United States Court of Appeals
For the Eighth Circuit
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No. 15-3324
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Jerry's Enterprises, Inc.
lllllllllllllllllllll Plaintiff - Appellant
v.
U.S. Specialty Insurance Company
lllllllllllllllllllll Defendant - Appellee
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Appeal from United States District Court
for the District of Minnesota - Minneapolis
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Submitted: October 18, 2016
Filed: January 11, 2017
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Before GRUENDER, BEAM, and SHEPHERD, Circuit Judges.
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SHEPHERD, Circuit Judge.
Jerry’s Enterprises, Inc. (“JEI”) brought a breach of contract and declaratory
judgment action against its liability insurance carrier, U.S. Specialty Insurance
Company (“U.S. Specialty”). The conflict concerned the insurance carrier’s refusal
to indemnify JEI for the settlement of a lawsuit. U.S. Specialty argued that the
underlying suit, brought by a former director of JEI, was excluded from coverage by
language in the directors’ and officers’ liability insurance policy. On cross-motions
for summary judgment, the district court1 ruled in favor of U.S. Specialty. We note
jurisdiction over this final order of the lower court, see 28 U.S.C. § 1291, and affirm.
I. Background
A. Facts
In 1950, Jerry Paulson founded JEI as a small butcher shop in Edina,
Minnesota. Over the decades, JEI came to operate a score of retail and grocery stores
in Minnesota, Wisconsin, and Florida. The closely held family company now
employs approximately 4,000 employees. As he grew the business, Jerry Paulson
gifted non-voting shares in JEI to his three daughters, including Cheryl Sullivan. He
also gifted shares to his grandchildren, including Sullivan’s daughters Kelly and
Monica. Paulson established an estate plan that, upon his death, appointed his
daughters as members of the JEI Board of Directors. They would remain as directors
until such time as their shares, and those of his grandchildren, were redeemed.
Jerry Paulson died on April 5, 2013. In accordance with Paulson’s estate plan,
Sullivan became a director of JEI in April, and she held that position until August,
when her shares were redeemed. At that time, Cheryl Sullivan owned 28.06% of all
outstanding company shares, while Kelly and Monica owned 2.4% and 1.2%,
respectively. During her stint as a company director, Sullivan raised a number of
concerns with directors of JEI in regards to how her shares were being valued. These
concerns were never addressed to her satisfaction.
1
The Honorable John R. Tunheim, Chief Judge, United States District Court for
the District of Minnesota.
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As a result, Sullivan and her daughters filed suit against JEI, alleging multiple
acts of misconduct by JEI directors designed to lower the value of their shares. The
complaint contained claims for declaratory judgment, breach of fiduciary duty, aiding
and abetting tortious conduct, equitable relief under Minnesota common and statutory
law, breach of contract, civil conspiracy, and preliminary and permanent injunctive
relief. All claims were brought jointly by all three plaintiffs. After several months of
negotiation, JEI reached a confidential settlement agreement with Sullivan and her
daughters. When JEI sought coverage for its defense costs and for sums paid under
the settlement agreement, U.S. Specialty refused to pay.
B. The Insurance Policy
JEI held a directors’ and officers’ liability insurance policy—Policy No. 14-
MGU-12-A27558—through U.S. Specialty. Under the policy, U.S. Specialty agreed
to “pay to or on behalf of the Insured Persons [or the Insured Organization] Loss
arising from Claims first made against them during the Policy Period or Discovery
Period (if applicable) for Wrongful Acts.” (Appellant App. 32.) There is no dispute
that the Sullivan lawsuit is a claim made during the policy period for wrongful acts.
The policy defines Insured Person as “any past, present or future director, officer,
managing member, manager or Employee of the Insured Organization . . . .”
(Appellant App. 34.) Claim is defined, in relevant part, as “any civil proceeding
commenced by service of a complaint or similar pleading.” (Appellant App. 32.)
Aside from these particular definitions, JEI’s insurance policy contains two
other provisions significant to this appeal. The first is the “Insured vs. Insured”
exclusion. This provision excludes from coverage under the policy any claim:
[B]rought by or on behalf of, or in the name or right of . . . any Insured
Person, unless such Claim is:
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(1) brought and maintained independently of, and without the
solicitation, assistance or active participation of . . . any Insured
Person . . . .
(Appellant App. 69.)
The second significant provision of JEI’s policy is the allocation clause. This
clause deals with a lawsuit involving both covered and uncovered loss in the
following way:
If Loss covered by this Policy and loss not covered by this Policy are
both incurred in connection with a single Claim, either because the
Claim includes both covered and uncovered matters, or because the
Claim is made both against Insureds and against others not included
within the definition of Insured, the Insureds and the Insurer agree to use
their best efforts to determine a fair and proper allocation of all such
amounts . . . .
(Appellant App. 42.)
C. Procedural History
After repeated communications between the parties, in which U.S. Specialty
steadfastly refused to extend coverage for the Sullivan settlement and related defense
costs, JEI filed this action in Minnesota state court. U.S. Specialty subsequently
removed the case to federal district court, which had diversity jurisdiction pursuant
to 28 U.S.C. § 1332. JEI’s suit alleged claims of breach of contract, declaratory
judgment, and estoppel. Both parties filed motions for summary judgment in the
district court, raising three primary issues. First, whether Cheryl Sullivan qualified
as an Insured Person under the insurance policy. Second, whether the Insured vs.
Insured exclusion applied to Cheryl Sullivan’s claims. Third, whether the Insured vs.
Insured exclusion applied to the claims brought by Sullivan’s daughters.
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The district court ruled in favor of U.S. Specialty on each issue. It found that
the plain language of the insurance policy qualified Cheryl Sullivan as an Insured
Person and so the Insured vs. Insured exclusion applied to her claims. The court also
held that the exclusion applied to the claims brought by Sullivan’s daughters. On this
last point, the court’s reasoning centered on the nature of the suit. Each and every
claim of the suit was brought jointly by Sullivan and her daughters. Therefore, since
the Insured vs. Insured exclusion allows coverage only for claims asserted by Insured
Persons if they are brought independently and without the active participation of the
Insured Person, the claims brought by Sullivan’s daughters were not subject to
coverage under the policy.
JEI appeals this last ruling of the district court on the issue of coverage for the
claims brought by Sullivan’s daughters.
II. Discussion
“We review de novo ‘the district court’s interpretation of the terms of the
insurance policy and its’ summary judgment decisions.” Oakdale Mall Assocs. v.
Cincinnati Ins. Co., 702 F.3d 1119, 1122 (8th Cir. 2013) (quoting Corn Plus Coop.
v. Cont’l Cas. Co., 516 F.3d 674, 678 (8th Cir. 2008)). We will uphold a grant of
summary judgment “if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(a). The interpretation of an insurance contract is a question of law. Midwest
Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, 636 (Minn. 2013). “Because this
case is in federal court based on diversity jurisdiction, Minnesota’s substantive law
controls our analysis of the insurance policy.” Corn Plus, 516 F.3d at 678 (citation
omitted).
“We must predict how the Supreme Court of Minnesota would rule” if this
issue came before it. Neth. Ins. Co. v. Main St. Ingredients, LLC, 745 F.3d 909, 913
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(8th Cir. 2014) (citation omitted). “Under Minnesota law, the insured bears the initial
burden of establishing that coverage exists, at which point the insurer then carries the
burden of demonstrating that a policy exclusion applies.” Friedberg v. Chubb & Son,
Inc., 691 F.3d 948, 951 (8th Cir. 2012) (citing Travelers Indem. Co. v. Bloomington
Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006)). If the insurer succeeds, the
burden shifts back to the insured to show that an exception to the exclusion applies.
Wolters, 831 N.W.2d at 636.
General contract principles apply to the construction of an insurance policy
under Minnesota law, and we must interpret the policy to effect the intentions of the
parties. See Thommes v. Milwaukee Ins. Co., 641 N.W.2d 877, 879 (Minn. 2002).
“An insurance policy ‘must be construed as a whole, and unambiguous language must
be given its plain and ordinary meaning.’” Wolters, 831 N.W.2d at 636 (quoting
Henning Nelson Constr. Co. v. Fireman’s Fund Am. Life Ins. Co., 383 N.W.2d 645,
652 (Minn. 1986). “Language in a policy is ambiguous if it is susceptible to two or
more reasonable interpretations.” Id. But we will not read ambiguity into the plain
language of an insurance policy. “The courts ‘must fastidiously guard against the
invitation to create ambiguities where none exist.’” Oakdale Mall, 702 F.3d at 1122
(quoting Latterell v. Progressive N. Ins. Co., 801 N.W.2d 917, 921 (Minn. 2011)).
A. The Insured vs. Insured Exclusion
We turn first to the actual language of the exclusion clause. The language
itself, as it applies to this case, is straightforward: “the Insurer will not be liable to
make any payment of Loss in connection with a Claim brought by . . . any Insured
Person.” The policy defines Claim, in relevant part, as “any civil proceeding
commenced by service of a complaint.” Finally, an Insured Person includes any past
director. In essence, therefore, the Insured vs. Insured exclusion bars coverage for
any lawsuit brought by a former director. An exception exists if the lawsuit is
brought independently of the former director, and without their active participation.
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Under these circumstances, the exclusion does not apply and coverage is restored for
the lawsuit.
Application of the exclusion to the present case demonstrates that U.S.
Specialty does not owe coverage to JEI. Cheryl Sullivan is, JEI concedes, an Insured
Person under the policy due to her brief time as a director of JEI’s board. Her lawsuit
was a civil proceeding commenced by service of a complaint—in other words, a
Claim. She (along with her two daughters) brought the lawsuit against JEI. Our
conclusion seems inescapable: loss associated with the Sullivan lawsuit is not
covered under the insurance policy due to the presence of a former
director—Sullivan—as an active participant.
JEI objects to this seemingly straightforward application of the exclusion
clause. According to JEI, a fundamental principle of Minnesota insurance law is that
exclusion clauses are to be “narrowly considered” and construed “in favor of the
insured.” Gen. Cas. Co. of Wis. v. Wozniak Travel, Inc., 762 N.W.2d 572, 575
(Minn. 2009); Safeco Ins. Co. v. Lindberg, 380 N.W.2d 219, 222 (Minn. Ct. App.
1986); see also Am. Family Ins. Co. v. Walser, 628 N.W.2d 605, 613 (Minn. 2001)
(“We . . . construe exclusions strictly against the insurer.”). The Minnesota Supreme
Court, JEI continues, would narrowly construe the exclusion clause to allow for
coverage of loss associated with the claims of Sullivan’s daughters, who, after all, are
not Insured Persons under the policy.
JEI’s argument exhibits a fundamental misunderstanding of the insurance
policy and our role in analyzing the policy’s language. The cases cited by JEI pertain
to insurance policies with readily apparent ambiguities. See Walser, 628 N.W.2d at
609 (relevant language not defined in the policy); Lindberg, 380 N.W.2d at 221-22
(an exclusion not clearly identified in the policy). Here, the exclusion clause contains
no ambiguity, and we must not read ambiguities into its language. See Oakdale Mall,
702 F.3d at 1122. JEI and U.S. Specialty entered into an agreement in which they
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defined the terms of that agreement. It is our responsibility to give effect to that
contracted language. See Thommes, 641 N.W.2d at 879. JEI’s repeated references
to the separate claims of Sullivan and her daughters betray the language as actually
contracted by the parties. A claim is not afforded its ordinary meaning under the
insurance policy. Rather, the policy defines Claim as a civil proceeding commenced
by service of a complaint, i.e. the entirety of the Sullivan lawsuit. U.S. Specialty,
therefore, need only show that the exclusion clause applied to the lawsuit as brought.
It has done so. We have no room under the language of the exclusion clause to apply
the clause to some parts of a lawsuit but not others.
B. The Allocation Clause
JEI next presents a fallback position: loss suffered in the Sullivan lawsuit
should be allocated, pursuant to the allocation clause, between covered and uncovered
matters, resulting in payment for settlement of claims solely attributable to Sullivan’s
daughters. The insurance policy’s allocation clause reads: “If Loss covered by this
Policy and loss not covered by this Policy are both incurred in connection with a
single Claim . . . because the Claim includes both covered and uncovered matters . . .
the Insureds and Insurer agree to use their best efforts to determine a fair and proper
allocation of all such amounts . . . .” In other words, if a lawsuit includes both
covered and uncovered matters, U.S. Specialty owes coverage for those matters that
are covered under the insurance policy. No Minnesota court or Eighth Circuit panel
has reviewed this kind of clause in an insurance contract; the parties instead direct our
attention to three out-of-circuit cases analyzing the issue of allocation.
In Level 3 Communications, Inc. v. Federal Insurance Co., 168 F.3d 956 (7th
Cir. 1999), the Seventh Circuit first faced the issue of insurance policy allocation
clauses. The policy in that case contained an exclusion clause precluding coverage
for any “Claim made against an Insured Person” when the Claim was “brought or
maintained by or on behalf of any Insured.” Id. at 957. The underlying suit against
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Level 3 was a securities action that settled out of court. One of the eight plaintiffs
was a former company director who joined the suit six months after it had been filed.
Id. The Seventh Circuit quickly concluded that “the contract clearly excludes
coverage for the part of the settlement . . . allocable to [the former director].” Id. at
958. But the issue of coverage for the rest of the settlement gave the court pause. It
expressed concern for a potentially “whacky result”—that a former director could be
an unnamed member of a multimillion dollar class action, with a personal stake of
only $10, and thus defeat insurance coverage for the entire suit. Id. This would
transform a suit from one entirely covered by insurance when filed into one wholly
uncovered when later joined by an Insured Person. Id. at 960. Finding this potential
outcome discomforting, the court looked to the policy’s allocation clause. With
language nearly identical to that in JEI’s allocation clause, the Level 3 court
ultimately allocated loss between covered and uncovered matters in the underlying
lawsuit, reasoning that “a matter could be ‘uncovered’ . . . because it excluded a
particular type of claimant who had joined in the suit with persons whose claims were
covered.” Id.
The Eleventh Circuit reached the opposite result in Sphinx International, Inc.
v. National Union Fire Insurance Co., 412 F.3d 1224 (11th Cir. 2005). Sphinx also
involved a securities action brought by a group of plaintiffs, one of whom was a
former director of the company. Id. at 1226. Unlike the former director in Level 3,
this former director was the driving force of the lawsuit; he brought the original suit
on his own, adding additional plaintiffs only later in the litigation process. Id. When
Sphinx sought coverage for the lawsuit from its insurance provider, the provider
denied coverage based on the Insured vs. Insured exclusion. Id. The exclusion
barred coverage for any Claim brought by a former director “unless such CLAIM is
instigated and continued totally independent of, and totally without the solicitation
of, or assistance of, or active participation of, or intervention of” that former director.
Id. Sphinx argued that coverage should be allocated between the former director’s
uncovered loss and the other covered losses. Id. at 1230. The Eleventh Circuit
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rejected this argument. The court distinguished Level 3 in two ways. First, the
former director in Level 3 was a passive shareholder who joined a larger suit, in
contrast to this former director who “brought the lawsuit and recruited every other
plaintiff.” Id. at 1231. Second, the language in Sphinx’s exclusion clause was
materially different than the one in Level 3; specifically, the exclusion clause in
Sphinx contained an elaborate assistance exception that would act to restore coverage
if the former director did not actively participate in the lawsuit. Id. Level 3 contained
no such assistance exception. The court therefore held, “While the language in Level
3 Communications gave the court some wiggle room, the language in our case is plain
and clear, compelling our conclusion that [the insurer] need not cover Sphinx for [the
underlying] lawsuit.” Id.
The Seventh Circuit revisited the issue of an insurance policy’s allocation
clause in Miller v. St. Paul Mercury Insurance Co., 683 F.3d 871 (7th Cir. 2012). In
Miller, five plaintiffs, including two former company directors, brought suit against
the company and its directors. Id. at 873. The company’s insurance provider refused
to indemnify, citing the policy’s Insured vs. Insured exclusion. Id. The court
reaffirmed its holding in Level 3, but then turned its attention to the Eleventh
Circuit’s reasoning in Sphinx. Id. at 876-79. The Miller court noted the inclusion of
an assistance exception in Sphinx’s exclusion clause, whereas both Level 3 and
Miller involved exclusion clauses containing no exceptions. Id. at 879. “A proper
appreciation of the different policy language in the two cases is more than sufficient
to support” the differing results. Id.
After considering these cases for the persuasive authority they offer, we hold
that the allocation clause does not restore coverage for any part of the Sullivan
lawsuit. Like the former director in Sphinx, Cheryl Sullivan was the driving force of
the litigation. She owned the vast majority of shares at issue in the underlying
lawsuit, and she was the former director who repeatedly raised concerns about the
valuation of shares to JEI’s board of directors. She then brought the suit as one of the
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original plaintiffs, unlike Level 3’s passive shareholder who joined the lawsuit six
months after it had been filed.
The presence of an assistance exception both alleviates the concerns expressed
in Level 3 and distinguishes the present case from those decided by the Seventh
Circuit. The Level 3 court made its decision, in part, out of a concern for a class-
action lawsuit otherwise covered under an insurance policy, rendered uncovered due
to the presence of an Insured Person as an unnamed class member, even though that
Insured Person’s personal stake in the suit was de minimis. See Level 3, 168 F.3d at
958. The assistance exception in JEI’s insurance policy prevents such an outcome.
The exception allows for coverage as long as the Insured Person did not solicit, assist,
or actively participate in the lawsuit. This language, also found in Sphinx, does not
appear in the insurance policies analyzed by the Seventh Circuit in Level 3 and
Miller. As the Miller court intimated, an appreciation of the differing policy language
supports our conclusion that the allocation clause does not restore coverage for a suit
brought with the active participation of an Insured Person.
We here acknowledge the tension that exists between the Insured vs. Insured
exclusion and the allocation clause. We also recognize that, of the cases we have
analyzed, Level 3 and Miller both had allocation clauses but no assistance exception
whereas Sphinx involved an assistance exception but no allocation clause. So, the
persuasive authority offered by these cases is limited. JEI has presented various
arguments for allocating loss among the claims of Cheryl Sullivan and her daughters
despite the presence of the assistance exception, and these arguments are not wholly
without merit. But ultimately, two principles of Minnesota contract law counsel us
to rule in favor of U.S. Specialty. First, applying the allocation clause to the Sullivan
claim would render the assistance exception superfluous, effectively reading that
exception out of the contract. See PowerSports, Inc. v. Royal & Sunalliance Ins. Co.,
307 F. Supp. 2d 1355, 1362 (S.D. Fla. 2004). That we cannot allow. See Henning,
383 N.W.2d at 652 (insurance policies must be construed as a whole). Our holding,
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on the other hand, does not read the allocation clause out of the contract. It simply
limits the reach of the allocation clause when more specific language exists elsewhere
in the contract. Second, a basic principle of Minnesota contract law instructs courts
to make specific contract language controlling over general language. See Bank
Midwest v. Lipetzky, 674 N.W.2d 176, 181 n.8 (Minn. 2004) (“[C]ontract
construction compels us to determine that the more specific language takes
precedence over the more general language . . . .”). Here, the Insured vs. Insured
exclusion speaks directly to lawsuits brought with the participation of Insured
Persons. The allocation clause speaks generally to any claim brought with covered
and uncovered matters. The exclusion clause controls.
III. Conclusion
For the foregoing reasons, we affirm the district court’s grant of summary
judgment to U.S. Specialty.
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