186 A.D.3d 132
N.Y. App. Div.2020Background
- RCAP (debtor) filed Chapter 11; its confirmed plan created a post-confirmation Creditor Trust to pursue estate causes of action for the benefit of unsecured creditors.
- The Creditor Trust sued former RCAP directors/officers (the insureds) in Delaware for alleged fiduciary breaches arising from pre‑bankruptcy conduct.
- RCAP had D&O insurance: a primary policy (with an insured‑vs‑insured exclusion) and multiple excess follow‑form layers; the excess policies contained a bankruptcy exception restoring coverage for claims brought by a “Bankruptcy Trustee or … comparable authority.”
- Westchester (seventh‑layer excess) denied coverage, arguing the Creditor Trust’s suit was effectively by/for the company and barred by the insured‑vs‑insured exclusion; other excess carriers joined.
- Supreme Court granted partial summary judgment for the insureds, declaring excess insurers obligated to advance defense and indemnity costs and awarding insureds attorneys’ fees; the insurers appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy exception (“Bankruptcy Trustee or … comparable authority”) to the insured‑vs‑insured exclusion covers a post‑confirmation Creditor Trust | Westchester: Creditor Trust is an assignee/proxy of the debtor; exclusion applies and exception does not cover the Trust | Insureds: Creditor Trust is a post‑confirmation estate representative/authority comparable to a trustee or committee, so the exception restores coverage | Held: The phrase “comparable authority” unambiguously includes a Creditor Trust functioning as a post‑confirmation litigation trust; exception applies to restore coverage for purposes of the insured‑vs‑insured exclusion |
| Whether excess insurers must advance defense costs and are liable for indemnity (breach of contract counterclaim) | Insurers: No coverage → no duty to advance or indemnify | Insureds: Policy requires advancement of defense costs and indemnity where covered; counterclaim states a viable claim | Held: Duty to advance defense costs is triggered because the underlying complaint alleges possibly covered wrongful acts; but material factual disputes preclude summary judgment on indemnity liability, so the declaration requiring indemnity payments and award of attorneys’ fees was vacated |
| Whether the insureds’ breach of contract counterclaim should be dismissed | Insurers: Counterclaim fails as a matter of law because exclusion applies | Insureds: Exception applies and pleadings suffice | Held: Motion to dismiss denied; counterclaim survives to resolve remaining coverage disputes |
Key Cases Cited
- State of New York v. Home Indem. Co., 66 N.Y.2d 669 (N.Y. 1985) (courts interpret insurance contracts to give effect to parties’ intent).
- Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351 (N.Y. 1978) (policy language is ambiguous only if reasonably susceptible to more than one meaning).
- Hartford Acc. & Indem. Co. v. Wesolowski, 33 N.Y.2d 169 (N.Y. 1973) (contract construction generally a judicial function).
- Bovis Lend Lease LMB, Inc. v. Great Am. Ins. Co., 53 A.D.3d 140 (1st Dep’t 2008) (insurance policy is a contract; interpret under contract principles).
- Broad St., LLC v. Gulf Ins. Co., 37 A.D.3d 126 (1st Dep’t 2006) (avoid strained constructions of clear policy provisions).
- Fed. Ins. Co. v. Kozlowski, 18 A.D.3d 33 (1st Dep’t 2005) (duty to defend/advance arises when underlying complaint alleges facts that may be covered).
- J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324 (N.Y. 2013) (disgorgement of ill‑gotten gains may be uninsurable).
- Indian Harbor Ins. Co. v. Zucker, 860 F.3d 373 (6th Cir. 2017) (interpreting insured‑vs‑insured exclusion where policy lacked a bankruptcy exception; distinguished).
- Biltmore Assoc. LLC v. Twin City Fire Ins. Co., 572 F.3d 663 (9th Cir. 2009) (federal court treatment of insured‑vs‑insured exclusion in bankruptcy context).