that, because the MGIC policy is a claims-made policy, coverage under the policy can only be triggered by notice of a potential claim, or the filing of a claim itself, not by the mere occurrence of wrongful acts.
American's claim that the MGIC policy is a claims-made policy has merit. The MGIC policy contains the one element most characteristic of a claims-made policy -- it provides retroactive coverage. Section 2(A) of the MGIC policy notes that the policy covers "any Wrongful Act committed prior to the termination of this policy arising from any claim made . . . within the policy period . . . [or] any claim made subsequent to the policy period as to which notice was given to the insurer within the policy period . . . ." (Emphasis added.)
Nonetheless, it is not possible for American to hide behind a blanket assertion that its policy is a claims-made policy,
because it is the language of the MGIC policy itself that must be the starting point of any coverage analysis. This language represents the formal agreement between the parties. If the language of the MGIC policy is ambiguous, it is to be construed strictly against the insurer and in favor of coverage even if the Court determines that it is a claims-made policy.
Section 4(A) of the MGIC policy states that the insurer shall be liable to pay 100 per cent of any loss up to the limit of liability in subsections 4(B) and 4(C). Section 4(B) provides that the maximum liability in each policy year shall be the limit set out in the declarations ($ 20 million per loss with an aggregate limit of $ 20 million per director per policy year).
The allegedly ambiguous language arises in the second sentence of Section 4(B), which reads: " For purposes of this Clause 4(B), a claim shall be deemed to be made at the date notice is given . . ., or at the date the claim is made . . ., whichever shall occur first." (Emphasis added.)
Gilliam argues that the second sentence of Section 4(B) is ambiguous because it fails to specify whether the yearly limits of liability are triggered by losses, claims, or wrongful acts. Gilliam correctly notes that the language of the MGIC policy never expressly states what defendant contends it means: that the date that a "loss" is deemed to have occurred is the date that notice was given to the insurer.
Gilliam suggests that the insurer could easily have drafted a clear statement that the date of loss is deemed to be the date of notice, and he cites other D & O liability policies as examples of how properly to draft such a provision. For example, Section 7(a) of a D & O policy issued by the National Union Fire Insurance Company states: "The time when a Loss shall be incurred for purposes of determining the [Insurer's liability for loss] . . . shall be the date on which the Company shall give written notice to the insurer as hereinafter provided." W. Knepper & D. Bailey, supra, at 845.
The MGIC policy contains no such provision. It refers to losses, claims, and notice without ever expressly defining the relationship between these terms. Gilliam argues that the lack of such an express provision in the MGIC policy makes the policy ambiguous, because the policy does not explain whether a "loss" is deemed to have occurred when the wrongful acts took place, or when the insurer received notice of the potential claim.
Gilliam interprets this alleged ambiguity to mean that, with respect to wrongful acts that occurred during the policy period, the MGIC notice requirement exists only to preserve the general right to coverage, and that, once general coverage is preserved, the yearly liability limits should apply separately to each year in which wrongful acts occurred.
American responds that the language of Section 4(B) is not ambiguous, and constitutes an "abundantly clear" statement that the date of notice or claim is deemed to be the date of loss for purposes of determining which yearly limits apply. However, while Section 4(B) does address when a claim is deemed to have been made for the purposes of applying the yearly liability limits, it does not address when a loss is deemed to have occurred for that same purpose.
While the Court, therefore, disagrees with American that Section 4(B) is "abundantly clear," it is also not convinced that the policy is ambiguous. When the policy is construed as a whole, with all of its provisions taken together, the connection between claims, losses, and wrongful acts is discernible.
As an initial matter, Gilliam has repeatedly urged the Court to find that the yearly limits of liability under the policy are triggered when "losses" occur. Gilliam uses the term "losses" to refer to the disputed loan transactions. The term "loss," however, is a term of art that is defined in the policy, and the policy definition clearly links losses with claims.
The term "loss" is defined in Section 1(D) of the policy, as " any amount which the Directors and Officers are legally obligated to pay or for which the Association is required to indemnify the Directors or Officers, . . . for a claim or claims made against the Directors and Officers for Wrongful Acts . . . ."
(Emphasis added.) Accordingly, "losses" are distinctly different from the underlying "wrongful acts" for which the Directors may be liable.
Under the policy, there can be no "loss" until a claim is made and the legal obligation to pay is determined. Therefore, it is inaccurate to argue, as Gilliam does, that coverage is triggered under the policy "at the time the loss occurs." Here, wrongful acts were allegedly committed in 1983 and 1984, but no "loss" has yet occurred.
What Gilliam obviously means to argue is that the annual limits of liability are triggered when wrongful acts occur. Under the terms of the policy, however, the insurer is only liable for "losses," and not "wrongful acts." This being the case, it is irrelevant when the wrongful acts occurred. What matters is when a loss occurs, and losses by definition can only occur when a claim is made (although under the policy a claim will be deemed to have been made either at the time notice is given to the insurer or at the time the claim is actually filed, whichever comes first).
Moreover, American points out that the "coverage preservation" theory advanced by Gilliam as the proper interpretation of Section 4(B) leads to "bizarre and indefensible" results when it is applied to fact situations that differ from those presented in the Kidwell case. For example, if a claim is made in year two of the policy period for a wrongful act that occurred prior to the policy period, under Gilliam's theory, the making of such a claim has "preserved coverage." Although coverage has been established, however, it would be impossible to apply any yearly liability limit to such a claim, because, under Gilliam's theory, the yearly limits apply to the years in which a wrongful act occurred. Because this hypothetical wrongful act did not occur during any policy year, no liability limit applies even though the loss is supposedly "covered."
The Court notes that rejection of Gilliam's interpretation of the policy will not always result in limiting the coverage available to an insured. In fact, adoption of Gilliam's theory would dramatically limit the coverage available to an insured if the unique facts of this case were slightly altered. Under Gilliam's theory, if wrongful acts leading to three separate losses had occurred during policy year one, but notice of these potential claims was given (or actual claims were made) in years one, two, and three, respectively, only one year of coverage would be available. Under American's interpretation of the policy, however, three yearly limits of liability would apply.
In conclusion, although the language of the MGIC policy lacks the clarity of other D & O claims-made policies that were cited to the Court, taken as a whole it is not ambiguous. The policy, though clumsily drafted, does outline a discernible coverage scheme that relates covered losses to the earlier of two events: the giving of notice of a potential claim within the policy period, or the filing of an actual claim within the policy period. Interpretation of the policy in its entirety reveals that coverage is not triggered at the time a wrongful act occurs, as Gilliam suggests. Gilliam's interpretation of the policy rests on an inaccurate application of the term "loss" that contradicts the definition of loss provided in the policy. Moreover, Gilliam's theory of how coverage is triggered under the policy produces anomalous results outside the context of these peculiar facts, as in the case where a wrongful act occurs before the policy period but is reported to the insurer during the policy period.
IT IS HEREBY ORDERED that Gilliam's motion for summary judgment is denied, and American's cross-motion for summary judgment is granted. The Court finds that American received notice of potential claims in only the last year of a three-year policy period, and that the defendant's maximum exposure is for one yearly limit of liability, or $ 20 million per director, for a total amount of $ 100 million.
Dated: March 26, 1990.