In a recent decision, a California court ruled in favor of the excess Directors and Officers carrier in holding that its policy was an indemnity contract which required an out-of-pocket loss by the party seeking reimbursement.

When the Insured sought coverage for its directors and officers, the carrier denied it for late notice and other reasons. Coverage litigation ensued. The court denied the carrier’s motion for summary judgment and ordered the parties to resolve certain issues during a bench trial. While proceeding with the bench trial, the insured filed for bankruptcy and entered into a settlement for the suit for which it needed insurance coverage. The settlement of the underlying suit expressly excluded directors and officers from release. During the bench trial between the carrier and the Insured, the court held that the policy at issue was an indemnity policy which would be triggered only if the Insured paid the directors indemnity for legal expenses. At the time, the Insured’s bankruptcy trustee appealed the trial court’s holding.

The trustee for the Insured argued that the trial court erred in interpreting the policy as an indemnification contract. Instead, the trustee invited the court to recognize that the policy at issue was a liability contract which required the carrier to cover the Insured when liability attached. The trustee argued that the policy was ambiguous because it provided that “[the carrier] shall pay on behalf of [the Insured],” while simultaneously suggesting that the carrier could not pay an obligation on behalf of its Insured, unless the Insured pays the obligation first. According to the trustee, such ambiguity needed to be interpreted in favor of the Insured; however, the appellate court disagreed.

The appellate court pointed that the title of the policy at issue provided that it was an “insured adviser professional and management liability insurance and corporate reimbursement” policy. Therefore, the word “reimbursement” required the Insured to bear an out-of-pocket loss. The court interpreted the word “reimburse” to mean “to pay back to someone,” and held that the policy’s language was unambiguous. 

In the underlying litigation, the U.S. government brought a lawsuit against several affiliated healthcare companies (the “Company”) alleging that they had fraudulently been mismanaged. While litigation was pending, the Company defaulted on several loans and appointed an independent director (the “Director”). Eventually, the Company filed for Chapter 7 bankruptcy.

Following bankruptcy, a bankruptcy trustee (the “Trustee”) sent a demand letter to the Director alleging that the Director had breached their fiduciary duties to the Company by failing to file for Chapter 11 Restructuring and initiated an adversary proceeding. The Trustee alleged that the Director “made no attempt to coordinate a sale or refinance of the Debtors and did not even begin a corporate restructuring.” In short, the Trustee alleged that the Director’s wrongful acts caused the Company to file for Chapter 7 bankruptcy.  

The Director sought coverage from the D&O tower. Under a duty to defend policy, the primary carrier agreed to defend the Director in the adversary proceeding. However, after the primary carrier’s limits had been exhausted, the excess carrier (the “Carrier”) denied coverage invoking the policies’ Bankruptcy/Insolvency Exclusion (the “Exclusion”). The Exclusion eliminated coverage for “Claims” against the Company that were “alleging, arising out of, based upon, attributable to, or in any way involving, directly or indirectly, in whole or in part” certain wrongful acts.

The issue before the court was whether the adversary proceeding was a Claim that was excluded from coverage. The Director argued that if the policy provided coverage against any of the Trustee’s causes of action, then the Carrier had the broad duty to defend all causes of action. However, the Carrier argued that if the policy excluded from coverage any of the Trustee’s causes of action, then the Carrier had no duty to defend the Director against any of the underlying claims due to the broad exclusion. 

The court agreed with the Carrier and pointed that the policy defined “Claim” as a “civil . . . proceeding,” as opposed to defining it as a cause of action within a proceeding. Moreover, the Exclusion applied to “any Claim alleging, arising out of, based upon, attributable to, or in any way involving, directly or indirectly, in whole or in part, any” otherwise excluded “Wrongful Act.” Thus, the adversary proceedings were the civil proceedings arising in part out of otherwise-excluded conduct—precisely what the Exclusion contemplated.

When denying coverage based on the prior acts exclusion, carriers need to establish that the causes of action asserted in the underlying claim could not exist but for the alleged wrongful acts preceding the prior acts date, an appellate court holds.

In the case at issue, a Corporation’s Directors and Officers Liability insurance policies contained an exclusion for any "Claim . . . based upon, arising from, or in consequence of any fact, circumstance or Wrongful Act committed, attempted, or allegedly committed or attempted in whole or in part prior to [the prior acts date]."

Two months after the prior acts date, multiple shareholders filed a lawsuit opposing the purchase of the Corporation. The suit asserted a breach of fiduciary duty, malfeasance of the board in undervaluing the Corporation, and failure to follow an open bidding process. The Corporation provided notice of the lawsuit to its D&O carriers. After the primary and the first excess carriers contributed their policy limits to the settlement and related defense costs, the Corporation submitted the invoices to the second excess carrier (the “Carrier”). The Carrier denied coverage, citing the Prior Acts exclusion. Coverage litigation ensued.

The appellate court reversed a lower court and ruled in favor of the Corporation, clarifying that the Carrier failed to show that “none of the causes of action [the shareholders] assert[] could exist but for the existence of the excluded activity.” According to the court, the acts giving rise to liability were the negotiations and the approval of the allegedly disadvantageous transaction, the Corporation’s denial of a request to waive the deadline for advance notice of director nominations (taking place after the prior acts date). The complaints also alleged that the former CEO and its directors breached their fiduciary duties by agreeing to a self-serving, rushed, and unfavorable transaction—all causes of action that could have been viable even if the Corporation had not previously entered the joint venture with the purchaser. In ruling in favor of the Corporation, the appellate court reversed the lower court, stating that the latter should have granted the Corporation’s motion for summary judgment on the issue as a matter of law. 

A Delaware court ruled a series of lawsuits were unrelated and, therefore, an excess D&O carrier was required to provide coverage to the Insured. In doing so, the court clarified that establishing “some meaningful linkage” to show that one claim was “arising out of” another one required enough material similarities between the claims.

In the case at issue, a biotechnology company (the “Company”) faced several securities class action lawsuits over a period of years stemming from the development of one of its cancer treatments. The Company sought and received coverage under its D&O insurance policy for an earlier lawsuit. After exhaustion of the primary and first two excess carriers, the third excess carrier (the “Carrier”) refused to continue defending the matter. The Carrier argued that the claim was related to a prior lawsuit; therefore, the claim at issue has been made under a prior Policy Period. According to that Carrier, there was a sufficient connection between the two suits to trigger the Related Claims provision and Prior Notice exclusion.

The primary policy defined Related Claim as "a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured." The Prior Notice exclusion precluded coverage for any Claim “that has been reported . . .  under any directors and officers liability insurance policy in force prior to the inception date of this policy.”

Under Delaware law, "arising out of" means to share "some meaningful linkage.”  In determining whether “some meaningful linkage” existed between the two actions the court considered: (1) the parties, (2) the relevant time periods, (3) the overall theory of liability, (4) sampling of relevant evidence, and (5) the claimed damages. Ultimately, the court determined the suits were unrelated, finding that there was no meaningful link between the lawsuits because they involved different parties, time periods, theories of liability, evidence, and relief sought.