Terms that Can Magnify the Power of a D&O Exclusion
In a result that may at first appear harsh, Judge Casper of Massachusetts federal district court has made clear that when an insurance exclusion uses the words “arising out of,” “directly or indirectly resulting from,” or “in consequence of,” it has the potential to swallow up a lot of otherwise covered conduct. The case, Clark Sch. for Creative Learning, Inc. v. Philadelphia Indem. Ins. Co., is instructive as to how broadly courts can apply exclusions.
The facts concern a nonprofit school experiencing financial problems, and the D&O policy it secured. The school addressed its financial difficulties in a lengthy footnote to its financial statement, which it submitted to the insurer. The footnote also noted that the school had received a major unrestricted gift of $500,000. Using that information, the insurer included a “Known Circumstances” endorsement to the policy, excluding coverage for “any Claim made against the Insured based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any matter, fact, or circumstance disclosed in connection with Note 8 of the Financial Statement.”
Later, the $500,000 gift’s benefactor sued the school. He claimed that its director misrepresented his intention to use the gift to build a new school building, when he instead, allegedly, used the money to repay loans he and his family had made to the school. Relying on the exclusion, the insurer disclaimed. In response, the school argued the claim did not “arise out of” the donation, but rather that it arose out of the director’s alleged misrepresentations to the benefactor about use of the donation.
Rejecting the school’s interpretation, Judge Casper held that the exclusion applied, because the misrepresentation claim “result[ed] from” or “involved” the donation. The result does seem harsh — the footnote was intended to address the school’s financial difficulties, and one would ordinarily expect those difficulties to be the source of a claim, not a large donation. Moreover, judges are supposed to construe exclusions narrowly, and in favor of coverage. But, as this case reaffirms, when exclusions use the terms “arising out of” “directly or indirectly resulting from” and “in consequence of,” they have the potential for broad application.
About Steve: I specialize in Insurance Law and Litigation at Anderson & Kreiger. My most recent blog post was about the latest salvo in the ongoing saga concerning CGL insurance and the duty to defend.
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