No Coverage for Wrongful Termination Claim After Employer Ceased to be an Insured Under D&O Policy

The United States District Court for Montana, applying Canadian (Ontario) law, has ruled that an entity had no coverage under a D&O policy for a claim alleging wrongful termination one month after the entity ceased to be a subsidiary of the named insured. Dunluck v. Assicuranzioni Generali S.P.A. – UK Branch, 2022 WL 684377 (D. Mont. Mar. 8, 2022). The court also ruled that the claim was not covered because it was not simultaneously “commenced and continuously maintained against an Insured Person” as the policy required. Id.

Several individuals were hired to work for a subsidiary of the named insured that sought to “develop a cannabidiol processing plant in Eureka, Montana.” By the fall of 2019, the subsidiary began paying the employees with bad checks, although the employees continued to work for the subsidiary hoping that they would eventually receive the wages they were owed. On December 4, 2019, the insured parent and subsidiary executed an agreement whereby each company gave up its shares in the other, terminating the parent-subsidiary relationship. On February 26, 2020, the employees sued the subsidiary, complaining that they were terminated on January 4, 2020. They ultimately secured a default judgment against the subsidiary, with the court finding that the subsidiary had wrongfully terminated the employees without cause on or about January 4, 2020. The employees then sought to recover under the D&O policy issued to the subsidiary’s former parent.

In ensuing coverage litigation, the court agreed with the D&O insurer that the lawsuit was not covered under the policy. 

First, the court ruled that there was no coverage under the policy because the subsidiary was not an “Insured” on January 4, 2020, when the employees alleged they were wrongfully terminated by the insured. Instead, the court noted that the subsidiary was not entitled to insured status after it ceased to be a “subsidiary” on December 4, 2019. The court applied the definition of “management control” set forth in the policy and found no evidence to suggest that the parent retained “management control” over the subsidiary after that date. The court also rejected the argument that the insurer could be liable for a constructive discharge on or before December 4, 2019, noting that no constructive discharge theory was advanced in the underlying litigation that resulted in the judgment being entered against the subsidiary.

Second, the court independently ruled that no coverage existed because none of the subsidiary’s officers or directors were sued in the underlying state court lawsuit. The relevant insuring agreement provided that “no coverage is provided to a Named Organization under this Coverage Extension unless such Claim is commenced and continuously maintained against an Insured Person.” “Insured Person," in turn, was defined to include the general partners of the subsidiary (as it was organized as a limited liability company). The court determined that there was no coverage because the underlying lawsuit was against the subsidiary alone, and not against any directors or officers of the subsidiary.  The court ruled the policy language to be unambiguous, and it rejected the argument that the outcome rendered coverage illusory or was otherwise against public policy.

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