January 11, 2017
Jerry's Enterprises, Inc. Plaintiff- Appellant
U.S. Specialty Insurance Company Defendant-Appellee
Submitted: October 18, 2016
from United States District Court for the District of
Minnesota - Minneapolis
GRUENDER, BEAM, and SHEPHERD, Circuit Judges.
SHEPHERD, Circuit Judge.
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 court 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
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
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
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.
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.)
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:
(1) brought and maintained independently of, and without the
solicitation, assistance or active participation of . . . any
Insured Person . . . .
(Appellant App. 69.)
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.)
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
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.
appeals this last ruling of the district court on the issue
of coverage for the claims brought by Sullivan's
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).
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 (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
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)).
Insured vs. Insured Exclusion
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. Under these
circumstances, the exclusion does not apply and coverage is
restored for the lawsuit.
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.
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.
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 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.
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.
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 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.
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 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.
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.
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 original plaintiffs, unlike
Level 3's passive shareholder who joined the
lawsuit six months after it had been filed.
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.
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, 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.
foregoing reasons, we affirm the district court's grant
of summary judgment to U.S. Specialty.
The Honorable John R. Tunheim, Chief
Judge, United States District Court for the District of