Hantz Financial Services, Inc. v. American International Specialty Lines Insurance Co.

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 16a0598n.06
Case No. 15-2237
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
HANTZ FINANCIAL SERVICES, )
INCORPORATED; HANTZ GROUP, )
INCORPORATED, ) FILED
) Nov 09, 2016
Plaintiffs-Appellants, ) DEBORAH S. HUNT, Clerk
)
v. )
) ON APPEAL FROM THE UNITED
AMERICAN INTERNATIONAL ) STATES DISTRICT COURT FOR
SPECIALTY LINES INSURANCE CO., an ) THE EASTERN DISTRICT OF
Illinois corporation, nka Chartis Specialty ) MICHIGAN
Insurance Company; AMERICAN )
INTERNATIONAL GROUP, INC.; )
NATIONAL UNION FIRE INSURANCE )
COMPANY OF PITTSBURGH, PA, a )
Pennsylvania corporation, )
)
Defendants-Appellees. )
BEFORE: ROGERS, SUTTON, and COOK, Circuit Judges.
COOK, Circuit Judge. In an embezzlement scheme spanning eight years, Michael
Laursen, an employee of securities broker-dealer Hantz Financial Services, misappropriated over
$2.6 million in client funds. Hantz Financial Services reimbursed the stolen funds to the affected
clients and sought indemnification under two insurance policies: a fidelity bond from National
Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and an errors-and-
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omissions policy from American International Specialty Lines Insurance Company (“AISLIC”). 1
After both insurers denied coverage, Hantz Financial Services and its corporate parent, Hantz
Group, Inc. (collectively “Hantz”), sued National Union and AISLIC, alleging breach of contract
against each insurer and seeking penalty interest under Michigan law. The district court granted
summary judgment to both insurers, concluding that neither policy covered Hantz’s losses. We
AFFIRM the district court’s judgment.
I.
A. Factual Background
Hantz is a licensed securities broker-dealer that offers clients investment advice. Hantz
does not provide its own investment products to clients; instead, it introduces clients to
investment products offered by other financial services companies. To protect itself against risks
associated with its business model, Hantz purchased two insurance policies: a fidelity bond (the
“Bond”) from National Union, and an errors-and-omissions policy (the “E&O Policy”) from
AISLIC.
National Union issued the Bond to Hantz for the “Bond Period” from January 26, 2008 to
January 26, 2009. Under the Insuring Agreement of the Bond, National Union agreed to
indemnify Hantz for “[l]oss resulting directly from dishonest or fraudulent acts committed by an
Employee acting alone or in collusion with others.” As stated in the parties’ General
Agreements, the Bond applied to “loss of Property (1) owned by [Hantz], (2) held by [Hantz] in
any capacity, or (3) for which [Hantz] is legally liable.” With respect to loss arising from
litigation against Hantz, Section F of the General Agreements provided that “the Insured may not
1
National Union and AISLIC are both subsidiaries of American International Group, Inc.,
another named defendant.
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bring legal proceedings for the recovery of such loss after the expiration of 24 months from the
date of such final judgment or settlement.”
AISLIC’s E&O Policy ran from June 22, 2007 to June 22, 2008. The E&O Policy
provided coverage for “the Loss of an Insured arising from . . . any actual or alleged Wrongful
Act of the Insured in the rendering or failure to render Professional Services.” The Policy
defined “Wrongful Act” to include “any breach of duty, neglect, error, misstatement, misleading
statement, omission or act by such Insureds in their respective capacities as such, or . . . by
reason of their status as Directors, Officers or Employees.” The Policy included an exclusion for
losses in connection with claims against “an Insured . . . arising out of . . . any actual or alleged
Wrongful Act committed with knowledge that it was a Wrongful Act” (the “Wrongful Act
exclusion”). The Insuring Agreement under the E&O Policy also covered negligent-supervision
claims arising from Hantz’s financial activities as a broker-dealer:
This endorsement shall . . . pay on behalf of the Broker/Dealer all sums which the
Broker/Dealer shall become legally obligated to pay as damages resulting from any claim
or claims . . . for any Wrongful Act of the Broker/Dealer or of any other person for whose
Wrongful Act the Broker/Dealer is legally responsible . . . and solely in rendering or
failing to render Professional Services . . . or in Failing to Supervise a Registered
Representative in the rendering or failure to render Professional Services . . . on behalf of
the Broker/Dealer.
Michael Laursen worked as a registered investment representative for Hantz in its
Midland, Michigan office from 1999 until his death in March 2008. Between 2000 and 2008,
Laursen embezzled client funds by depositing checks written or endorsed by those clients
directly into his own bank accounts. His scheme unraveled in March 2008 when Brian and
Penny Bolton, two of his victimized clients, served Hantz and Laursen with a Financial Industry
Regulatory Authority (“FINRA”) arbitration action, alleging fraud and other claims. Two days
later, Laursen committed suicide.
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As a result of Laursen’s suicide and the FINRA arbitration claim, Hantz began to
investigate whether Laursen had embezzled money. By May 2008, Hantz determined that
Laursen embezzled funds from twenty-two clients. In subsequent years, eleven couples and nine
individuals brought claims against Hantz for their losses without initiating litigation. Hantz
settled these claims before the end of July 2009. In addition, two couples litigated against Hantz.
As noted, Brian and Penny Bolton brought a FINRA arbitration action, which settled on July 24,
2009. William and Susan Monroe also filed a FINRA arbitration action, and FINRA ultimately
entered an award in favor of the Monroes in June 2010. The Circuit Court for the County of
Midland, Michigan entered judgment confirming the award on December 17, 2010. On January
24, 2012, the Michigan Court of Appeals affirmed the circuit court judgment. In total, Hantz
paid over three million dollars to reimburse all of Laursen’s affected clients.
While working to settle and litigate affected clients’ claims, Hantz also sought
indemnification for the costs of resolving these claims under both the Bond and the E&O Policy.
In May 2008, Hantz sent National Union a Sworn Proof of Loss. Over the following two-and-a-
half years, Hantz and National Union traded correspondence, National Union requesting
documents and information for its coverage investigation, and Hantz updating the insurer on the
financial status of its claims and demanding coverage. Finally, in March 2011 National Union
denied coverage.
In April 2008, Hantz notified AISLIC of a potential claim on the E&O Policy. One
month later, AISLIC concluded that it could not fully evaluate coverage, but informed Hantz that
the policy’s Wrongful Act exclusion might preclude coverage because Laursen knowingly
misappropriated client funds. AISLIC did not communicate a final coverage decision to Hantz
prior to this lawsuit.
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B. Procedural Background
On March 18, 2013, Hantz sued National Union and AISLIC in the Eastern District of
Michigan, alleging breach of contract under each insurer’s respective policy. Hantz sought
coverage up to each agreement’s limit and claimed 12% penalty interest under the Michigan
Uniform Trade Practices Act, MCL § 500.2001, et seq. A few months later, Hantz filed an
amended complaint, alleging additional facts. After discovery, the parties filed cross-motions for
summary judgment. The district court granted National Union’s and AISLIC’s motion and
denied Hantz’s motion. Hantz timely appealed.
II.
We review the district court’s decision to grant summary judgment de novo, affirming if
the evidence demonstrates that no genuine issue exists as to any material fact and that National
Union and AISLIC are entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Ramsey v.
Penn Mut. Life Ins. Co., 787 F.3d 813, 818 (6th Cir. 2015). A dispute is genuine if a reasonable
jury could return a verdict in Hantz’s favor. Tysinger v. Police Dep’t of Zanesville, 463 F.3d
569, 572 (6th Cir. 2006). “The court must view the evidence in the light most favorable to
[Hantz] and draw all reasonable inferences in its favor.” Id.
Since “[s]ubject matter jurisdiction in this case is premised solely on diversity of the
parties,” we apply state law in accordance with the controlling decision of the highest state court
to analyze the issues in dispute. See Tooling, Mfg. & Techs. Ass’n v. Hartford Fire Ins. Co.,
693 F.3d 665, 670 (6th Cir. 2012). The parties agree that Michigan law governs the
interpretation of both insurance policies.
In Michigan, a court interprets an insurance policy “similar[ly] to any other contractual
agreement.” Hunt v. Drielick, 852 N.W.2d 562, 565 (Mich. 2014). We must therefore
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“determine what the agreement was and effectuate the intent of the parties.” Id. (quoting Auto-
Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 433–34 (Mich. 1992)); see also Rory v. Cont’l
Ins. Co., 703 N.W.2d 23, 28–29 (Mich. 2005) (applying contract interpretation principles to the
interpretation of an insurance policy). In ascertaining an insurance policy’s meaning, Michigan
courts “give the words used . . . their plain and ordinary meaning . . . apparent to a reader of the
instrument.” Rory, 703 N.W.2d at 28. To this end, Michigan courts enforce insurance policies
according “to their unambiguous terms,” or “as written.” Id. at 30.
We address Hantz’s claims under the Bond and E&O Policy in turn.
A. The Bond
The district court concluded that the Bond did not cover Hantz’s claimed losses because
they were not “direct” losses and, on that basis, granted summary judgment to National Union.
But we begin by assessing the threshold question of whether Hantz timely brought its lawsuit
under the Bond’s twenty-four month contractual limitations provision. Finding resolution of that
issue dispositive as to all of Hantz’s claimed losses, we affirm the district court judgment. See
United States v. Henderson, 626 F.3d 326, 334 (6th Cir. 2010) (“A decision below must be
affirmed if correct for any reason, including a reason not considered by the lower court.”
(quoting United States v. Childs, 539 F.3d 552, 559 (6th Cir. 2008))).
As noted, Michigan courts enforce unambiguous policy language “as written.” Rory, 703
N.W.2d at 30. Accordingly, “an unambiguous contractual provision providing for a shortened
period of limitations is to be enforced as written unless the provision would violate law or public
policy.” Id. at 31. “Only recognized traditional contract defenses [e.g., duress, waiver, estoppel,
or fraud] may be used to avoid the enforcement of the contract provision.” Id. at 31, 31 n.23.
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For purposes of assessing the applicable limitations periods under the Bond, we group
Hantz’s claimed losses into three categories: (1) claims arising out of settlements with the 20
clients (eleven couples and nine individuals) who did not litigate against Hantz (totaling
$1,967,423.60); (2) claims arising out of Brian and Penny Bolton’s FINRA arbitration action
(totaling $600,000); and (3) claims arising out of William and Susan Monroe’s FINRA
arbitration action (totaling $587,063). At oral argument, Hantz’s counsel conceded that the
Bond’s limitations provision barred its claims related to the 20 non-litigating clients. We
therefore address only the timeliness of Hantz’s claims with respect to the Boltons and the
Monroes.
Because Hantz’s losses related to these clients involved litigation, Section F governs the
timeliness of its claims. That section provides that the Insured “may not bring legal proceedings
[against National Union] for the recovery of such loss[es] after the expiration of 24 months from
the date of such final judgment or settlement” (emphasis added). Hantz settled with the Boltons
on July 24, 2009. The Circuit Court for the County of Midland, Michigan entered an “Order of
Judgment” confirming the Monroes’ FINRA arbitration award on December 17, 2010. July 24,
2011 thus marked twenty-four months after the date of the Bolton settlement, and December 17,
2012 marked twenty-four months after the date of the circuit court judgment. Yet Hantz did not
file the present lawsuit until March 18, 2013—well after the limitations periods appear to have
expired for both the Bolton and Monroe losses.
Hantz nevertheless raises two arguments in an attempt to salvage these claims. We
consider each in turn.
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1) The Monroe Claims and the Date of “Final Judgment”
First, Hantz contests the expiration of the contractual limitations period for the Monroe
claims. Though acknowledging that the Midland County Circuit Court Order of Judgment would
constitute a “final judgment” under Michigan law, it contends that the “Michigan-specific”
definition of final judgment does not govern interpretation of the Bond’s terms. From there, it
argues that the words “final judgment” in the Bond are ambiguous and could refer to a judgment
resolving any appeals, rather than the lower court judgment itself. Hantz thus asserts that,
construing the term “final judgment” against the insurer, the court should consider the date of
final judgment to be the date that the Michigan Court of Appeals affirmed the Midland County
Circuit Court’s Order of Judgment, January 24, 2012.
The Bond does not define “final judgment.” But in Michigan, “[t]he fact that a[n]
[insurance] policy does not define a relevant term does not render the policy ambiguous.”
Henderson v. State Farm Fire and Cas. Co., 596 N.W.2d 190, 194 (Mich. 1999). Instead, the
test for ambiguity is whether the “words may reasonably be understood in different ways.”
Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 544 (6th Cir.
2007) (quoting UAW-GM Human Res. Ctr. v. KSL Recreation Corp., 579 N.W.2d 411, 414
(Mich. Ct. App. 1998)). If a term in an insurance policy is ambiguous, it should be construed
against the insurer, Henderson, 596 N.W.2d at 194, but Michigan law instructs us not to “create
ambiguity where the terms of the contract are clear,” City of Grosse Pointe Park v. Mich. Mun.
Liab. & Prop. Pool, 702 N.W.2d 106, 113 (Mich. 2005) (quoting Frankenmuth Mut. Ins. Co. v.
Masters, 595 N.W.2d 832, 837 (Mich. 1999)); see also Farm Bureau Mut. Ins. Co. of Mich. v.
Nikkel, 596 N.W.2d 915, 920 (Mich. 1999) (noting that “the most fundamental principle of
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contract interpretation [is that] the court may not read ambiguity into a policy where none
exists”).
Here, it is clear from the context of the section in which “final judgment” appears—a
section entitled “Notice of Legal Proceedings Against [the] Insured”—that the words refer to a
specific point in a legal action or case. In that way, the Bond clearly employs the term for its
legal meaning. “As a general rule, where terms having a definite legal meaning are used in a
written contract, the parties to the contract are presumed to have intended such terms to have
their proper legal meaning, absent a contrary intention appearing in the instrument.” Northland
Ins. Co. v. Stewart Title Guar. Co., 327 F.3d 448, 455 (6th Cir. 2003) (quoting Conagra, Inc. v.
Farmers State Bank, 602 N.W.2d 390, 401 (Mich. Ct. App. 1999)). Accordingly, while “[t]he
Michigan Supreme Court employs dictionary definitions to interpret nontechnical terms, [it] uses
specialized dictionaries and caselaw to interpret legal terms of art.” Minges Creek, L.L.C. v.
Royal Ins. Co. of Am., 442 F.3d 953, 956 (6th Cir. 2006) (citing Twichel v. MIC Gen. Ins. Corp.,
676 N.W.2d 616, 622 (Mich. 2004); Henderson, 596 N.W.2d at 195, 195 n.9).
Canvassing Michigan case law, we glean that Michigan courts use the term “final
judgment” to refer to the trial court’s order ending litigation at that level. See, e.g., Dep’t of
Agric. v. Appletree Mktg., L.L.C., 779 N.W.2d 237, 240 (Mich. 2010); Mich. Dep’t of Transp. v.
Tomkins, 749 N.W.2d 716, 719 (Mich. 2008); Ayar v. Foodland Distribs., 698 N.W.2d 875, 877
(Mich. 2005) (per curiam); Huggett v. Dep’t of Natural Res., 629 N.W.2d 915, 918 (Mich.
2001); Twp. of Bingham v. RLTD R.R. Corp., 624 N.W.2d 725, 728 (Mich. 2001); Doe v. Boyle,
877 N.W.2d 918, 920, 923 (Mich. Ct. App. 2015) (per curiam); New Prop., Inc. v. George D.
Newpower, Jr., Inc., 762 N.W.2d 178, 186 (Mich. Ct. App. 2009). Specifically, the term “final
judgment” in Michigan courts’ legal parlance routinely denotes a trial court’s order resolving all
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pending claims that a party may appeal as of right. See, e.g., Children’s Hosp. of Mich. v. Auto
Club Ins. Ass’n, 545 N.W.2d 592, 594–95 (Mich. 1996) (citing Mich. Ct. R. 7.203(A)(1));
Greater Macedonia Baptist Church v. Nat’l Bank of Detroit, 475 N.W.2d 359, 360 (Mich. 1991)
(concluding it lacked jurisdiction over an appeal because the district court had not entered final
judgment); see also 7A Mich. Pl. & Pr. § 53:10 (2d ed.) (“Unless otherwise provided by statute
or court rule, a judgment or order is appealable of right only if it is ‘final.’ This principle was
declared by the courts long ago, and is expressly recognized and reiterated by court rule.”)
(citations omitted). Also, though not controlling, the Michigan Court Rules define the term
“final judgment” in a civil case as “the first judgment or order that disposes of all the claims and
adjudicates the rights and liabilities of all the parties.” Mich. Ct. R. 7.202(6)(a)(i); see also Cole
v. Auto-Owners Ins. Co., 723 N.W.2d 922, 925 n.2 (Mich. Ct. App. 2006) (citing the definition
of “pedestrian” in a Michigan statute to support its conclusion that the term was not ambiguous
when used in an insurance contract).
Michigan courts are not alone in using the term in this way—federal courts almost
universally refer to the judgment of a district court ending litigation on the merits as a “final
judgment,” a concept frequently articulated in the context of the “final-judgment rule.” See, e.g.,
Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 106–07 (2009) (noting that parties are
ordinarily not entitled to an appeal until “final judgment has been entered”); Kitchen v. Heyns,
802 F.3d 873, 875 (6th Cir. 2015) (declining to exercise appellate jurisdiction when the lower
court had “not yet reached final judgment”). Definitions of the term found in specialized legal
dictionaries are in accord. See Final Judgment, Black’s Law Dictionary (10th ed. 2014)
(defining final judgment as “[a] court’s final determination of the rights and obligations of the
parties in a case,” which includes “any order from which an appeal lies”) (emphasis added);
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Final-Judgment Rule, Black’s Law Dictionary (10th ed. 2014) (defining “final-judgment rule” as
the “principle that a party may appeal only from a district court’s final decision that ends the
litigation on the merits”); accord Final Judgment, Oxford Dictionary of Law (7th ed. 2014)
(defining “final judgment” as “the judgment in civil proceedings that ends the action, usually the
judgment of the court at trial” and stating that “[a]ppeal against a final judgment may be made
without leave of the court”).
Accordingly, as a legal term of art, “final judgment” virtually always designates the
judgment by a court that determines all the rights and obligations of the parties in a case so that it
can be appealed—not a judgment that has been resolved after appeal. Mindful that we must not
read ambiguity into contracts where none exists, we do not find Hantz’s proposed construction of
the term to be a reasonable alternative interpretation. And no other language that could support
its reading of “final judgment”— i.e., words like “appeal,” “exhaust,” “affirm,” or “deny”—
appears anywhere in this section of the Bond.2
At oral argument, Hantz’s counsel also posited that a hypothetical reasonable
businessperson could interpret “final judgment” to mean the judgment after all appeals are
exhausted. But when a contract uses a legal term of art, the court interprets the term according to
its legal meaning. See Northland Ins. Co., 327 F.3d at 455. And, as discussed at length, the term
2
At oral argument, Hantz’s counsel identified only one case, a Connecticut Court of
Appeals decision, that held that the term “final judgment” is ambiguous. See Aetna Life & Cas.
Co. v. Braccidiferro, 643 A.2d 1305, 1309 (Conn. Ct. App. 1994). We are not bound by that
court’s holding, and in any event, the facts of that case are clearly distinguishable because the
court there interpreted language in a Connecticut statute. See id. Hantz’s counsel also suggested
that some Michigan cases addressing the issue preclusion doctrine interpret the finality of a court
decision to be affected by a pending appeal, thus making use of the term “final judgment” in the
Bond ambiguous. We fail to see how this narrow area of case law, none of which Hantz cites in
its briefs, supports a reasonable alternative interpretation of the term “final judgment,” especially
given how it is used in the Bond.
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“final judgment” has a legal meaning, designating an order appealable as of right because it
resolves all claims. To the extent Hantz argues that we should graft a businessperson’s
reasonable expectations onto this unambiguous term, Michigan law precludes us from doing so.
Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776, 786 (Mich. 2003) (“The rule of reasonable
expectations clearly has no application to unambiguous contracts. That is, one’s alleged
‘reasonable expectations’ cannot supersede the clear language of a contract.”)
For these reasons, “final judgment” is unambiguous, and the date of the Midland County
Circuit Court’s Order of Judgment, December 17, 2010, marked the date of final judgment for
Hantz’s claims related to the Monroe litigation. As a result, these claims expired in December
2012, three months before Hantz filed suit.
2) The Bolton Claims and Equitable Estoppel
Hantz does not dispute the expiration of the Bond’s contractual limitations period for its
Bolton litigation claims. Hantz argues, however, that National Union should be equitably
estopped from enforcing the provision because the insurer implicitly waived it. According to
Hantz, the insurer “induced Hantz to believe” that the limitations clause would not be enforced.
In support, Hantz points to National Union’s extensive and lengthy investigation of Hantz’s
claims, citing a series of letters that Hantz and National Union exchanged between February
2010 and March 2011. Hantz argues that National Union implicitly waived enforcement of the
Bond’s limitations provision when it demanded and obtained Hantz’s cooperation with its
internal claims investigation.
In Michigan, courts treat implied waiver and equitable estoppel as functionally the same
doctrine. See Reed Estate v. Reed, 810 N.W.2d 284, 290 (Mich. Ct. App. 2011) (“Proof of
express words is not necessary, but the waiver may be shown by circumstances or by a course of
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acts and conduct which amounts to an estoppel.” (quoting Klas v. Pearce Hardware & Furniture
Co., 168 N.W. 425, 427 (Mich. 1918))); see also Landelius v. Sackellares, 556 N.W.2d 472, 476
(Mich. 1996) (“There are some circumstances, however, wherein justice requires that a person be
treated as though he had waived a right where he has done some act inconsistent with the
assertion of such right and without regard to whether he knew he possessed it. This is the
doctrine of estoppel.”).
“For equitable estoppel to apply [in the context of a contractual limitations period], [a]
plaintiff must establish that (1) defendant’s acts or representations induced plaintiff to believe
that the limitations period clause would not be enforced, (2) plaintiff justifiably relied on this
belief, and (3) [plaintiff] was prejudiced as a result of [his or] her reliance on [his or] her belief
that the clause would not be enforced.” McDonald v. Farm Bureau Ins. Co., 747 N.W.2d 811,
819 (Mich. 2008). Michigan courts are generally “reluctant to recognize an estoppel in the
absence of conduct clearly designed to induce the plaintiff to refrain from bringing action within
the period fixed by statute.” Lothian v. City of Detroit, 324 N.W.2d 9, 18 (Mich. 1982) (citations
and quotations omitted).
National Union’s contractual limitations defense survives despite its investigative efforts.
No evidence supports Hantz’s argument that National Union “induced” Hantz to believe it would
not enforce the limitations clause. Although National Union spent nearly three years
investigating Hantz’s claims and requested Hantz’s cooperation throughout the process, it never
implied it would waive the contractual limitations provision, nor did it suggest that it would
cover the losses. Quite the contrary: National Union’s letters conveyed that the insurer planned
to contest coverage, albeit on grounds other than the Bond’s limitations period. In a November
11, 2010, letter, for example, National Union provided Hantz with a summary of information that
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“caused [National Union] to believe coverage may not be available with respect to this alleged
loss.” Hantz argues that National Union should have expressly stated its intent to enforce the
limitations period, as opposed to its other defenses, but the insurer’s failure to specify which
defenses it would assert does not constitute a waiver of those defenses by any stretch.
Hantz also fails to identify record evidence that could lead a reasonable juror to find
justifiable reliance on the part of Hantz’s counsel. In its communications with Hantz, National
Union stated repeatedly that it did not waive any rights or defenses under the Bond. And when
National Union ultimately denied Hantz’s claims, the insurer again stated that it “reserve[d] all
rights and defenses.” Even assuming that National Union was responsible for unnecessary
delays in the claims investigation process, as Hantz contends, delay alone won’t support a
reliance finding. See McDonald, 747 N.W.2d at 820 (“The trial court’s factual finding that
defendant caused delays is insufficient to grant estoppel because there is no evidence that
plaintiff relied on anything defendant did or said.”).
Without any justified waiver or estoppel defense to revive Hantz’s untimely claims, we
uphold the district court’s judgment. As a result, we need not address the parties’ arguments
with respect to National Union’s other asserted bases for denying coverage under the Bond.
B. The E&O Policy
The district court concluded that the Wrongful Act exclusion in the E&O Policy barred
coverage for Hantz’s claims, because the policy excluded indemnification for claims against “an
Insured . . . arising out of . . . any actual or alleged Wrongful Act committed with knowledge that
it was a Wrongful Act.” Under the E&O Policy, “Insured” persons included Hantz and its
directors, officers, and employees.
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The parties do not dispute that Laursen knowingly stole client funds. Nevertheless,
Hantz makes two arguments contending that the district court erred in reaching its conclusion.
Both miss the mark.
Hantz first argues that the use of the word “knowledge” under the Wrongful Act
exclusion is ambiguous and could mean “knowledge attributable to the insured against whom the
claim is made, knowledge attributable to the insured who committed the wrongful act, or
knowledge attributable to any insured.” Construing this purported ambiguity against AISLIC,
Hantz proffers that only one insured party had knowledge of Laursen’s fraud—Laursen—and
thus Hantz, without such knowledge, can claim coverage under the E&O Policy.
Although Michigan law counsels courts to construe ambiguities in an insurance contract
against the insurer, Western World Ins. Co. v. Hoey, 773 F.3d 755, 762 (6th Cir. 2014) (citing
Fire Ins. Exch. v. Diehl, 545 N.W.2d 602, 606 (Mich. 1996)), Hantz’s argument relies upon a
strained reading of the exclusion, creating possible ambiguities where none exist. In the phrase,
“Wrongful Act committed with knowledge that it was a Wrongful Act,” “with knowledge”
clearly modifies the verb “committed.” In other words, the clause plainly refers to the
“knowledge” of the Insured who “committed” the Wrongful Act. We will not entertain
unreasonable alternative interpretations of this clause. Because Laursen indisputably knew that
what he was doing was wrongful, the exclusion applies.
Hantz next claims that the district court’s reading of the Wrongful Act exclusion renders
coverage under the E&O Policy illusory. Hantz cites the E&O Policy’s negligent supervision
rider, which extends coverage for negligent supervision claims arising out of Hantz’s financial
activities as a broker-dealer. Hantz suggests that the district court’s interpretation of the
Wrongful Act exclusion would make the rider illusory because it would not cover negligent
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Case No. 15-2237
Hantz Financial Services, et al. v. Am. Int’l Specialty Lines Ins. Co., et al.
supervision claims when one of Hantz’s representatives fails to provide services through
knowing wrongful conduct.
Applied to insurance contracts, the illusory coverage doctrine dictates that “an insurance
policy [] be interpreted so that it is not merely a delusion to the insured.” Emp’rs Mut. Cas. Co.
v. Helicon Assoc., Inc., 880 N.W.2d 839, 843 (Mich. Ct. App. 2015) (quoting Ile v. Foremost
Ins. Co., 809 N.W.2d 617, 622 (Mich. Ct. App. 2011), rev’d on other grounds, 823 N.W.2d 426,
426 (Mich. 2012)). Michigan courts thus “avoid interpreting insurance policies in such a way
that an insured’s coverage is never triggered and the insurer bears no risk.” Id. (citations and
quotations omitted). But “[the Michigan] Supreme Court will not strike an insurance policy as
illusory if there is any manner in which the policy could be interpreted to provide coverage.”
Cincinnati Ins. Co. v. Hall, No. 308002, 2013 WL 3107640, at *6 (Mich. Ct. App. June 20,
2013) (citing Ile v. Foremost Ins. Co., 823 N.W.2d 426, 426–427 (Mich. 2012)).
Hantz fails to establish that the Wrongful Act exclusion, as interpreted, renders the
negligent supervision rider illusory. Although the rider would not cover negligent-supervision
claims stemming from a representative’s knowing wrongful conduct—such as Laursen’s
embezzlement—it would still cover negligent-supervision claims arising out of the negligent
(and unwitting) conduct of one of Hantz’s other representatives. In other words, Hantz’s
coverage under this rider is “not merely a delusion,” see Helicon Assoc., Inc., 880 N.W.2d at
843, as Hantz contends: the rider would indemnify Hantz for “all sums” it is “legally obligated to
pay” for negligent supervision of certain employees who did not knowingly commit a wrongful
act.
For these reasons, we agree with the district court that Laursen’s knowing wrongful
conduct eliminates coverage under the E&O Policy.
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Case No. 15-2237
Hantz Financial Services, et al. v. Am. Int’l Specialty Lines Ins. Co., et al.
III.
We AFFIRM the judgment of the district court in favor of National Union and AISLIC.
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