‘Wrongful Acts’ Includes Both Negligent and Intentional Acts

The United States District Court for the Northern District of Illinois, applying Illinois law, has held that an insurer had a duty to defend an insured condominium association and its board members against an underlying lawsuit because the association’s board members allegedly committed “Wrongful Acts” under the directors and officers coverage part of a business liability policy. Cambridge Mut. Fire Ins. Co. v. Bell & Arthur Condo. Ass’n, et al., 2022 WL 13827758 (N.D. Ill. Oct. 21, 2022). In doing so, the court interpreted “Wrongful Acts” to include both negligent and intentional acts. The court also held that the policy’s conduct exclusion did not preclude coverage because the underlying lawsuit did not allege any intent to mislead or defraud on the part of the insureds.

Owners of an insured association’s condominiums brought a lawsuit in state court for multiple torts, accusing the association and its board members of mismanagement. Among other things, the association and board members allegedly violated the municipal code, caused property damage and bodily injury, failed to allow a records inspection, and breached their fiduciary duty by adopting rules and regulations through procedures that violated Illinois law. After receiving notice of the underlying lawsuit, the association’s business liability insurer sought a declaratory judgment that it owed no duty to defend under the directors and officers coverage of its policy.

The court held that the duty to defend applied to both the board members and the association. The duty to defend provision in the directors and officers coverage section stated that the insurer has “the right and duty to defend the insured against any ‘suit’[.]” “Suit,” in turn, was defined as a “civil proceeding in which damages because of ‘Wrongful Acts’ to which this insurance applies are alleged.” The court held that the insurer’s duty to defend extended to claims against the association arising from the board members’ “Wrongful Acts.” Because “insured” was not defined in the directors and officers coverage section, the court looked to the business liability coverage form, which defined “insured” to mean the association and its board members. The court further held that, even if the insurer only had a duty to indemnify the board members for their “Wrongful Acts,” the insurer had to defend both the board members and the association from suits premised upon those acts.

The court held that the insurer had a duty to defend because the complaint alleged “Wrongful Acts” by the association’s board members. The policy defined “Wrongful Acts” to mean “any negligent act, any error, omission or breach of duty of directors or officers of the ‘Named Insured’ while acting in their capacity as such.” In doing so, the court determined that two of the underlying claims satisfied the policy definition of “Wrongful Acts” – a count asserting the board members’ failure to allow a records inspection and a count for breach of fiduciary duty.

The court rejected the insurer’s argument that the policy excluded any intentional conduct as well as “dishonest, fraudulent, criminal, or malicious acts.” First, the court opined that intentional acts could be construed as errors, omissions, or breaches of duty within the policy definition of “Wrongful Acts.” The court noted that the phrase “any negligent act, any error, omission or breach of duty” was ambiguous as it was “either missing a conjunction before the second ‘any’ or the second ‘any’ was surplusage,” such that if “negligent” was meant to modify the other terms in the definition, the second “any” would have no meaning. The court resolved the ambiguity in favor of the insured, noting that the policy language showed that the insurer knew how to exclude and could have excluded intentional conduct from coverage. Second, the court determined that, even if the policy covered only negligent errors, omissions, or breaches, the underlying conduct was plausibly negligent or careless because there was no indication that the association and the board members intended to mislead or defraud the underlying plaintiffs, noting that “failure to follow rigidly certain procedures and laws in [adopting rules] also potentially encompasses negligent conduct.” Further, the court noted that the complaint “allege[d], in the alternative, that the defendants failed to follow the rules and caused injury even ‘[a]ssuming there was no misrepresentation.’”

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