedly for the benefit of other Carlyle interests and to the detriment of [Carlyle Capital] and its outside shareholders . . . .<\/p>\n<\/blockquote>\n

Further: \u201cTo the extent that these claims \u2013 or some of them \u2013 would be classified as \u2018management-liability claims\u2019 in the insurance industry generally or in some other insurance contract, in this contract they are Professional Services Claims<\/strong> arising from Professional Services<\/strong> provided to [Carlyle Capital].\u201d<\/p>\n

The LLCs argued that \u201cthe Exclusion is narrower than the coverage and was intended to exclude only claims arising from professional services in the nature of those provided by lawyers and accountants (\u2018E&O\u2019 claims), not \u2018management-liability claims,\u2019 such as those alleging acts, errors, or omissions in corporate governance, often referred to as \u2018directors and officers claims\u2019 . . . .\u201d<\/p>\n

But as the court stated, \u201cWhatever might be true in the insurance industry generally, in this insurance contract, \u2018Loss<\/strong> in connection with any Professional Services Claim<\/strong> arising from Professional Services<\/strong> provided to Carlyle Capital Corp.\u2019 was expressly excluded from coverage.\u201d<\/p>\n

Several officers and directors of the LLCs also were directors of Carlyle Capital, which reportedly had its own D&O policy. No word on how those D&O carriers fared\u2014but we suspect not well.<\/p>\n

Moral of the story: If Carlyle wanted the terms, Professional Services Claims<\/strong> and Professional Services<\/strong>, to have narrower meanings in the exclusions it should have asked for the policies to be written another way or tried other carriers. Some courts have deemed undefined terms to have broader meanings when used in coverage grants and narrower meanings when used in exclusions. But in Carlyle\u2019s policy the terms in the coverage grant and exclusions not only were defined, but defined the same way. A policyholder doesn\u2019t get to pick and choose when contractually defined terms apply to a particular claim\u2014even if the policyholder is part of the Carlyle Group!<\/p>\n

Tags:<\/strong> professional liability insurance, errors and omissions insurance, E&O, private equity, advancement, eight corners rule, contractually defined terms, professional services exclusion, District of Columbia, management liability<\/p>\n","protected":false},"excerpt":{"rendered":"

by Christopher Graham and Joseph Kelly George Herbert Walker Bush. James Baker. John Major. Frank Carlucci. These are a few of the political figures reportedly associated with the global private equity firm known as the Carlyle Group. Carlyle even has been in the movies. Michael Moore\u2019s Fahrenheit 9\/11 claimed that Carlyle was in essence one […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[4],"tags":[],"_links":{"self":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2698"}],"collection":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/comments?post=2698"}],"version-history":[{"count":8,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2698\/revisions"}],"predecessor-version":[{"id":2721,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2698\/revisions\/2721"}],"wp:attachment":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/media?parent=2698"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/categories?post=2698"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/tags?post=2698"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}