Appeals Court Sides With Insurer In Shareholder Dispute

The Eighth Circuit Court of Appeals handed a big victory recently to Liberty Insurance Underwriters over the use of life insurance in a company stock dispute.

The case -- Russell v. Liberty Insurance Underwriters, Inc. -- involved three shareholders of a business who entered into stock agreements that provided for the company to purchase life insurance for each shareholder.

Paul Russell co-owned Cates Sheet Metal Industries, Inc. with Daniel and J. Carson Cates. Daniel Cates' 2003 cancer diagnosis prompted the three shareholders to create a succession plan.

The company purchased life insurance policies on each shareholder. If a shareholder died, the company would use the insurance proceeds to buy the deceased shareholder’s stock from his personal representative.

Daniel Cates died on September 20, 2013. The company received the life insurance proceeds and deposited the money into its bank account. But Daniel’s shares, held by the Daniel J. Cates Revocable Trust, were never purchased. Elizabeth Cates, Daniel’s widow, beneficiary, and personal representative, was never paid.

She sued and received a judgment against the president of the company for breach of fiduciary duty.

The two remaining shareholders assumed they were covered by the company’s directors and officers insurance and its fiduciary liability coverage carrier. But Liberty disclaimed once the widow sued. The shareholders sued the insurance company in state court and the case was removed to federal court.

Does Not Apply

The Eighth Circuit agreed with the district court that the fiduciary liability coverage did not apply to the claim because the stock agreements were not a plan administered by the shareholders as fiduciaries.

The court also found that while the policy applied to misdeeds done in the discharge of their duties as fiduciaries of any plan, but the breach of fiduciary duty they were sued for was in their capacity of fiduciaries of the company and its shareholders, not for their duties as employee benefit plain fiduciaries, a Squire Patton Boggs blog post noted.

As for the D&O coverage, the policy excluded coverage for liability or defense costs based on any liability under or in breach of any contract or agreement.

"Because the company broke its promise to the widow that the life insurance proceeds would be used to buy out the deceased shareholder’s stock, it appeared to the court that the insurance company had no duty to cover the surviving shareholders or to defend them," Squire Patton Boggs authors said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.