D&O claim excluded by “Known Circumstances Revealed in Financial Statement Exclusion”


by Christopher Graham and Joseph Kelly

The Clark School for Creative Learning, Inc. v. Philadelphia Indemnity Insurance Company, Case No. 13-1171 (1st Cir. Oct. 23, 2013)(Massachusetts)

Philadelphia Indemnity issued a D&O policy to The Clark School for Creative Learning, Inc. with a policy period of July 1, 2008 to July 1, 2009.

Clark School was sued during the policy period by two of the school’s donors seeking return of a $500,000 gift who claimed their donation was induced by misrepresentations. The case settled and Clark School returned some of the gift.

Clark School then filed suit against Philadelphia Indemnity seeking defense and indemnity coverage. The District Court granted summary judgment to Philadelphia Indemnity based on the policy’s “KNOWN CIRCUMSTANCES REVEALED IN FINANCIAL STATEMENT EXCLUSION.” That exclusion provides, in pertinent part, that there’s no coverage for any losses” in any way involving any matter, fact, or circumstance disclosed in connection with Note 8 of the [School’s] Financial Statement.” Note 8 of the Financial Statement described the donor’s gift and referred to Note 7 which further described their gift.

Clark School appealed arguing that Note 8 was limited to the School’s financial difficulties and so the exclusion was limited to losses resulting from the school’s financial difficulties. The disagreed noting that Clark School’s reading of the exclusion was factually incorrect; it explicitly referenced the donor’s gift.

Clark School also argued that ejusdem generis requires that “in any way involving” in the exclusion be interpreted in light of the earlier phrases in the exclusion: “based upon, arising out of, directly or indirectly resulting from or in consequence of.” Clark School claimed that because the earlier clauses including a notation of causation, then “in any way involving” must as well. The court disagreed noting that: (1) “or in any way involving” is “a mop-up clause intended to exclude anything not already excluded by the other clauses; and (2) the word “or” is used in the disjunctive sense and indicates that “in any way involving” is “a separate item in the list that goes beyond the scope of the other terms.” The 1st Circuit further noted that even if causation were required, causation exists as Clark School’s losses were caused by the school’s alleged misrepresentations about the donor’s gift.

Clark School lastly argued the plain language reading of the exclusion must give way to Clark School’s reasonable expectations. Clark School claimed that it couldn’t have known the exclusion would apply to the gift because suit hadn’t been filed and it wasn’t a “known” circumstance. That argument was rejected because the exclusion clearly referred to the gift. The court also noted that “when a contract is not ambiguous, a party can have no reasonable expectation of coverage when that expectation would run counter to the unambiguous language of an insurance policy.”

Tags: Massachusetts, D&O, insurance, known circumstances exclusion

Category: D&O Digest Comment »

Comments are closed.

Back to top