Paraco Gas Corporation v. Ironshore Idemnity, Inc.

Background

Paraco Gas Corporation, a closely held corporation that markets and distributes propane fuel and equipment, purchased directors, officers, and private-company liability insurance from Ironshore Indemnity, Inc. Joseph Armentano and Christina Armentano were also plaintiffs and were alleged to be insured persons under the policy. The relevant policy covered losses, including defense costs, resulting from a covered civil proceeding involving a wrongful act.

The policy excluded losses connected to claims alleging, arising from, or based on an insured person’s actual or alleged contractual liability or obligation under any contract or agreement. The policy defined a “claim” as a civil proceeding seeking monetary or nonmonetary relief that began with service of a complaint.

In 2020, Robert and John Armentano and the trustee of the John Armentano Family Trust 2012 sued Joseph Armentano, Christina Armentano, and others in New York Supreme Court. The lawsuit asserted individual and derivative claims concerning alleged transfers of Paraco Class A and Class B shares in violation of shareholder agreements. It included breach-of-contract, constructive-trust, and declaratory-judgment claims. The parties later settled that lawsuit.

The plaintiffs alleged that they properly notified Ironshore and asked it to defend and indemnify them, but Ironshore refused. They sought a declaration that Ironshore had to provide coverage and damages for breach of the insurance contract.

Motion and Arguments

Ironshore moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally plausible claim. Ironshore argued that the contract exclusion barred coverage because the underlying lawsuit arose from alleged contractual violations in the shareholder agreements.

The plaintiffs argued that the exclusion did not apply to the underlying lawsuit’s fourth count, which sought a declaration that an agreement purporting to terminate the Class A Shareholder Agreement was invalid. They also argued that allegations about the Paraco board’s conduct could support liability independent of a contract breach and therefore triggered Ironshore’s duty to defend and indemnify.

Court’s Analysis

The court applied New York law, which the parties agreed governed. Under that law, the insured must show that the underlying allegations fall within the policy’s coverage, while the insurer must show that an exclusion applies. An insurer has no duty to defend when the underlying allegations are entirely within a policy exclusion.

The court held that the policy’s definition of “claim” clearly referred to the entire underlying civil proceeding, not each separate cause of action. Because the underlying lawsuit as a whole was based on alleged violations of the shareholder agreements, the contract exclusion barred coverage for the entire proceeding.

The court added that the same result followed even if each cause of action were analyzed separately. The phrase “arising out of” was broad and required only a connection between the alleged conduct and the excluded contractual obligation. The nine counts that alleged breach of contract or constructive trust could not exist without the shareholder agreements.

The court also held that the fourth count, seeking a declaration that the Termination Agreement was invalid, arose from contractual obligations. That count alleged that one agreement involving an insured person violated another agreement involving an insured person. The court rejected the argument that allegations about the board’s approval or concealment of the Termination Agreement created covered, independent liability. Those allegations were made to explain why a demand on the board would have been futile in connection with derivative claims, not to assert a separate claim against board members in their board-member capacities.

Disposition

The court concluded that all ten causes of action in the underlying lawsuit arose from contractual obligations and that Ironshore had no duty to defend or indemnify the plaintiffs. The court therefore granted Ironshore’s motion to dismiss and dismissed the plaintiffs’ claims.

The court had previously given the plaintiffs an opportunity to amend their complaint, but they chose not to do so. The plaintiffs did not request another amendment or identify additional facts that would cure the defects. The court declined to grant another opportunity to amend and directed the Clerk of Court to terminate the motion and close the case.

The opinion does not expressly state whether the dismissal was with or without prejudice.