Companies taking out errors and omissions (E&O) policies should pay close attention to the exclusion language after the 1st Circuit took a broad view of an antitrust exclusion in The Saint Consulting Group Inc. v. Endurance American Specialty Insurance Company Inc.
In 2007, the national food retailer SuperValu Inc. reportedly enlisted The Saint Consulting Group to block the construction of two Wal-Mart stores in the Chicago suburbs of Mundelein and New Lenox. To this end, a Saint representative, Leigh Mayo, allegedly concealed his affiliation with Saint and hired an attorney to file multiple lawsuits against the Mundelein development, indefinitely stalling its construction.
When Mayo subsequently left the consulting firm, he sold papers detailing his former employer’s actions to Rubloff Development Group Inc., the contractor in charge of the Mundelein project, which sued both Saint and SuperValu in June 2010. Rubloff charged Saint with violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), tortious interference with prospective economic advantage and—most notably—conspiracy in restraint of trade under the Sherman Antitrust Act.
Saint filed counterclaims, including conversion and misappropriation, seeking to retrieve the documents that Mayo had turned over to Rubloff (see “Saint’s Services”).
Saint planned to cover its court costs with an E&O policy—sometimes known as a professional liability policy—but the policy’s issuer, Endurance American Specialty Insurance Co. Inc., denied the claim, arguing that the coverage contained an antitrust exclusion for “any Claim based upon or arising out of any actual or alleged price fixing, restraint of trade, monopolization or unfair trade practices including actual or alleged violations of the Sherman Anti-Trust Act.”
In June 2011, Saint sued Endurance, claiming that the exclusion did not apply to its litigation with Rubloff. But a Massachusetts district court judge ruled that all of the claims—not just the antitrust charge—fell within the scope of the exclusion, and that Endurance thus had no duty to defend. On Nov. 2, 2012, a three-judge panel of the 1st Circuit upheld this ruling.
“The main takeaway is that the 1st Circuit refused to just look at the title of a cause of action, and actually got into what the root of the cause of action was,” says Brian Margolies, a partner at Traub Lieberman Straus & Shrewsberry. “That’s what really informed this decision that the exclusion applied broadly, not just to the antitrust cause of action, but to the RICO and other causes of action that had their roots in restraint of trade.”
When ruling on the exclusion’s scope, the 1st Circuit relied on the 1999 case Bagley v. Monticello Insurance Co., in which the Massachusetts Supreme Judicial Court ruled that “the phrase ‘arising out of’ must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law.”
Using this broad interpretation of Endurance’s “based upon or arising out of” policy language, the 1st Circuit found that the exclusion applied even to those claims that did not specifically mention restraint of trade. “It can hardly be disputed that the factual allegations of the [complaint] allege a conspiracy to forestall competition through misuse of legal proceedings and through deception,” Judge Michael Boudin wrote in his opinion. “And every count in the Rubloff action that is not itself described as an antitrust claim depends centrally on the alleged existence of such a scheme.”
The appeals court also disagreed with Saint’s claim that Endurance’s coverage was illusory because it excluded so many of the company’s core business activities. “As the court pointed out, there are a lot of professional activities that they could have been involved in that were not knocked out by the exclusion,” says Joseph Monteleone, a partner at Tressler and author of the firm’s D&O/E&O Monitor insurance blog.
Boudin emphasized in his opinion that it was not Endurance’s responsibility to ensure that the policy covered Saint’s principle business activities, and that “[the fact] that Saint may have expected more protection than it got suggests mainly that it may not have read carefully the policy it purchased.”
The main lesson from Saint is that having a professional liability policy is not always enough to guarantee coverage, according to Margolies. Instead, in-house attorneys should understand that antitrust exclusions are common in many professional liability policies, and they must plan accordingly. “If there is any lesson, it’s to understand what coverage you’re purchasing and to make sure that you have coverage for all contingencies,” he says.
Monteleone advises corporate counsel to pay attention to preamble language, which can contain broad exclusions. He also notes that companies may be able to negotiate for modifications in their policies, particularly in a competitive insurance climate.
“It’s always better to get what I call the simple ‘for’ language as opposed to ‘based upon,’ ‘arising from,’” he says. “Had it been the plain vanilla ‘for antitrust violation,’ that would have resulted in at least some of the allegations—maybe even only one of the allegations—being covered, but that would have been enough to get [Saint’s] entire defense costs covered.”