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Insurers Must Cover Former Executives Defense Fees in Litigation

August 28, 2020 | Posted in : Advancement of Fees, Coverage of Fees, Defense Fees / Costs, Expenses / Costs, Fee Issues on Appeal, Fees Paid by Insurers

A recent Law 360 story by Mike Curley, “Insurers Must Cover Ex-RCAP Execs' Defense Costs,” reports that a New York appeals court has found that Westchester Fire Insurance Co., Aspen American Insurance Co. and RSUI Indemnity Co. must pay defense costs incurred by five former executives for RCAP Holdings LLC in a suit by the bankrupt company's litigation successor, reversing course from its own May opinion.

In the opinion, the five-judge panel broke from its earlier opinion in finding the excess insurers must advance defense costs to former RCAP Executive Chairman Nicholas S. Schorsch and his fellow former officers and directors, Edward M. Weil Jr., William Kahane, Peter M. Budko and Brian S. Block, in a suit by the RCS Creditor Trust alleging they drove RCAP into bankruptcy.  The panel did, however, leave intact its other holdings from the prior opinion, including its conclusion that a so-called insured-versus-insured exclusion does not bar coverage for the ex-officers and directors.

According to the new opinion, the insurance companies are obligated to pay for Schorsch and the others' defense costs because the policies provide that the insurers must advance such costs for any claim before its "final disposition."   By the plain policy terms, if there is a possibility that coverage applies to an underlying complaint, the insurer must pay for the insureds' defense of the complaint until and unless the trial court finds coverage is barred, the panel wrote.

"This court's finding that the creditor trust action 'may reveal' that defendants insureds' claim is not covered necessarily means that there is a possibility of coverage under the policies for the advancement of defense costs for the defendants insureds," the panel wrote.

The new opinion comes after the directors pushed for a reconsideration in June, arguing the May ruling ignored the plain language in the policies and settled New York law on the matter.  Under the plain policy language, the directors argued, the insurers' obligation to pay for defense costs is cemented in the facts of the complaint against them, even if a court later finds there was no duty to defend.

In May, the appeals court agreed that the insured-versus-insured provision did not apply because of the bankruptcy exception, saying that when the insured-versus-insured exclusion and the bankruptcy exception are read in tandem, the term "comparable authority" is clearly broad enough to encompass RCS.mmIf the insurers intended to exclude claims brought on creditors' behalf by an entity like the trust, they could have inserted language to that effect, the panel said.

The May opinion, however, reversed Justice Sherwood's granting of summary judgment on the directors' breach of contract claims, because the lower court has not ruled on the merits of Westchester and RSUI's other defenses, such as the argument that the directors were not acting in their capacity as officers of the company, but enriching themselves as individuals.

The opinion largely follows that prior opinion, keeping the determination that the bankruptcy exception to the insured-versus-insured provision applies to the litigation trust, as well as the reversal of the summary judgment on Schorsch's counterclaims.  Both the May opinion and the new opinion also vacate Justice Sherwood's finding that the insurers must pay indemnity costs in the creditor trust suit and the awarding of attorney fees incurred by Schorsch and the other defendants in this action.