APPELLATE WATCH: Eleventh Circuit Asked To Interpret Contractual Liability Exclusion In D&O Policy

Because insurers generally draft their own policies, it is a common rule of construction that ambiguous terms will be construed against the insurers. However, in Bond Safeguard Ins. Co. et al. v. National Union Fire Insurance Co. of Pittsburgh, PA., the United States District Court for the Middle District of Florida held that the phrase "arising out of" in a D&O policy's contractual liability exclusion is "unambiguous" and "indiscriminately broad" in denying coverage.

Bond Safeguard concerned whether the defendant, National Union, was obligated to provide indemnity for a stipulated judgment of $40,410,729.03, which was entered against National Union's insured and in favor of Plaintiffs Bond Safeguard Ins. Co. ("Bond Safeguard") and Lexon Ins. Co. ("Lexon"). The stipulated judgment was the result of what is known as a Coblentz settlement agreement—based on the U.S. Court of Appeals for the Fifth Circuit's holding in Coblentz v. Am. Sur. Co. of New York, 416 F.2d 1059, 063 (5th Cir. 1969) that, absent fraud or collusion, a liability insurer (such as National Union) with notice of an action against its insured who declines to defend may be bound by a consent judgment entered in the underlying action. As the court noted in Bond Safeguard, Florida courts have adopted the reasoning in Coblentz and a party will be bound by a consent judgment if it is established that: (1) the policy imposed on the insurer a duty to indemnify the defendant for the judgment; (2) the insurer wrongfully refused to defend in the underlying action; and (3) the consent settlement was both reasonable and made in good faith. See Stephens v. Mid-Continent Cas. Co., 749 F.3d 1318, 1322 (11th Cir. 2014).

National Union refused to defend its insured ("Ward") in the underlying action, so the question depended on whether the policy imposed on National Union a duty to indemnify Ward for the stipulated judgment and whether the consent settlement was both reasonable and made in good faith.

The consent settlement came about from peculiar circumstances. In essence, the underlying action arose from the default of various bond principals on subdivision bonds (the "Bonds") that the Plaintiffs, Bond Safeguard and Lexon began issuing on behalf of Land Resource, LLC ("LRC") to guarantee LRC's land development projects. The Plaintiffs required LRC and Ward, an officer of LRC, to execute a General Agreement of Indemnity ("GAI") as a prerequisite to the execution of the Bonds. Under the GAI...