In these economic times, every company needs directors’ and officers’ (D&O) insurance to protect those running the business. D&O insurance is one of the cornerstones of any insurance program for a publicly traded company. However, many directors and officers are unaware of the scope of the coverage and what is needed to avail themselves of coverage.
The 9th Circuit recently addressed triggering D&O coverage in Goerner v. Axis Re-Insurance Co., 2010 U.S. App. LEXIS 21624 (9th Cir., Oct. 20, 2010). The lower court ruled that Axis Re did not owe a duty to defend the CEO of TransDimension, Inc. The court held that “the underlying complaint did not specifically allege that Goerner acted in his capacity as Chief Executive Officer.” It is a surprise to many that they have insurance, but cannot access it when they become a victim of the plaintiff’s allegation in the complaint that in essence pleads them out of coverage.
The CEO appealed and won a reversal in the 9th Circuit. On appeal Axis Re argued that the complaint failed to allege that the plaintiff’s losses arose from actions that Goerner took in his capacity as CEO of TransDimension. Thus, the insurer asserted that it was relieved of its duty to defend. In analyzing the issue, the appellate court noted that “[t]he guiding consideration is whether ‘the insured would reasonably expect a defense by the insurer.’” The court highlights that fact that under Axis’ interpretation, the insured would lose coverage if he did undertake the actions as CEO but the plaintiff did not plead such.
As the court noted, “ . . . an insured would reasonably expect coverage for actions taken in the capacity of director or officer of an insured company, whether or not that capacity was alleged by the third-party plaintiff.” In this instance, the court found that Goerner meet his burden on summary judgment that the alleged actions could have been taken in his capacity as CEO, thereby giving rise to possible coverage under Axis D&O policy.
D&O coverage is a necessary component to a corporate insurance program. Unfortunately, plaintiffs may create situations through their allegations that actually eliminate coverage under the policy. This is particularly true for the indemnity obligations. In such instances, it is critical to provide information to the insurers demonstrating the true nature of the situation and that the acts at issue fall within coverage. Of course, heightened care is needed in jurisdictions that strictly follow the “Eight Corners” rule. Getting an early jump on the coverage analysis is critical when looking to D&O coverage. Finally, just to make it more confusing the whole situation gets exponentially more complicated in foreign jurisdictions where a parent company’s master D&O program is involved.