Mea culpa. I haven’t written here in a while, because I’ve been focusing my creative juices on developing a new podcast about effective negotiation and communication skills. (Shameless plug: Please check it out! It’s called Station 4 Negotiation and it’s available on all of the major podcast platforms.) But I had to return to discuss a very nice win by my good friend Barry Buchman and his colleagues at Haynes and Boone in a coverage case captioned Huntington National Bank v. AIG Specialty Insurance Company, which you can read here.

For some reason, many judges seem to be unwilling or unable to apply the rules of insurance policy construction. Under those rules, the policyholder is supposed to get the benefit of the doubt with respect to coverage; put another way, if any reasonable construction of the insurance policy language would support coverage, the policyholder is supposed to win. After all, the insurance company wrote the policy, and should bear the risk of the language being susceptible of more than one construction. Too often, in my humble opinion, judges (especially federal judges) give lip service to the rules and then simply disregard them, substituting their own views of what should and shouldn’t be covered. But as a famous meme says, that’s not how this works. That’s not how any of this works.

That problem didn’t happen in the Huntington case, though. Basically, Huntington, which is (obviously) a bank, had a depositor, Barton Watson, who was running a Ponzi scheme. Watson (who later committed suicide) had set up two shell companies to facilitate the scheme, unbeknownst to Bank officials. Watson later repaid large loans that the Bank had provided to one of Watson’s companies, which was of course a great relief to the Bank.

The two shell companies eventually went bankrupt. (To quote Margaret Thacher in another context, eventually you run out of other peoples’ money.) The bankruptcy trustees of the two companies later filed suits against Huntington, alleging that the Bank had put its desire to be repaid ahead of concerns that Watson was committing fraud and, by doing so, perpetuated the Ponzi scheme to its benefit and other lenders’ detriment.  Both complaints included allegations of fraudulent conveyances and sought to recover those transfers from Huntington. (Under the bankruptcy code, a “fraudulent conveyance” happens, for example,  when a debtor transfers property with the intent to hinder, delay or defraud its creditors.)

The Bank eventually settled the claims for $32 million, and looked to its insurance companies to recover $15 million of that amount.

There were several coverage issues involved in the case, but here I’ll focus on just one. AIG’s bankers professional liability insurance policy excluded coverage for “civil or criminal fines or penalties imposed by law, punitive or exemplary damages . . . or matters that may be deemed uninsurable under the law pursuant to which this policy shall be construed.” AIG argued that the bankruptcy trustees’ recovery of a fraudulent conveyance was tantamount to a fine or penalty and therefore not covered.

But the Sixth Circuit disagreed, writing as follows: 

“For insurance coverage to be uninsurable under the law, the damages claimed must be based on an intent to injure, malice, ill will, or other similar culpability. Huntington argues that the settlement payment to the trustee is insurable under Ohio law, contrary to the district court’s holding, because the settlement payment was not akin to punitive damages and was not intended to punish an intentional bad act. We agree. Holding otherwise, as the district court did, would wrongly expand what is uninsurable under Ohio law and contravene the well-established principle in Ohio that policymaking is for the legislative branch, not the courts.”

“Policymaking is for the legislative branch, not the courts.” I like that so much that I may have to put it in my next legal brief when an insurance company tries to convince a judge to engage in what’s euphemistically called “post-loss underwriting.”