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(Article from Insurance Law Alert, October 2016)

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The Fifth Circuit ruled that a D&O insurer had no duty to defend suits alleging that the insured fraudulently induced companies to enter into loan agreements, finding that a Creditor Exclusion unambiguously barred coverage.  Markel Am. Ins. Co. v. Verbeek, 2016 WL 5400412 (5^th Cir. Sept. 27, 2016).

Color Star entered into loan agreements with several companies.  When Color Star defaulted on its obligations, the companies sued, alleging fraudulent inducement.  Color Star sought a defense from Markel.  Markel refused to defend based on a Creditor Exclusion that bars coverage for “any Claim brought or maintained by or on behalf of: Any creditor of a Company or Organization in the creditor’s capacity as such . . . .”  In ensuing litigation, a Texas district court ruled that the Creditor Exclusion precluded coverage for the underlying suits.  The Fifth Circuit affirmed.

Color Star argued that the Creditor Exclusion applies only to breach of contract claims brought by creditors to recover debt owed by Color Star and not to the claims at issue, which alleged inaccurate financial statements were “at best peripheral to the debt.”  Color Star also contended that the Exclusion does not apply because at least one of the underlying plaintiffs sued in its capacity as an investor, not as a creditor.  The Fifth Circuit rejected both assertions.  It explained that the Exclusion applies because all damages sought in the underlying complaint originated from the loan and credit agreement.  The court deemed it irrelevant that the underlying claims sounded in fraud rather than breach of contract, noting that in determining whether a policy exclusion applies, “it is not the cause of action alleged that determines coverage but the facts giving rise to the alleged actionable conduct.”  The court also dismissed Color Star’s “capacity” argument, reasoning that although the underlying complaint used the term “investment” in referring to the loan, the “factual allegations reveal that the origin of the damages is the fraudulently induced loans.”