“On Behalf Of” Requirement Narrows Defense Cost Recovery Under D&O Policy

The United States District Court for the Central District of California, applying California law, has held that an insurer was not required to cover attorneys’ fees for work performed for an insured’s special committees or for electronic data hosting because such fees were not incurred “on behalf of” the directors and officers. Sempra v. Assoc. Elec. & Gas Ins. Servs. Ltd., 2025 WL 3022284 (C.D. Cal. Aug. 13, 2025).

The directors and officers of an insured company were named as defendants in several derivative lawsuits and a securities class action following a natural gas leak at one of the insured’s facilities. The insured tendered the lawsuits to its D&O insurance carrier. The policy required the insurer to pay on behalf of the insured all “Ultimate Net Loss,” including “Defense Costs.” The policy defined “Defense Costs” to mean, in relevant part, “all reasonable fees and expenses incurred by or on behalf of the [directors] and [officers] in the investigation, negotiation, settlement or defense of any [Claim].” The insurer concluded that a portion of the insured’s legal fees qualified as covered “Defense Costs” but denied coverage for “redacted time entries, excessive billing rates, fees not incurred in defense of the claim [and] lack of documentation for expenses and insufficient description” because, among other reasons, they were not performed “on behalf of” the directors and officers. The insured sued for breach of contract, and the insurer moved for summary judgment.

The court granted the insurer’s motion in part. The court ruled in favor of the insurer with respect to fees incurred by a special matters committee and demand review committee because they were not incurred “on behalf of” the directors and officers but rather “on behalf of” the insured itself. In so holding, the court concluded that the term “on behalf of” was unambiguous and held that fees are incurred “on behalf of” the directors and officers “if and only if they are generated by one who acts with the intent to benefit the Directors and Officers.” The court also ruled that the insurer properly declined coverage for redacted invoices pertaining to the hosting and review of electronic data because they lacked sufficient connection to discovery and lacked evidence to show that the costs were incurred specifically for the defense of the directors and officers.

However, the court denied the insurer’s motion for summary judgment with respect to other deducted time entries, including work purportedly unrelated to the defense of the derivative lawsuits, redacted/vague time entries, rate caps, administrative costs, and overhead costs. The fact-specific nature of these amounts and conflicting expert testimony warranted further review by a special master.