No Coverage for Individual for Claims Based on Role Outside of Insured Organization
A North Dakota federal district court, applying Idaho law, has ruled that a series of underlying antitrust lawsuits against an individual and several other defendants did not allege a “wrongful act” by the individual under the terms of a company’s D&O policy because the allegations involved the individual’s conduct on his own behalf, and in his capacity as chairman of different company, not for his role as a director of the insured company. Offutt v. Twin City Fire Ins. Co., No. 3:13-cv-00054-RRE-KKK (N.D. Sept. 26, 2014). The court ruled, in the alternative, that coverage would be barred because the policy at issue excluded loss related to the individual’s conduct on behalf of a company other than the company to which the policy was issued.
An individual was the founder and chairman of a potato grower and processor. That company, through two of its subsidiaries, owned a 54% stake in a manufacturer of mashed potato products and dehydrated potato products. The individual also held a seat on the board of the potato products company. The grower/processor, the products company, and the individual were all named in a series of lawsuits alleging that the defendants violated antitrust laws by manipulating the potato market to increase the price of fresh potatoes.
The products company was insured under a D&O policy. The individual sought coverage under that policy, but the insurer denied coverage on a number of grounds. First, the insurer argued that the underlying suits did not allege a “wrongful act,” which was defined to include conduct “by an Insured Person in their capacity as such.” In addition, the policy barred coverage for any action “arising from, or in any way related to such Insured Person’s service, at any time, as a director, officer, trustee, regent, governor or equivalent executive … of any entity other than an Insured Entity ….” Coverage litigation ensued.
On cross motions for summary judgment, the court ruled in favor of the insurer. First, the court observed the split of authority with regard to the duty to defend versus the duty to advance, noting that some courts require insurers to advance costs of defense if there is a possibility of coverage while other courts require advancement only if the insured proves that the claims actually fall within the scope of coverage. After finding that this was an open question under Idaho law, the court predicted that Idaho courts would take the “progressive” approach and require advancement if there was the potential for coverage, provided there was “some link” between the underlying lawsuit and the insurance policy at issue.
However, with respect to coverage, the court held that the suit did not allege that the individual committed a “wrongful act” because the relevant allegations all concerned the individual’s conduct in his own capacity and on behalf of the grower/processor, and not in his capacity as a director of the products company. In so ruling, the court rejected the individual’s reliance on certain allegations that the products company’s conduct was “performed by their respective officers, directors, agents, employees or representatives while actively engaged in the management, direction, control or transaction of the [products company’s] business affairs,” ruling instead that those allegations were “merely an axiom of corporate law,” not an allegation that the individual personally committed a “wrongful act” in his capacity as a director of the company. As a result, the court ruled that the insuring clause of the products company’s D&O policy was not triggered as to the claims against the individual.
Alternatively, the court ruled that even if the underlying suits did allege a “wrongful act,” there would be no coverage because of an exclusion barring coverage for loss “based upon, arising from, or in any way related to [an] Insured Person’s service, at any time, as a director, officer, trustee, regent, governor or equivalent executive or as an employee of any entity other than an Insured Entity.” The court noted that the allegations against the individual in the underlying suits related to his position as chairman of the grower/processor, and it ruled that they therefore fell “squarely” within the exclusion.