First Circuit Holds “Breakaway” Church Not an “Insured” Under Original Church’s D&O Policy

The United States Court of Appeals for the First Circuit, applying Massachusetts law, has held that an insured church’s D&O policy did not afford coverage for a claim against a “breakaway” congregation because the breakaway congregation was not an “insured” under the policy.  Newton Covenant Church v. Great Am. Ins. Co., 2020 WL 1815971 (1st Cir. Apr. 10, 2020). Even if the breakaway congregation were to be deemed an “insured,” the Court ruled that coverage was still unavailable because an “insured v. insured” exclusion would apply.

As a result of an ecclesiastical schism, certain members voted to withdraw from a religious organization and create a “breakaway” congregation.  The original congregation filed suit against the breakaway congregation, alleging trespass and conversion of real property and financial assets.  The breakaway congregation sought coverage for defense costs and indemnification under the original congregation’s D&O policy.  The insurer denied coverage, and the breakaway congregation filed suit against it for breaching its duty to defend.  The United States District Court for the District of Massachusetts granted the insurer’s motion to dismiss the suit.  The Executive Summary’s coverage of the District Court’s decision, which includes more on the factual background, can be found here.

The First Circuit affirmed the District Court’s ruling. The D&O policy afforded coverage for a “civil proceeding . . . made against an Insured.”  (Emphasis in original.)  “Insured” was defined as the “Organization” and “Insured Persons.”   “Insured Persons” referred to, among others, “persons who were, now are, or shall be directors, trustees, [or] officers . . . of the Organization.”  The only “Organization” named under the policy was the original congregation, and thus coverage was not available for either the breakaway congregation or its officers.

The Court further held that, even if the breakaway congregation were instead treated as a “segment of the original [congregation],” the policy’s exclusion for “any Claim made against any Insured . . . by, or for the benefit or, or at the behest of the Organization or any Subsidiary or any entity which controls, is controlled by, or is under common control with the Organization or any Subsidiary, or any person or entity which succeeds to the interest of the Organization or any Subsidiary” would apply.

In a footnote, the Court also observed that the suit against the breakaway congregation did not arise out of a “Wrongful Act.”  The policy covered “Wrongful Act[s]” claimed against insured persons only when such persons are “acting in their capacity” with the “Organization,” “solely by reason of their status” with the “Organization,” or “arising out of their service” as officers of an outside entity, “but only if such service is at the request of the Organization.”  Here, the officers of the breakaway congregation were not sued in their official capacity as officers of the original congregation, but rather as members of the “Leadership Team” of the breakaway congregation.

Wiley Executive Summary

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