Fortunately, they don't always succeed, as evidenced by the recent decision discussed below.
I have returned from vacation and a lot of work that has kept me away from posting. But I am hopefully back in the swing of things now.
One of the many ways that some insurance companies try to avoid honoring their obligations under D&O insurance policies is to claim that one of the many insureds included within the coverage of the policy took some action that assisted the plaintiffs in the lawsuit against the company and its directors and officers. In doing so, they rely upon the insured vs. insured exclusion. That exclusion is frequently called by way of shorthand the IVI exclusion.
It is a good thing that so many people are insureds under the policy because of the need for a company to protect as many officers and directors as possible. But it is a bad thing when one of the numerous insureds claims to have been hurt by the others or even cooperates with the plaintiffs, thus arguably triggering the IVI exclusion. I litigated one such suit several years ago when the only thing two former officers of an indirect subsidiary of the company being sued -- who were insureds under the breadth of the policy's coverage -- did was to talk by phone for about 15 minutes to the plaintiff's attorney. (More about that below). When one insured participates or assists the plaintiffs, many carriers will seek to deny coverage to the entire group of insureds (the company and its directors and officers) based upon the IVI exclusion.
Fortunately, not all courts are willing to buy into the insurer party line. In the recently issued decision of Chartrand v. Illinois Union Insurance Co. et al., No. 08-5805, 2009 WL 2776484 (N.D. Cal. Aug. 28, 2009), the federal district court in California ruled that the carrier, Illinois Union, was not entitled to summary judgment in its favor and instead granted summary judgment in favor of the insureds. In this case, one of the plaintiffs was a new investor in the insured company being sued who claimed that he (and the other investor poaintiffs) had paid too much for the company because of alleged wrongdoings and mis-statements by the former owners. The problem was that he had recently been appointed chairman of the company and thus was now an insured under the policy and was suing other insureds, the former officers. The other investor-plaintiffs were not directors or officers and thus were not insureds under the policy.
The court gave short shrift to Illinois Union's argument that its entire coverage obligation was voided because one of many plaintiffs was an insured. The court held that only the costs allocable to the defense of the claims by that single plaintiff insured were not covered under the policy and that the duty to defend and pay defense costs for the remainder existed. Given that most defense costs in these types of lawsuits go to the defense of the entire action and not to the claim of a single claimant, the practical reality is that the insured defendants will likely be entitled to virtually all of their defense costs.
The case that I litigated, mentioned above, was Harris v. Gulf Insurance Co., 297 F.Supp 2d 1220 (ND Cal) 2003). The facts upon which the carrier predicated its denial of coverage were even slimmer than those in the Illinois Union case. In Harris v. Gulf, two former officers of indirect subsidiaries of the insured, who were not parties to the litigation against other former directors, agreed to spoke with and did briefly speak with an investigator for the suing plaintiffs. That was all they did. Not much assistance but it was enough for Gulf to try to defeat all coverage for all of the defendant officers and directors who were sued. No evidence existed that the two former officers who spoke with the investigator intended to help or aid the prosecution of the litigation or were going to benefit in any way. The district court held that the critical fact that was missing that was required to sustain Illinois Union's denial of coverage was any intent by the two former officer-insureds to obtain any benefit whatever from their cooperation. The court accordingly granted summary judgment for the policyholders and ordered Gulf to pay the defense costs of the litigation against the directors and officers. The court also held that allowing the draconian interpretation asserted by Gulf was dangerously close to inviting a violation of public policy.
For reasons that were never clear, Gulf took this case to the Ninth Circuit, apparently assuming the pro-insured decison would be reversed and taken off of the books. Gulf erred in its assessment. The Ninth Circuit, rather, affirmed the district court in an unpublished slip opinion, the case settled shortly thereafter, and the decision by the district court remains good law today.
The moral of these two cases is simple: when the stakes are high, as they most always are in these types of D&O coverage disputes, an insured needs to be ever vigilant and perhaps aggressive when dealing with its carriers as the carriers will often themselves be quite aggressive in seeking to deny coverage.
I have returned from vacation and a lot of work that has kept me away from posting. But I am hopefully back in the swing of things now.
One of the many ways that some insurance companies try to avoid honoring their obligations under D&O insurance policies is to claim that one of the many insureds included within the coverage of the policy took some action that assisted the plaintiffs in the lawsuit against the company and its directors and officers. In doing so, they rely upon the insured vs. insured exclusion. That exclusion is frequently called by way of shorthand the IVI exclusion.
It is a good thing that so many people are insureds under the policy because of the need for a company to protect as many officers and directors as possible. But it is a bad thing when one of the numerous insureds claims to have been hurt by the others or even cooperates with the plaintiffs, thus arguably triggering the IVI exclusion. I litigated one such suit several years ago when the only thing two former officers of an indirect subsidiary of the company being sued -- who were insureds under the breadth of the policy's coverage -- did was to talk by phone for about 15 minutes to the plaintiff's attorney. (More about that below). When one insured participates or assists the plaintiffs, many carriers will seek to deny coverage to the entire group of insureds (the company and its directors and officers) based upon the IVI exclusion.
Fortunately, not all courts are willing to buy into the insurer party line. In the recently issued decision of Chartrand v. Illinois Union Insurance Co. et al., No. 08-5805, 2009 WL 2776484 (N.D. Cal. Aug. 28, 2009), the federal district court in California ruled that the carrier, Illinois Union, was not entitled to summary judgment in its favor and instead granted summary judgment in favor of the insureds. In this case, one of the plaintiffs was a new investor in the insured company being sued who claimed that he (and the other investor poaintiffs) had paid too much for the company because of alleged wrongdoings and mis-statements by the former owners. The problem was that he had recently been appointed chairman of the company and thus was now an insured under the policy and was suing other insureds, the former officers. The other investor-plaintiffs were not directors or officers and thus were not insureds under the policy.
The court gave short shrift to Illinois Union's argument that its entire coverage obligation was voided because one of many plaintiffs was an insured. The court held that only the costs allocable to the defense of the claims by that single plaintiff insured were not covered under the policy and that the duty to defend and pay defense costs for the remainder existed. Given that most defense costs in these types of lawsuits go to the defense of the entire action and not to the claim of a single claimant, the practical reality is that the insured defendants will likely be entitled to virtually all of their defense costs.
The case that I litigated, mentioned above, was Harris v. Gulf Insurance Co., 297 F.Supp 2d 1220 (ND Cal) 2003). The facts upon which the carrier predicated its denial of coverage were even slimmer than those in the Illinois Union case. In Harris v. Gulf, two former officers of indirect subsidiaries of the insured, who were not parties to the litigation against other former directors, agreed to spoke with and did briefly speak with an investigator for the suing plaintiffs. That was all they did. Not much assistance but it was enough for Gulf to try to defeat all coverage for all of the defendant officers and directors who were sued. No evidence existed that the two former officers who spoke with the investigator intended to help or aid the prosecution of the litigation or were going to benefit in any way. The district court held that the critical fact that was missing that was required to sustain Illinois Union's denial of coverage was any intent by the two former officer-insureds to obtain any benefit whatever from their cooperation. The court accordingly granted summary judgment for the policyholders and ordered Gulf to pay the defense costs of the litigation against the directors and officers. The court also held that allowing the draconian interpretation asserted by Gulf was dangerously close to inviting a violation of public policy.
For reasons that were never clear, Gulf took this case to the Ninth Circuit, apparently assuming the pro-insured decison would be reversed and taken off of the books. Gulf erred in its assessment. The Ninth Circuit, rather, affirmed the district court in an unpublished slip opinion, the case settled shortly thereafter, and the decision by the district court remains good law today.
The moral of these two cases is simple: when the stakes are high, as they most always are in these types of D&O coverage disputes, an insured needs to be ever vigilant and perhaps aggressive when dealing with its carriers as the carriers will often themselves be quite aggressive in seeking to deny coverage.
