Applying Montana law, the United States District Court for the District of Montana has held that a D&O policy’s personal profit exclusion, which was implicated by a finding of conversion against an insured director, did not relieve the insurer of the duty to advance defense costs for the other remaining causes of action against the director.  Johnson v. Federated Rural Elec. Ins. Exch., 2016 WL 7243526 (D. Mont. Dec. 14, 2016).

The insured director was sued for breach of fiduciary duty, conversion, unjust enrichment, constructive fraud, conspiracy, and tortious interference with business relations.  The insurer agreed to advance defense costs to the director subject to a reservation of rights, but the director filed suit alleging the insurer had failed to pay the full amount of fees and costs incurred in the underlying litigation.  While the coverage action was ongoing, the court in the underlying action found the director liable on one conversion claim for approximately $14,000.  The insurer issued an amended reservation of rights letter indicating that, due to the finding of conversion, the policy’s personal profit exclusion barred coverage for the underlying litigation.

The court agreed with the insurer that the director’s conversion implicated the personal profit exclusion, which barred coverage for “Loss in connection with any claim[] or claims made against the Insureds . . . which results in a finding of personal profit, gain or advantage.”  However, the court found that the “any claim” prefatory language signaled to an ordinary reader that individual claims should be segregated.  Therefore, the court considered each cause of action asserted against the director to be a separate claim.  Because the other causes of action were not “in connection with” or “inextricably related to” the conversion, the court found they were not subject to the exclusion.

Accordingly, the court held that the insurer had no further duty to advance defense costs for the conversion count but did have the duty to advance defense costs for the remaining causes of action.  Looking to Ninth Circuit precedent, the court further held that the insurer must advance defense costs at the time they were incurred because that was when the director was legally obligated to pay the costs.

The insurer also sought reimbursement of the defense costs already paid in connection with the conversion claim.  The court recognized that Montana law allows an insurer to recoup defense costs for claims outside the scope of coverage if the insurer timely and explicitly reserves the right of recoupment.  However, because the insurer’s first reservation of rights letter to the director did not explicitly reserve the right to recoup, the court held that the insurer was not entitled to reimbursement of defense costs related to the conversion claim.  The court noted that even if it were to allow reimbursement, it would be impossible to distinguish between defense costs advanced to defend the conversion claim as opposed to the other causes of action against the director.