Contract Exclusion Bars Coverage for Lawsuit Over Stock Repurchase Agreement

The U.S. Court of Appeals for the Eighth Circuit, applying Kansas law, has held that a contract exclusion bars coverage for a lawsuit asserting claims for conversion and breach of fiduciary duty for failure to purchase a deceased owner’s stock under a stock repurchase agreement.  Russell v. Liberty Ins. Underwriters, Inc., 2020 WL 812910 (8th Cir. Feb. 19, 2020).  The court also held that the agreement was not an employee benefit plan that would implicate fiduciary liability coverage.

Insured co-owners of a business created a succession plan in which the company would use the proceeds of life insurance policies purchased for each owner to repurchase the respective stock from the deceased owner’s personal representative.  One of the owners died, and the company received the life insurance proceeds.  The remaining owners, however, did not repurchase the stock, causing the personal representative to sue the owners for conversion and breach of fiduciary duty.  The owners sought coverage under the directors and officers and fiduciary liability coverage parts of their professional liability insurance policy.  The D&O coverage part contained a contract exclusion barring coverage “[b]ased upon, arising out of, or attributable to any actual or alleged liability under or breach of any contract or agreement.”  The fiduciary liability coverage part provided coverage for the owners “in the discharge of their duties in their capacities, or solely by reason of their status, as fiduciaries of any Plan” in which “Plan” was defined as any “employee benefit plan or program . . . sponsored solely by the Company for the benefit of the employees of the Company.”  The insurer denied coverage based on the contract exclusion and the policy’s definition of “Plan.”  The owners sued the insurer and the U.S. District Court for the Western District of Missouri granted the insurer’s motion for summary judgment.

The court of appeals affirmed.  The court concluded that the contract exclusion barred coverage under the D&O coverage part “[g]iven the company’s broken promise to pay [the deceased owner’s] life-insurance proceeds to [the personal representative].”  The court rejected the argument that the contract exclusion did not apply because the personal representative sued the insureds for conversion and breach of fiduciary duty, not breach of contract, because “theories of liability are irrelevant when injuries occur from intentional acts.”  The court also concluded that no coverage was available under the fiduciary liability coverage part because the agreement was not a “Plan” since it “benefited primarily company shareholders; its effect on employees is accidental” and the owners “were not sued for breaching their duties as employee-benefit-plan fiduciaries; they were sued . . . for breaching their duties as fiduciaries of the company and its shareholders.”