Tile Shop Holdings, Inc. v. Allied World National Assurance Company

Background

Tile Shop purchased primary directors-and-officers insurance from an American International Group member and excess insurance from Allied. Both policies covered one-year periods beginning August 20, 2012, and renewed for a second year. Both included exclusions for wrongful acts occurring before August 20, 2012. Allied’s excess policy followed the primary policy but also added broader language excluding losses connected with claims alleging, arising out of, based upon, or attributable to wrongful acts before that date.

Tile Shop’s registration statements and later filings allegedly failed to disclose related-party transactions involving people connected to Tile Shop’s chief executive officer and certain suppliers. The alleged relationships and transactions dated back to at least 2011. Securities lawsuits brought by purchasers of Tile Shop stock and shareholder derivative lawsuits followed. Tile Shop settled the securities action in January 2017 and the derivative actions in August 2018. AIG paid $9.5 million toward the settlements and defense costs under the primary policy. Tile Shop paid the remaining $500,000 needed to exhaust that policy and trigger the excess policy. Allied denied coverage based on the prior-acts exclusion.

Motions and Legal Standard

The parties filed cross-motions for summary judgment. Summary judgment is a decision without a trial when the record shows no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment under the law. The court stated that insurance-policy interpretation is generally a legal question suitable for summary judgment.

Minnesota law governed the policies. Under the burden framework described by the court, the insured first must establish that coverage exists; the insurer then must show that an exclusion applies; and the insured may then show that an exception to the exclusion applies.

Court’s Analysis

The court interpreted the primary policy’s language excluding losses connected with claims alleging wrongful acts before August 20, 2012, including losses arising from the first same or related wrongful act. The court read that language to cover an ongoing wrong or repeated wrongful conduct based on the first instance of the same or related wrongdoing.

The court found the excess policy’s exclusion broader than the primary policy’s exclusion. It emphasized the added terms “based upon” and “attributable to,” as well as the repeated use of “any.” In the court’s view, those terms meant that prior acts leading to claims made during the policy period could be excluded even without a direct liability connection.

The court held that the post-August 20, 2012 omissions arose from the same underlying conduct as the pre-August 20 omissions. The related-party transactions allegedly extended back to at least 2011, and Tile Shop and its executives omitted required information from SEC filings in June and July 2012. The omissions continued after August 20, 2012, until reports and later filings disclosed more information.

The court rejected Tile Shop’s argument that the relevant wrongful acts occurred only when later omissions or misrepresentations were made. It also rejected Tile Shop’s argument that Tile Shop, as a newly formed entity, could not have committed wrongful acts before its merger with Tile Shop, LLC. The court relied on pre-August 20 SEC filings signed by Robert A. Rucker as Tile Shop’s director and chief executive officer and concluded that Tile Shop and Rucker fell within the policy definitions of insured entities and executives. The court also concluded that the policy definitions did not prevent prior conduct from triggering the exclusion.

The court further rejected Tile Shop’s argument that coverage should be based only on claims actually proven in the settled underlying lawsuits or on how the settling parties viewed the claims. It concluded that this approach could not override the nature of the actions and the plain policy language. The court noted that Tile Shop had admitted violations of an SEC regulation requiring disclosure of related-party transactions and that the same omissions appeared in filings before and after the exclusion date.

Ruling

The court held that the excess policy’s prior-acts exclusion applied to the admitted disclosure violations and excluded coverage for losses from all claims in the securities and derivative actions. It also held that Tile Shop was not entitled to Allied’s coverage for defense or investigation costs.

The court granted Allied’s Motion for Summary Judgment and denied Tile Shop’s Motion for Summary Judgment. Judge Ann D. Montgomery ordered that judgment be entered accordingly.