A U.S Court of Appeals ruled in favor of an insurance carrier seeking to avoid any obligation to indemnify and advance legal defense costs to its insured. The court’s ruling was based on its interpretation of the California Insurance Code § 533, holding that the insurance coverage was excluded for the willful acts alleged against the insured. In the underlying matter, the insured was sued by a competing talent agency for breach of contract, conspiracy, intentional interference with contractual relationships, and other intentional misconduct. The court held that these causes of action were of the type intended to be excluded by § 533.

Per its policy with the insured, the carrier was required to advance defense costs for covered claims. However, the carrier argued, and the court later agreed, that claims arising out of the insured’s willful misconduct did not qualify as a covered claim. Notably, the court rejected the insured’s argument that defense costs were separate from the carrier’s duty to indemnify. 

A Prior Acts exclusion bars coverage for Wrongful Acts alleged in whole or in part before the Prior Acts date.

A minority shareholder of a food company accused the company’s sole manager and CEO of fraudulently orchestrating a transaction to sell the company’s assets CEO’s new venture to avoid his personal guarantee of a loan. The shareholder alleged the CEO “pressured and induced" them to invest in the food company with "inaccurate and misleading" financial projections. The CEO "grossly mismanaged" the company causing it to lose money and incur debt that it could not repay. Portions of the debt was secured by the company’s assets and the CEO’s personal guarantee. The CEO created a new venture to raise funds to purchase the food company, ultimately completing the transaction, which resulted in a release of the personal guarantee and loss of the shareholder’s investment in the food company. The shareholder sued the CEO and new venture for aiding and abetting breach of fiduciary duty, constructive fraud, and civil conspiracy, as well as a fraudulent tortious concealment against the CEO.

The new venture had obtained D&O insurance prior to purchasing the food company’s assets. The policy included a "Prior Acts Exclusion" barring coverage for any Claim alleging any Wrongful Act that occurred, "in whole or in part," before the policy period began:

In consideration of the premium charged, it is agreed that no coverage will be available under the Directors & Officers and Entity Liability Coverage Part for Loss on account of any Matter based upon, arising from, or in consequence of any Wrongful Act, fact, or circumstance committed, attempted, or allegedly committed or attempted, in whole or in part, prior to June 14, 2023.

The CEO and new venture sought coverage, which was denied with the carrier arguing that the alleged scheme and plans for the transaction occurred prior to the Prior Acts date. The underlying complaint alleged the conspiracy began years prior when the CEO “pressured and induced" the shareholder to invest. The CEO argued that the transaction occurred during the new venture’s policy period and therefore the Exclusion did not apply. However, the court found that the CEO’s argument ignored the Exclusion’s unambiguous language that barred coverage for Wrongful Acts occurring, "in whole or in part, prior to June 14, 2023," and that the complaint alleged “the sale was negotiated weeks, if not months, before it was finalized” within the policy period.

The CEO tried to argue the carrier could not rely on the in-part portion of the exclusion, citing the “mend the hold” doctrine, because it relied on the in whole portion to deny coverage before litigation was filed. “The mend the hold doctrine precludes an insurer from asserting one reason to deny coverage of a claim and then raising a different reason for denial as a defense once litigation occurs." The court determined the carrier did not rely solely on the in whole wording when initially denying coverage and the doctrine did not apply.

Finally, the CEO also sought coverage under the food company’s D&O policy, which was issued by the same carrier. The carrier denied coverage based on capacity. The policy defined an Insured Person as an "Executive or Employee" of the food company. The court agreed with the carrier that the allegations never described the CEO as an executive or employee of the food company, but rather solely in his capacity within the new venture.  

A federal court determined that based on the plain meaning of a Regulatory Claims endorsement to a D&O policy, defense costs were included within the amended definition of Loss and those costs incurred in defending such a claim were subject to a Retention. 

The Insured was a provider of infectious-disease laboratory testing and was subject to significant regulatory oversight. The Insured’s parent company had purchased an insurance policy that included an endorsement to the policy’s D&O coverage section for Regulatory Claims coverage. During the policy period, the Insured received several regulatory claims seeking production documents and responses to interrogatories. When the Insured notified the carrier of the claims, the carrier agreed to defend those claims and consented to the Insured’s selection of counsel. The carrier noted that pursuant to the Regulatory Claims endorsement, the costs of defending the claims were subject to: (1) a $250,000 retention, and (2) a $250,000 sub-limit. The Insured filed for a declaratory judgment that the Retention did not apply, and that Defense Expenses were not subject to the sub-limit.

The endorsement stated:

The Insurer will pay on behalf of the Insured any Loss from a Regulatory Claim first made against them during the Policy Period […].The Insurer's maximum aggregate Limit of Liability for Loss under this policy in connection with Regulatory Claims made against all Insured's hall be 250,000. This sublimit shall be part of and not in addition to the amount set forth in Item 2.A of the Directors and Officers Liability Declarations Page.

A Retention in the amount of $250,000 shall apply to any Loss arising from a Regulatory Claim. Such Retention shall be borne by the Insured, and the Insurer shall only be liable for the amount of Loss arising from a Regulatory Claim which is in excess of the above stated Retention amount.

While the D&O section’s definition of Loss included Defense Expenses, the endorsement amended this definition to include “the amount that any Insured shall become legally obligated to pay on account of any covered Regulatory Claim, including but not limited to: (a) damages; (b) judgments; (c) settlements; and (d) pre-judgment and post-judgment interest.” The Insured argued that because the endorsement did not include Defense Expenses within the definition of Loss, the cost of defending a Regulatory Claim was not subject to a Retention and did not erode the sub-limit. 

However, the court determined under Indiana law they must “afford clear and unambiguous policy language its plain, ordinary meaning.” The court noted that the endorsement “identifies four types of covered losses that are also included in the [D&O] [C]overage [S]ection, it explicitly states that covered losses are '[included] but not limited to' those enumerated types", rather than replacing the existing definition within the D&O section that includes Defense Expenses. Regarding the policy’s Retention, it stated that “[a]s a condition precedent to coverage under this policy, the Insured shall pay with respect to each Claim the applicable Retention amount,” which the court determined must include the Retention stated in the endorsement. Therefore, the definition of Loss for a Regulatory Claim included Defense Expenses, and the Insured was not entitled to "first-dollar" coverage. The Retention amount listed in the endorsement must be satisfied before coverage is triggered. Finally, due to an apparent error in the language of the endorsement, the court was unable to determine as a matter of law whether Defense Expenses incurred by defending against Regulatory Claims counted against the Policy's sub-limit.

Under Nevada law, “pleading the self-interest of a single officer or director” is not sufficient to overcome the business judgment rule and shift the burden to prove entire fairness.

A merger of two Nevada energy companies (“Company A” and “Company B”), both headquartered in Houston, Texas, spawned shareholder class action litigation stemming from disclosures made in public filings leading up to the transaction. Following an initial transaction, Company B purchased a majority of Company A’s stock and Company A’s CEO became the CEO of both to lead the then aligned companies. Company A’s CEO was also a director and the controlling shareholder of Company A. He maintained voting control of Company A after the initial transaction based on his preferred stock. The Company A’s board consisted of the CEO and two independent directors. Eventually the companies were merged and the CEO’s positions at both companies was disclosed, an independent director lead the direct negotiations, and independent advisors opined on the fairness of the transaction.

The transaction was not challenged by any of Company B’s shareholders and the Company A shareholder did not file suit until after the merger, naming only Company B and the CEO, alleging the CEO “withheld material information from the joint proxy statement through self-dealing.” The complaint alleged the CEO “knowingly engaged in fraudulent misconduct by orchestrating the merger to secure special treatment for his [Company A] stock” and that the merger was financially unfair to Company A shareholders. The complaint included three causes of actions: 1) the CEO breached his fiduciary duty to Company A shareholders in his corporate capacities, 2) the CEO breached his fiduciary duty as the controlling shareholder of Company A, and 3) Company B aided and abetted the alleged breaches of fiduciary duty. The complaint alleged the transaction was “conflicted” because the CEO was on both sides as CEO of each company and could vote his majority Company A shares in favor, such that the transaction lacked “requisite ‘strict protections,’ thus nullifying the business judgment rule—with specific citation to Delaware law.” However, the matter would be decided under Nevada law, rather than Delaware.

The court determined that under Nevada law, based on the statutory framework governing Nevada corporations, the allegation that a director was an interested party does not on its own rebut the business judgment rule. Plaintiffs cannot manufacture a rebuttal to the business judgment rule merely by suing an alleged interested director, while ignoring the rest of the board that may have approved a transaction. Rather, the business judgment rule applies to the board in its entirety. The Company A shareholder was therefore required to "allege disloyal conduct, and thereby rebut the business judgment standard, with respect to at least half of the directors voting in favor of [the] merger,” rather than cherry picking a single director. 

Covenants of good faith and fair dealing cannot be used to circumvent the bargained-for terms of a contract, held a Delaware court.

The action stems from an investor’s acquisition of a majority stake at an urgent care provider (the “Provider”), which was owned by physician members. As a result of a merger with a medical group, a limited liability company (the “LLC”) was formed. Following that merger, the relationship between the unitholders the majority of which were owned by the investor were governed by the LLC Agreement. The agreement contained rules designed for protection of minority unitholders. According to such rules, every unitholder would be treated similarly in case of company’s sale. The rules also specified that the minority unitholders possessed tag-along rights which enabled them to participate in sale transactions that could result in change of control. Importantly, the agreement expressly shielded the investor from fiduciary duties to the LLC and its members beyond the LLC Agreement.

Later, the Provider entered a merger with a primary care provider. According to the merger’s terms, the investor would be paid in cash, whereas the minority unitholders would receive a mix of cash and equity in the primary care provider entity. Because the transaction treated the investor and the minority unitholders differently, in violation of the LLC Agreement, the LLC Agreement required and underwent an amendment pursuant to voting. The requisite votes, including the votes of the members bringing the underlying lawsuit were secured and the merger was successful. However, the post-merger company ended up losing billions in value and the minority investors argued that the amendment to the LLC Agreement that they voted for was in violation of covenants of good faith and fair dealing.

The Court disagreed, holding that canons of good faith and fair dealing could not govern expressly bargained terms of a contract. Instead, considerations of good faith and fair dealings could fill gaps contractual provisions. Moreover, the court held that an LLC Agreement can contractually eliminate fiduciary duties, reaffirming the freedom of contract in the context of LLC and LP’s.