Courts Continue Broad Interpretations of D&O Provisions

A luxury vehicle company recently initiated a coverage lawsuit against its Directors & Officers (“D&O”) and Excess carriers. The coverage action is styled as Driven Lifestyle, LLC, et al. v. RSUI Indemnity Co., et al., Case No. 1:26-cv-20812, U.S.D.C. Southern District of Florida. The underlying action alleged that the company and several of its executives engaged in wrongful business conduct against a competing company, such as assisting one of their employees in her breach of fiduciary duty toward her former employer. The insurers conceded that the claims satisfied the requirements of the policy’s basic insuring agreement, but both carriers denied any obligation to defend or indemnify based on various exclusions.  

Coverage counsel for the insured wrote to explain why the exclusions did not apply. For example, the “Intellectual Property” exclusion only applied to “Insured Organizations,” meaning it could not preclude potential coverage for the claims against the individuals. The coverage complaint also alleges that “the cause of action in the Underlying Lawsuit that RSUI relied on to argue that the Telecommunications Exclusion applied was not asserted against Mr. Cunningham, meaning even by RSUI’s own erroneous reasoning, the Telecommunications Exclusion would not apply to him.”  

Luckily, many decisions addressing D&O policies have shut down insurers similarly relying on overbroad constructions of exclusions. For example, the Delaware Supreme Court addressed another wrongful denial by the same insurer in RSUI Indem. Co. v. Murdock, 248 A.3d 887 (Del. 2021). The court reasoned that because the plain meaning of a “Profit/Fraud” exclusion required a “final and nonappealable adjudication” and no adjudication addressed the alleged fraudulent conduct, to read such language to bar coverage for the alleged fraud claims would not be in accord with the Insured’s reasonable expectations. RSUI was also corrected in a federal court decision in the Eastern District of New York. In North. Metro. Found. for Healthcare, Inc. v. RSUI Indem. Co., No. 20-CV-2224(EK)(JAM), 2024 WL 4266007 (E.D.N.Y. Sept. 23, 2024). The insurer argued that the Government Funding provision barred coverage for the underlying qui tam action on the ground that the FCA causes of action included a “request to return. . . funds.” The court disagreed: “That definition does not encompass the relators’ qui tam claims, which sought to do more than put the government ‘back to or in a former position.’ . . . . [T]he relators explicitly requested ‘treble the United States’ damages,’ plus “an $11,000 penalty for each and every false or fraudulent claim,” accompanied by attorney's fees and the ‘relator's share.’” Id. at *4.  

For more analysis of cases addressing D&O coverage, see David A. Gauntlett, New Case Continues Trend Determining D&O Policies Offer Broad Coverage, https://lnkd.in/ghr_DJQD (Dec. 12, 2024).