Certain Underwriters at Lloyd's, London v. LM Ericsson Telephon, AB, #05-07-01467 (Tex. App. Dallas November 24, 2008) See LM Ericsson Decision
When asked by a corporate client to review its insurance policies, the first thing I check is the definition of the insureds. This case is a chilling reminder of how wrong things can go if a corporate entity is left off the list. The court will usually show no mercy.
Ericsson, Inc. ("Ericsson US") is the American subsidiary of a Swedish company, LM Ericsson Telephon, AB ("LM Ericsson"). Apparently, Ericsson typically procured errors & omissions coverage for all the Ericsson companies, including LM Ericsson. In 2003 Ericsson applied for a new $20 million E&O policy from an AIG affiliate and a $10 million excess policy from Lloyd's London. The AIG application included a list of 54 named insureds to be added to the policy, including both Ericsson US and LM Ericsson. The Lloyd's policy followed the terms, conditions and definitions of the AIG policy.
LM Ericsson was then sued for various license breaches and misappropriation of trade secrets apparently falling within the covering agreements of both policies. AIG, however, denied the claim because when the policy issued, it named Ercsson US as the named insured and defined "Insureds" to include only the Named insured and its subsidiaries, no mention of parents. In the coverage action that followed, LM Ericsson pointed out that the policy explicitly provided that "All the statements and representations in the application are . . . incorporated into and have become a part of this policy." Surely, this was enough to require AIG (and Lloyd's) to treat LM Ericsson as an Insured, said the Insured.
The trial court found that LM Ericsson was an Insured by virtue of the named insured list in the application and the incorporation statement quoted above. But the appellate court disagreed. Look at the definitions section of the policy, said the appellate court. The policy covers certain liability "you" are legally obligated to pay. "You" is defined as each "organization," which is defined as (1) the named insured; and (2) each "subsidiary." "Subsidiaries" are controlled by the named insured (but not vice versa). Even though the application list of named insureds also uses the word "you," the "you" in the policy definition section is different than the "you" in the application, said the court, apparently because one is in boldface and the other is not.
The appellate court likewise brushed aside other arguments by LM Ericsson: (1) that all previous policies covered LM Ericsson, and the policyholder asked for no alteration of this arrangement; (2) AIG should be held to cover the entire list in the application unless it explicitly denied coverage for one or more of them; (3) (my favorite) AIG's interpretation renders the word "you" in the application meaningless when the application is incorporated into the policy. The court refused to allow the application list to penetrate the policy definition section without an explicit provision to that effect.
The point here is not whether the case was wrongly decided. I believe Ericsson and the underwriters at AIG intended to cover LM Ericsson, but courts are very reluctant to stray from the plain language of the policy in order to indulge in speculation over the extrinsic intent of the parties. Arguably, the appellate court here was overly cavalier in dismissing the import of the application, which would, at least, create an ambiguity over the definition of named insured.
But the point is this: "Risk Managers Beware!" Today's business entities often take on incredibly complex forms, particularly in the land of limited partnerships. Keeping up with the entity lists and affiliations can be a challengin task. But the Ericsson case shows that the onus is on the insured to check the policy and make sure the entities that are supposed to be covered actually fall within the policy definition of the "insured." It must be on the policyholder's checklist.
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