The Department of Justice (DOJ) revised its internal policies to clarify that nonbinding agency guidance could not, by itself, establish liability.

The revised policy barred the DOJ from bringing civil or criminal enforcement actions based solely on a party’s failure to follow nonbinding agency guidance. Instead, the DOJ will be required to base its actions on violations of applicable legal requirements. Guidance could still be used as evidence of knowledge or intent, to describe professional or industry standards, to show a party’s compliance, or to provide legal context. In a False Claims Act case, evidence that a party knew about guidance could help show knowledge of a legal requirement, but failure to follow the guidance alone would not establish a violation.

The revisions also directed DOJ attorneys to assess in each case whether seeking dismissal would serve the government’s interests when declining to intervene. If the DOJ did not seek dismissal at that stage, it could revisit the decision as litigation progressed. The existing, nonexclusive dismissal factors remained largely the same, including whether a case lacked merit, duplicated an investigation, interfered with agency programs, threatened government resources, or involved serious procedural errors. 

A student sued the school (the “Insured”), alleging that classmates bullied him and that, during a school trip, he was placed in a hotel room with them and subjected to an attempted sexual assault. The professional liability carrier denied coverage, citing its sexual misconduct exclusion, which stated:

The Insured settled the matter with the student. As part of the settlement, the student received a monetary judgment and an assignment of the Insured’s rights under the policy. The student then sued the carrier, alleging breach of duty to defend, indemnify, and settle the underlying matter. The lower court dismissed the case in favor of the carrier; however, the reviewing court overturned the dismissal. 

According to the court, the lower court mistakenly adopted the insurer’s argument that any non-sexual bullying was “inextricably” connected to the alleged sexual abuse because the bullying happened on the same day as the alleged abuse. The court did not disagree that such interpretation was reasonable; however, because on a motion-to-dismiss stage all reasonable inferences must be construed in favor of the non-moving party, the court highlighted that a different reasonable interpretation existed, too. Because it was possible that non-sexual bullying occurred over the course of the school year and continued before the sexual abuse allegation arose, the court drew the inference on unknown facts in favor of the Insured (as the motion to dismiss phase required). Thus, the court vacated the dismissal and remained the case for further proceeding.

In a coverage litigation matter, a New York federal court declined to decide whether a carrier owed a defense or indemnity to an insured because resolving the coverage dispute required determining whether the insured acted in an official or personal capacity, an issue the litigation court was better positioned to decide. The New York court concluded that deciding the issue before the Colorado court ruled could create inconsistent findings about the insured’s conduct.

The underlying Colorado action involved a nonprofit organization and several of its directors, collectively (the “Nonprofit”), who alleged that their former business partner (the “Partner”) and board member defamed them and interfered with their business relationships by making knowingly false statements to influential donors and organizations. The alleged statements purportedly resulted in terminated contracts, withdrawn donations, and organizations disavowing the plaintiffs. The Nonprofit initially sued the Partner and three related entities, alleging that the Partner acted both individually and in a representative capacity for the entities.

The carrier defended the Partner and the entities under a D&O policy issued to the entity. The policy covered wrongful acts committed by an insured person while acting as an executive or employee but excluded claims involving wrongful acts committed while the Partner served in any other capacity. Eventually, the entities were dismissed, and the Nonprofit filed an amended complaint naming the Partner individually. The amended complaint removed allegations that the Partner acted in a representative capacity and emphasized that they acted for their own personal benefit.

Following the amended complaint, the carrier sent the Partner a reservation of rights letter asserting its right to file a declaratory judgment action that it no longer had a duty to defend the Partner in the Colorado litigation. The carrier argued that the amended complaint alleged only personal conduct which was expressly excluded by the policy. The carrier also sought to rely on additional exclusions and to recoup defense costs if the court determined that no coverage existed.

The court concluded that deciding the duty-to-defend issue would require it to determine whether the Partner acted in an official or personal capacity. Because that issue remained relevant to the Colorado litigation, the Colorado court was the more appropriate forum to resolve it. The carrier argued that only two outcomes were possible (1) either the Partner acted in their official capacity, in which case the settlement agreement would eliminate their liability, or (2) they acted in their personal capacity, in which case the policy would not provide coverage. The court disagreed, explaining that the Partner could be found liable even if they acted in their official capacity, because the settlement agreement might preserve claims against them individually. The Colorado court could instead determine that the release did not apply while also finding that some of the insured’s conduct occurred in an official capacity.