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IN RE AMBASSADOR GROUP

May 10, 1990

IN RE AMBASSADOR GROUP, INC. LITIGATION. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., PLAINTIFF,
v.
AMBASSADOR GROUP, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Dearie, District Judge.

MEMORANDUM AND ORDER

BACKGROUND

Plaintiff National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union") is the liability insurer of the directors and officers of Ambassador Group, Incorporated ("Ambassador Group"), an insurance holding company whose two principal subsidiaries, Ambassador Insurance Company and Horizon Insurance Company, are presently in receivership. National Union brought this statutory interpleader action, see 28 U.S.C. § 1335, to facilitate the resolution of claims that have been asserted against several directors and officers it insures.*fn1

Defendants Arnold Chait, Doris June Chait, Edward C. Chait, Douglas M. Auster, Joseph F. Maresca, and Richard A. Tafro have moved for partial summary judgment on their first counterclaim. Defendants Sol Kroll and Edward M. Cameron, III have joined the motion, and defendant Jay Wells has moved for partial summary judgment on his counterclaim. The movants seek a declaration that National Union is obligated to pay on behalf of these individual defendants ninety-five (95) percent of the legal fees and costs, as they are billed, in defending certain actions which have been brought against them as officers or directors of Ambassador Group or its subsidiaries.

The motions require interpretation of certain provisions of the Directors and Officers Liability and Corporate Reimbursement Insurance Policy issued by National Union to Ambassador Group and its subsidiaries (referred to herein as the "Policy" or the "National Union Policy"). The insuring clause of the Policy provides for coverage

  against loss (as hereinafter defined) arising from
  any claim or claims which are first made against
  the Insureds, jointly or severally, during the
  policy period by reason of any Wrongful Act (as
  hereinafter defined) in their respective
  capacities as Directors or Officers.

Paragraph 2(c) of the Policy defines the term "loss" to include "costs, charges and expenses . . . incurred in the defense of actions, suits or proceedings and appeals therefrom." Paragraph 4(e) of the Policy sets forth various exclusions, which include claims "brought about or contributed to by the dishonesty of the Insured." Paragraph 4(e) also provides, however, that:

  notwithstanding the foregoing the Insureds shall
  be protected under the terms of this policy as to
  any claims upon which suit may be brought against
  them, by reason of any alleged dishonesty on the
  part of the Insureds, unless a judgment or other
  final adjudication thereof adverse to the Insureds
  shall establish that acts of active and deliberate
  dishonesty committed by the Insureds with actual
  dishonest purpose and intent were

  material to the cause of action so adjudicated.
  (emphasis added)

Thus, unless a judgment establishes that the acts of the Insureds were within the exclusion, National Union must provide coverage.

There is no dispute that the Insureds' legal expenses are covered "losses" as defined in paragraph 2 of the Policy. The question before the Court is whether the Policy requires National Union to provide contemporaneous, as-billed reimbursement of these expenses. For the reasons discussed herein, this Court answers this question in the negative.

National Union argues that Endorsement No. 3 to the Policy provides for a prioritization of payments which necessarily precludes the interim advancement of defense costs.*fn2 Paragraph A of Endorsement No. 3 provides, in pertinent part, that the Insurer shall pay 95% of all costs, charges and expenses, subject to the following conditions:

  1. If a payment not in excess of the Limit of
    Liability has to be made to dispose of a claim,
    costs, charges and expenses shall be payable up
    to the Limit of Liability applicable under this
    policy.
  2. If the claim is successfully resisted by the
    Insureds, costs, charges and expenses shall be
    payable up to but not exceeding the Limit of
    Liability under this policy.

National Union argues, and this Court agrees, that under paragraph A of the Endorsement the claims of third parties for injuries caused by the acts or omissions of the insured officers and directors are superior to the Insureds' claims for legal fees. Payment for the Insureds' costs, charges and expenses is required only to the extent that payment for the third-party claim has not exhausted the Policy's proceeds. Obviously the interim reimbursement of legal fees could easily deplete the ...


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