Indemnification Demands Made by Stock Option Plan Trustee Not “Fiduciary Claims” for “Wrongful Acts”

Applying Texas law, the United States District Court for the Eastern District of Texas granted an insurer’s motion to dismiss where an insured sought fiduciary liability coverage for amounts it paid to defend and indemnify the trustee for the insured company’s Stock Option Plan under an agreement between the two.  Martin Resource Mgmt. Corp. v. Fed. Ins. Corp., No. 6:20-cv-00083, 2020 WL 4550395 (E.D. Tex. Aug. 6, 2020).

A company that acted as a trustee for the insured’s Stock Option Plan faced two class action lawsuits for its acts pertaining to that work.  In turn, the trustee sent two demand letters to the insured, asking for a defense and indemnification against the lawsuits.  The insured defended and indemnified the trustee under an indemnification agreement between the two parties, and subsequently sought coverage for those costs from its insurer.  In the ensuing coverage litigation, the insurer filed a motion to dismiss the case on the ground that the demand letters did not trigger the policy’s fiduciary liability insuring agreement because they arose solely under an indemnity agreement between the insured and the trustee, not from the insured’s “wrongful acts.”  The insurer further argued that the demand letters did not constitute a “fiduciary claim” made against the insured for a “wrongful act” by the insured, as those terms were defined in the policy.

The court sided with the insurer and granted the motion to dismiss.  The court reasoned that, while the trustee’s demands may have constituted “fiduciary claims” under the policy’s definition of that term, those claims were not for “wrongful acts”; rather, they were claims made pursuant to the trustee’s own indemnity agreement with the insured.  Furthermore, although the plaintiffs in the lawsuits may have alleged that the insured committed “wrongful acts” as defined in the policy, those allegations did not constitute “fiduciary claims” against the insured because they were made against the trustee, not the insured.



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