Sixth Circuit Predicts Michigan Allows Reimbursement of Defense Costs to Insurer
The Sixth Circuit affirmed the district court in finding that the insurer who reserved rights was entitled to reimbursement for uncovered claims. Great Am. Fid. Ins. Co. v. Stout Rises Ross, Inc., 2024 U.S App, LEXIS 8576 (6th Cir. April 8, 2024).
Stout Rises Ross, Inc. was sued in two civil actions: the Appvion ESOP and Halperin actions. Both stemmed from Stout's professional services for Appvion, Inc, a paper manufacturing company owned by Paperweight Development Corp. (PDC). Appvion operated an Employee Stock Ownership Plan (ESOP), which owned all of PDC's stock and was governed by the Employee Retirement Income Security Act (ERISA). The ESOP's trustees hired Stout to serve as a financial advisor and value PDC's stock price. The lawsuits alleged that Stout overvalued PDC's stock and induced Appvion employees to invest their retirement savings in the ESOP. When Appvion declared bankruptcy in October 2017, PDC's stock price collapsed, resulting in hundreds of millions of dollars in losses of funds invested in the ESOP. In addition to claims arising out of ERISA and securities laws, the underlying lawsuits alleged fraud, negligent misrepresentation, and breach of fiduciary duty.
Stout turned to its insurer, Great American Fidelity Insurance Company, for a defense. The policy's Exclusion F excluded from coverage any claim "based on or arising out of actual or alleged violation" of ERISA or securities laws. Great American agreed to defend in both underlying cases, but reserved the right to seek a declaration regarding its rights and obligations. It also reserved the right to seek reimbursement if it had no duty to defend.
Great American filed suit for a declaratory judgment that it had no duty to defend or to indemnify Stout. The district court denied the motion because Exclusion F did not preclude coverage for common law claims such as fraud and negligent misrepresentation alleged in the underlying suits.
On September 25, 2020, the ESOP filed an amended complaint in the Appvion ESOP action asserting only federal securities law claims, not common law claims. Great American again moved for partial summary judgment. The district court granted the motion, finding Great American no longer and a duty to defend or indemnify Stout. Great American then moved for partial summary judgment for reimbursement for expenses in defending the Appvion ESOP litigation. The district court held that Great American could recover defense costs incurred after September 25, 2020, the date of the amended complaint, under an implied-in-fact contract theory.
Both parties appealed. The Sixth Circuit held that the district court properly concluded that Great American's duty to defend Stout in the Appvion ESOP action ended with the filing of the amended complaint which eliminated the common law claims. Likewise, the Halperin action's sole live claim against Stout, alleging a state law breach of fiduciary duties, did not stem from a violation nof ERISA or securities law. Therefore, the district court's ruling regarding Great American's duty to defend Stout in the two underlying cases prior to the filing of the amended complaint was affirmed.
On the reimbursement issue, the court noted that the policy did not expressly authorize reimbursement, but the district court granted the motion for reimbursement on implied-in-fact contract grounds. Where an insurer explicitly reserved its right to reimbursement and notified the insured of the specific possibility of reimbursement, the parties formed an implied-in-fact contract for the reimbursement of costs expended by the insurer for claims that it had no duty to defend.
The court noted Michigan law had not answered whether an insured must reimburse the insurer for defendants claims that the insurer had no duty to defend. The court had to make an Erie guess had to predict how the Michigan Supreme Court would rule. Michigan law generally recognised impoied-in-fact contracts. Here, Stout accepted the defense after Grant American notified Stout that it might seek reimbursement. Therefore, the district court's determination that Stout must reimburse Great American for defending in the Appvion ESOP action after September 25, 2020, under an implied-in-fact contract theory, was affirmed.
Accordingly, the Sixth Circuit's decision that Michigan would allow reimbursement of defense costs for uncovered claims even though such right was not reserved in the policy departed from the Hawaii Supreme Court's recent decision on St. Paul Fire & Marine Ins. Co. v. Bodell Contr. Co., 153 Haw. 381, 538 P.3d 1049 (Haw. 2023). There, the Hawaii Supreme Court held there was not right to reimbursement of defense costs for uncovered claims if such a right was not provided for in the policy.
