LOR, Inc. v. Allied World National Assurance Company

Background

LOR, Inc. sued Allied World National Assurance Company for breach of contract, seeking reimbursement under an insurance policy for defense costs from two resolved Georgia state-court lawsuits called the “2010 Litigation” and the “2014 Litigation.” LOR alleged that it incurred more than $10 million in defense costs. Allied denied that it had a duty to reimburse LOR and asserted a counterclaim seeking a declaration that it had no duty to defend or indemnify LOR for either litigation.

LOR moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a pleading does not state a legally sufficient claim. LOR sought dismissal only of the portion of Allied’s counterclaim concerning the 2010 Litigation. LOR acknowledged that coverage for the 2014 Litigation was not appropriate for decision at that stage.

The Policy Dispute

The dispute concerned Section 3(h) of the policy’s directors-and-officers liability coverage. Allied interpreted Section 3(h) as excluding coverage for claims arising from an insured person’s actions outside the person’s insured capacity. LOR argued that the following indented subparagraph limited the exclusion to claims brought by or on behalf of an insured other than an employee. The plaintiffs in the 2010 Litigation were not insureds.

Allied argued that the policy contained formatting and punctuation errors, including a colon and indentation that, in Allied’s view, incorrectly made the later subparagraphs part of Section 3(h). Allied contended that the court should read those provisions as a separate, broader exclusion. LOR argued that the court should enforce the policy as written.

Choice of Law

The court concluded that New York and Georgia law had no pertinent conflict concerning the interpretation of insurance exclusions. Both jurisdictions require exclusions to be strictly construed against the insurer, and ambiguities are interpreted in favor of coverage. The court nevertheless applied Georgia law because Georgia was the principal location of the insured risk.

Court’s Analysis

The court held that the natural reading of Section 3(h) supported LOR’s interpretation. The paragraph ended with a colon, and the next subparagraph was indented, indicating that the subparagraph continued and modified Section 3(h). Under that reading, the exclusion applied only when claims based on actions outside an insured capacity were brought by an insured other than an employee. Because the plaintiffs in the 2010 Litigation were not insureds, Section 3(h) did not exclude coverage for that litigation.

The court rejected Allied’s argument that the policy’s apparent drafting errors should be corrected as “scrivener’s errors.” It explained that Georgia law requires insurers to define exclusions clearly and explicitly and that courts must enforce contracts as written rather than rewrite them. The court therefore concluded that the policy, as written, did not exclude coverage for the 2010 Litigation.

Reformation Defense and Disposition

The parties also disputed the merits and timeliness of Allied’s affirmative defense seeking reformation, a remedy that can change a written contract to reflect an alleged prior agreement. LOR had not actually moved to dismiss that defense, and the court declined to reach it.

The court granted LOR’s motion to dismiss in part. It dismissed Allied’s request for a declaration that Allied had no duty to cover the 2010 Litigation. The court did not resolve the counterclaim concerning the 2014 Litigation or Allied’s reformation defense. LOR was ordered to answer the remaining counterclaim within 21 days.