Best Academy v. Hanover Insurance Group, Inc., The

Background

Best Academy, Harvest Preparatory Charter School (HPCS), and Mastery School, Inc. are charter schools. Each had a commercial insurance policy issued by Massachusetts Bay Insurance Company. The policies included school and educators’ legal-liability coverage and directors-and-officers liability coverage. The policies were claims-made policies, meaning they generally covered claims first made during the applicable policy period.

The schools had charter management organization agreements with the Harvest Network of Schools (HNS), which provided management, administrative, and operational services. HNS separately entered agreements with Ricoh USA, Inc. for copying, printing, and scanning equipment and related services. The schools were not parties to those Ricoh agreements, but HNS placed the equipment at the schools and the schools paid HNS for it under their management agreements. HNS later dissolved.

Ricoh first sent HNS a payment demand on June 5, 2017, but did not include the schools in that demand. Ricoh later sued HNS and the schools in Hennepin County District Court. Ricoh asserted breach-of-contract claims against HNS and unjust-enrichment and quantum-meruit claims against the schools, seeking $1,553,443.81. The underlying lawsuit remained pending when the federal court issued this order.

The schools brought this insurance-coverage action seeking a declaration that The Hanover Insurance Group Inc. and Massachusetts Bay had to defend and indemnify them in the underlying lawsuit. They moved for partial summary judgment on the duty to defend. The court noted that Hanover disputed whether it was a proper defendant but assumed, for purposes of the motion, that it was properly named.

Court’s analysis

Under Minnesota law, an insurer must defend when any part of the underlying claim is arguably within the policy’s coverage. The insured first must establish a basic case for coverage; if it does, the insurer must prove that an exclusion applies.

The court rejected coverage under the policies’ educators-liability provision. That provision covered negligent acts, errors, or omissions committed in the lawful discharge of duties characteristic of, distinctive to, or inherent in operating an educational institution. The court concluded that the provision covered substantive wrongdoing by an educator, not non-substantive or ministerial matters such as copying and printing documents. The schools therefore did not establish a basic case for coverage under that part of the policies.

The court reached a different conclusion under the directors-and-officers liability provision. That provision covered loss resulting from a claim arising out of a wrongful act, which the policies broadly defined to include an act, error, omission, misstatement, misleading statement, neglect, or breach of duty by an insured acting within the scope of its duties. The court held that the insurers’ argument—that the schools’ alleged failure to pay Ricoh was not a wrongful act because Ricoh had not alleged tortious misconduct—ignored the policy’s broad wording.

The court also rejected the insurers’ arguments that Ricoh’s unjust-enrichment and quantum-meruit claims were not covered claims or did not seek a covered loss. The policies did not limit the definition of “claim” to legal, rather than equitable, causes of action. They defined “loss” broadly as a compensatory monetary award, settlement, or judgment that the insured was legally obligated to pay. The court concluded that Ricoh sought damages for its allegedly uncompensated performance, which could constitute a compensatory monetary award.

The court further held that the insurers had not shown that the Illegal Financial Gain exclusion applied. That exclusion covered claims arising from an insured obtaining or attempting to obtain remuneration or financial gain to which the insured was not legally entitled. The court was not persuaded that unjust-enrichment claims were categorically excluded or that the exclusion applied to the allegations in Ricoh’s lawsuit. Ricoh appeared to acknowledge that the schools were allowed under their agreements with HNS to use and benefit from Ricoh’s equipment and services; Ricoh alleged instead that the schools should have paid Ricoh directly.

The court also rejected the argument that HPCS’s cancellation of its policy prevented a duty to defend. HPCS merged with Best Academy, which became its successor in interest. Even if HPCS was not covered—a question the court said remained to be determined—Ricoh’s claims against HPCS were the same as, and effectively included within, the claims against Best Academy. The cancellation therefore did not change the court’s determination that the insurers had a duty to collectively defend the schools.

Disposition

Judge David S. Doty granted the schools’ joint motion for partial summary judgment. The court ordered that The Hanover Insurance Group Inc. and Massachusetts Bay Insurance Company have a duty to defend Best Academy, Harvest Preparatory Charter School, and Mastery School, Inc. in the Ricoh lawsuit pending in Hennepin County District Court.

The court declined to grant summary judgment to the defendants, who had not filed a cross-motion, and denied their alternative request for additional discovery under Federal Rule of Civil Procedure 56(d). The order decided the duty to defend, not whether the insurers ultimately had to indemnify the schools for any damages.