A simple example: if a director of Company A, a bank, also owns an unrelated amusement park, Company A’s D&O policy will not generally respond to claims related to the director’s activities as the owner (or manager or officer or director) of that amusement park. The reason is simple: the insurer of Company A agreed to cover the risks related to Company A, a bank, not an amusement park. Similarly, D&O policies do not respond to claims arising from the personal lives of the insured, such as divorce actions1.
Life, however, is not always so cut and dried.
Take the recent case, Goggin v. National Union Fire Insurance Company of Pittsburgh, PA2. (“Goggin”). Goggin involves claims against two individuals who were directors of U.S. Coal. The individuals were defendants in a case brought by the U.S. Coal bankruptcy trustee. After U.S. Coal’s D&O carrier denied coverage, the individuals sued. They moved for judgment on the pleadings. The Delaware Chancery Court denied the motion.
While the individuals were directors of the insured, U.S. Coal, the acts alleged involved two investment vehicles, of which they were members/managers. According to the court, they attempted to “reinvigorate” U.S. Coal through debt purchase and other capital restructuring. These investment vehicles were not insureds under the U.S. Coal policy. The allegations are that the individuals used these investment vehicles for their own personal enrichment. The opinion did not contain specifics of how this was accomplished.
The court found that the acts alleged against the individuals— siphoning money from U.S. Coal’s creditors—were not acts undertaken in the capacity as directors of U.S. Coal, but actions undertaken as member/managers of the investment vehicles. The court examined “arising out of” and found, in effect, even there were claims arising out of the insured capacity of directors, those claims did not arise solely from that capacity. Rather, it was the activities of the investment vehicles (and the individuals’ role therewith) which gave rise to the claims.
The insureds argued that they had been sued largely for “conflict of interest” in their capacity as directors—that is, had they not been directors, there would have been no suit against them.
The insured’s argument has some merit—had they not been directors, would they even have been in the position to make the investment decisions that they made? Further, the insureds argued that the crux of the claims was “conflict of interest” in their capacity as directors—that is, had they not been directors, there would have been no suit against them. In rejecting this argument, the court found that the individuals could not have performed the misdeeds alleged had they not controlled the investment vehicles. That was enough to satisfy the “but for”3 test.
In coming to this conclusion, the court focused on the language of Exclusion 4(g), the policy which stated that
The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an insured:
(g) alleging, arising out of, based upon or attributable to any actual or alleged act or omission of an Individual Insured serving in any capacity, other than as an Executive or Employee of a Company, or as an Outside Entity Executive of an Outside Entity4 (emphasis added).
The court found that although the allegations were partially grounded in the individuals’ insured capacity, that is, in their capacity as directors of U.S. Coal, the allegations also “arose out of” or were “attributable to” their capacity as members/managers of the investment vehicles.
According to those factual allegations and the claims asserted in the FAC, the Court concludes that the Trustee Claims—which give rise to this declaratory action—would not have been established “but-for” Goggin and Goodwin’s alleged ECM-related misconduct. Indeed, the alleged formation and use of the ECM Entities to engage in selfinterested dealing benefiting themselves and those ECM Entities, all at the expense of U.S. Coal, are no collateral matters but rather the core of the Trustee Claims. “But for” Goggin and Goodwin’s roles as members/managers of ECM Entities, the FAC claims would fail.5
What does this mean for our clients?
As with all litigation, this case is fact-specific. The exact wording of the policy, the activities of the insured and the precise allegations of the claim form the basis of a unique situation.
The most important lessons, however, can be clearly stated:
- Every word of the policy counts.
- Courts will not rewrite policies to expand coverage.
Every word of the policy counts.
In the policy at issue, coverage was triggered by a claim against the directors in their capacity as directors. Coverage was excluded for any claim that arose from or involved actions undertaken in a different capacity. In a case in which claims alleging actions undertaken in both capacities, the claim would be excluded from coverage.
Courts will not rewrite policies to expand coverage.
While the court noted that some of the allegations of the claims did arise from the individuals’ insured capacity, those allegations also involved actions performed in an uninsured capacity. Had the insureds not performed actions as member/managers of the investment vehicles (“but for”), they would not be facing the particular claims at issue in this case.
In the court’s words: “A claim does not ‘arise out of’ a circumstance or conduct if, independent of that circumstance or conduct, the claim is still valid.” The claims against the individuals were still valid, whether they had been directors or not.
Could this case have been decided differently?
This may not be the end of judicial determination in this matter. One key factor is the case’s procedural position. This opinion was rendered after the individuals moved for “judgment on the pleadings,” meaning that the court was limited in its consideration to the basic pleadings. Based on that very information, the court could not decide disputed facts or review discovery, as none were before it.
It is entirely possible that, after discovery is undertaken and further facts developed, the court would come to a different conclusion.
Capacity is a bedrock issue for D&O carriers, however, and it is likely that the carrier will vigorously resist any effort to expand coverage to uninsured capacities.
As always, Gallagher professionals are ready to assist.
Important Note: This publication of Advisor is not intended to offer legal advice. Any descriptions of coverage provided herein are not intended as an interpretation of coverage. Policy descriptions do not include all the policy terms and conditions contained in an actual policy, and should not be relied on for coverage interpretations. An actual insurance policy must always be consulted for full coverage details.
- One reason such questions arise is that many modern corporations provide far-reaching indemnification for managers. It is important to note that D&O insurance is not co-terminus with such indemnification obligations.
- No. N17C-10-083 PRW CCLD (Super. Ct. Del. Nov. 30, 2018).
- “But for” the individuals’ role controlling the investment vehicles, they could not have committed the acts alleged.
- “Outside Entity” is a defined term in the policy. There was no allegation that the investment vehicles met the definition of “Outside Entity.”
- Goggin v. Nat’l Union Fire Ins. Co., 2018 Del. Super. LEXIS 1533, *12, 2018 WL 6266195