Allegation That Officer was CEO of Insured Organization Sufficient to Survive Capacity Challenge to D&O Coverage

The United States District Court for the Central District of California, applying California law, has held that an underlying pleading sufficiently alleged that an individual was sued in an insured capacity as an officer of the insured company for purposes of surviving the insurer’s motion to dismiss the individual’s breach of contract counterclaim. Scottsdale Ins. Co. v. Bozorgi, No. CV 23-02094-MWF (AGRx) (C.D. Cal. Dec. 20, 2023). The court also held that the insured’s breach of good faith and fair dealing claim was sufficiently pled.

An individual was sued in two third-party complaints. The second third-party complaint alleged wrongful acts by the individual as a shareholder of the insured company, but also incorporated in all causes of action an allegation that the individual was the CEO of the insured company. After the dismissal of the first third-party complaint, the individual sought contribution from the insurer to a settlement of the second third-party complaint. The insurer refused to contribute and filed coverage litigation to determine the availability of coverage for the second third-party complaint. The individual asserted counterclaims for breach of contract and breach of the duty of good faith and fair dealing, which the insurer moved to dismiss.

Relying on cases discussing the duty to defend, the court held that the individual had made a prima facie showing that the second third-party complaint potentially implicated the insuring agreement. In so concluding, the court rejected the insurer’s argument that the individual was not entitled to coverage because he was sued in his capacity as a shareholder, rather than in an insured capacity as an officer of the insured company. The court found that the second third-party complaint incorporated allegations that the individual was the CEO of the insured company. As such, the court reasoned that it was not clear that the individual was sued solely in his capacity as a shareholder, such that the individual plausibly alleged a claim for breach of contract.

Further, the court held that the individual’s breach of the duty of good faith and fair dealing counterclaim was adequately pled because it sufficiently alleged a claim for breach of contract and also alleged that the insurer acted unreasonably in its coverage evaluation and investigation.