Court Reads Contract Exclusion Out of Policy Based on Ambiguity Created by Conflicting Endorsements

The United States Court of Appeals for the Eighth Circuit, applying Missouri law, has held that a D&O insurer cannot rely on a contract exclusion to deny coverage for an underlying lawsuit, finding that multiple endorsements addressing the deletion and replacement of the exclusion rendered the provision ambiguous.  See Verto Med. Solutions, LLC v. Allied World Specialty Ins. Co., 2021 WL 1877802 (8th Cir. May 11, 2021). 

The insured, a manufacturer of sports headphones, entered into an asset purchase agreement with an audio electronics company, which agreed to make periodic earn-out payments to the insured.  To garner support for the deal, the insured agreed to distribute an allocated portion of the earn-out payments to its investors, pursuant to the terms of reallocation agreements.  When the insured ultimately failed to make payments allegedly due under the reallocation agreements, a group of investors sued.  The insured’s D&O insurer denied coverage for the suit on the basis that the policy’s contract exclusion barred coverage.  Subject to certain exceptions, the relevant exclusion barred coverage for “any Claim . . . based upon, arising from, or in consequence of any actual or alleged liability of any Insured under any express contract or agreement.”

In the ensuing coverage action, the district court granted the insurer’s motion to dismiss, agreeing that the contract exclusion precluded coverage.  On appeal, the insured argued that the relevant portion of the policy was ambiguous because it included two endorsements, one of which purported to “replace” the contract exclusion with an amended version and the other which also purported to “replace” the contract exclusion and three other exclusions.  The latter endorsement set forth amended provisions for the three other exclusions but did not contain an amended contractual liability exclusion.  According to the court, this had the effect of leaving the policy “reasonably open to at least two different constructions,” including that the policy did not contain a contract exclusion.  Consistent with Missouri law, the court resolved the ambiguity in favor of coverage and remanded the case for further proceedings.