Ruebe v. Partnerre Ir. Ins. DAC, Case No. 18-cv-01192

470 F.Supp.3d 829

Richard H. RUEBE, Jeffrey W. Lemajeur, Vincent J. Kwasniewski, and Neal T. Jakel, Plaintiffs,

v.PARTNERRE IRELAND INSURANCE DAC, ANV Corporate Name Limited the Underwriting Member of ANV Syndicate 1861 at Lloyd's for the 2014 Year of Account, AXIS Specialty Europe SE, and Navigators Underwriting Agency Limited for and on Behalf of the Underwriting Members of Syndicate 1221 at Lloyd's for the 2014 Year of Account, Defendants.

Case No. 18-cv-01192

United States District Court, N.D. Illinois, Eastern Division.

Signed July 2, 2020

Erik J. Ives, Ashley Katharine Martin, Daniel Aaron Dorfman, Martin B. Carroll, Fox, Swibel, Levin & Carroll, LLP, Chicago, IL, for Plaintiffs.

Robin Christine Dusek, Danielle Lahee, John C. Gekas, Kellie Y. Chen, Saul Ewing Arnstein & Lehr LLP, Chicago, IL, for Defendants Partnerre Ireland Insurance DAC.

Christopher J. Shannon, Jeremy Douglas Kerman, Neil E. Holmen, William Patrick Bila, Walker Wilcox Matousek LLP, Chicago, IL, for Defendants Axis Specialty Europe SE.

Robin Christine Dusek, John C. Gekas, Kellie Y. Chen, Saul Ewing Arnstein & Lehr LLP, Chicago, IL, for Defendants ANV Corporate Name Limited.

Christopher J. Shannon, Walker Wilcox Matousek LLP, Chicago, IL, for Defendants Navigators Underwriting Agency.

Athanasios Papadopoulos, Lathrop GPM LLP, Chicago, IL, for Defendants Non Party Deponent.

MEMORANDUM OPINION AND ORDER

Steven C. Seeger, United States District Judge

This insurance case involves a dispute about coverage for a lawsuit in state court. Plaintiffs Ruebe, Lemajeur, Kwasniewski, and Jakel served on the board of an ethanol company, and voted in favor of a forced buyout of the minority owners. Almost two years later, the parent of the ethanol company applied for insurance, and represented that it was not aware of any circumstances that might give rise to claims. And a few months later, the minority owners sued the board members in state court about the buyout. The four board members, in turn, filed this federal suit against the excess carriers to obtain a declaratory judgment that they are entitled to coverage.

There are two layers of excess policies (the "Second Layer" and the "Third Layer") on top of the primary policy. The excess carriers challenged the complaint by filing a pair of motions. The Second Layer insurers (meaning the first layer of excess carriers) moved for judgment on the pleadings. They argue that Plaintiffs pled themselves out of court because the complaint itself shows that they were aware of potential claims. They also attempt to drag material from the state court case before this Court. They rely on material outside the pleadings to support a motion for judgment on the pleadings.

The Third Layer insurers, for their part, moved to dismiss. They argue that they have no obligation to provide coverage because Plaintiffs have not yet exhausted the primary policy (let alone the other excess policy). So the claims for coverage are not yet ripe.

For the reasons explained below, the motion for judgment on the pleadings by the Second Layer insurers is denied. The motion to dismiss by the Third Layer insurers is granted.

Background

A. The Minority Buyout

This insurance coverage litigation springs from the buyout of minority unitholders in a company – Illinois River Energy Holdings, LLC ("IREH") – that ran an ethanol plant in Rochelle, Illinois. See Second Am. Cplt. ¶¶ 4–7, 26–27 (Dckt. No. 62). The company had a seven-person board of managers. Id. at ¶ 26. The majority unitholder controlled four of the seven seats, and appointed Plaintiffs Ruebe, Lemajeur, Kwasniewski, and Jakel to serve on the board. Id. The minority unitholders controlled the other three seats. Id.

In 2012, the IREH board approved a buyout of the minority unitholders and a merger of IREH into a subsidiary of the majority unitholder (the "Minority Buyout"). Id. at ¶ 27. The board approved the buyout with the guidance of outside counsel, and at the price calculated by an independent valuation firm. Id. at ¶ 29. The deal ultimately went through. Each of the minority owners tendered their units and accepted payment for their stake in the company. Id. at ¶ 48(c).

According to the complaint, Sinav Limited – the parent company of IREH – and its subsidiaries had "no reason to ‘believe’ that minority unitholders would bring a claim related to the Minority Buyout." Id. at ¶ 48 (quoting the insurance policy). Some minority unitholders did express dissatisfaction with the deal in the first quarter of 2012. Id. at ¶ 48(e). But by January 2014, they gave "no indication that they would pursue legal action related to the Minority Buyout." Id. In fact, "multiple minority unitholders" told Plaintiffs Lemajeur and Ruebe in the wake of the buyout that they had no plans to sue. Id. at ¶ 48(f).

B. The Insurance Policies

Nearly two years passed, and no one sued over the Minority Buyout. Id. at ¶ 48(b). That's when Sinav Limited – again, the parent company of IREH – applied for insurance coverage.

In January 2014, Sinav applied for insurance for itself and its subsidiaries, including IREH. Id. at ¶ 18. Sinav completed an application called the "Proposal Form" that asked questions about the business, history, and structure of the company. Id. at ¶ 44; see also Proposal Form, at 1–4 (Dckt. No. 62-1, at 2–5 of 71). The Proposal Form requested documents such as auditor reports and prospectuses, and asked about current levels of insurance, too. See Proposal Form, at 1–3 (Dckt. No. 62-1, at 2–4 of 71).

Importantly, the Proposal Form also asked questions about any actual and pending claims in a section titled "CLAIMS INFORMATION/CIRCUMSTANCES ." See id. at § 6 (Dckt. No. 62-1, at 4 of 71). The first question asked if there were any "now pending" claims, and Sinav answered "No." Id. The second question asked about "any circumstance" that "may give rise" to a claim: "Is the Proposer aware, after enquiry, of any circumstance or incident, which may give rise to a claim against any Director or Officer of the Company in such capacity?" Id. Once again, Sinav's answer was simple and unequivocal: "No." Id.

Sinav did not mention the Minority Buyout in the Proposal Form. And Sinav did not reveal that some minority unitholders had expressed dissatisfaction with the deal, albeit two years earlier.

Candor mattered. The Proposal Form expressly requested "full and complete answers." Id. at 1 (Dckt. No. 62-1, at 2 of 71). The Form highlighted the "duty" to provide all information requested, "as well as to add additional relevant facts." Id. A "relevant fact" was something that may – may – impact the assessment of risk by a potential insurer. "A relevant fact is such known fact and/or circumstance that may influence the evaluation of the risk by the insurer." Id. If in doubt, the Form encouraged the applicant to speak up and raise questions: "If you have any doubts about what a relevant fact is, please do not hesitate to contact your broker." Id.

Plaintiff Lemajeur signed the application on behalf of Sinav in his capacity as the CFO. Id. at 4 (Dckt. No. 62-1, at 5 of 71). A declaration of truthfulness appeared right above his signature. "We declare that the statement and particulars in this Proposal form are true and that no material facts have been misstated or suppressed after enquiry." Id. Sinav also agreed to update the application if something changed before issuance of a policy. Id. "We agree that should any of the information given by us alter between the date of this Proposal and the inception date of the insurance to which this proposal relates, we will give immediate notice thereof." Id. Finally, Sinav expressly "agree[d] that this Proposal, together with any other information supplied by [Sinav] shall form the basis of any contract of insurance effected thereon." Id.

The Proposal Form was just that – a proposal submitted by Sinav to buy insurance. It was not a binding agreement to buy or sell insurance, but it did become part of the eventual policy. See id. at 1 (Dckt. No. 62-1, at 2 of 71) ("This proposal form does NOT BIND the Proposer to complete the insurance but will form part of any insurance[.]") (bold and all caps in original); id. at 3 (Dckt. No. 62-1, at 4 of 71) ("SIGNING THIS PROPOSAL FORM DOES NOT BIND THE PROPOSER OR THE INSURER TO COMPLETE THIS INSURANCE ") (bold and all caps in original).

On February 16, 2014, Sinav ultimately purchased insurance for all of its subsidiaries, including IREH. See Second Am. Cplt. ¶ 19. Sinav bought three distinct layers of directors’ and officers’ insurance, each provided by different insurers. Id. at ¶¶ 20–22. Each insurance policy expressly lists Sinav's Proposal Form dated January 8, 2014, as among the "Information ... provided to Insurers to support the assessment of the risk at the time of underwriting[.]" See First Layer Policy, at 24 (Dckt. No. 62-2, at 26 of 30); Second Layer Policy, at 11 (Dckt. No. 62-3, at 13 of 17); Third Layer Policy, at 11 (Dckt. No. 62-4, at 13 of 17).

The three tiers of insurance included one primary layer (the "First Layer") and two excess layers (the "Second and Third Layers"). The insured needed to exhaust the First Layer before tapping into the Second Layer, and so on. The Second Layer would kick in after the exhaustion of the First Layer (and not before), and the Third Layer would come into play after the exhaustion of the Second Layer. See Second Am. Cplt. ¶¶ 20–23. All together, there was $25 million in coverage. The First Layer had a policy limit of $5 million, the Second Layer covered the next $10 million, and the Third Layer covered the final $10 million. Id. ; see also Second Layer Policy, at 1 of 14 (Dckt. No. 62-3, at 3 of 17) (providing a $10 million liability limit, "[e]xcess of the underlying limits" of $5 million); Third Layer Policy, at 1 of 14 (Dckt. No. 62-4, at 3 of 17) (providing a $10 million liability limit, "[e]xcess of the underlying limits" of $15 million).

The First Layer coverage is provided by Lloyd's Syndicate 2003...