Directors and officers policy does not cover executive-induced decline of company (US)

Patrick Bracher

A California company specialising in plumbing fixtures unsuccessfully sought cover under a directors and officers policy for a claim brought by three former directors based on the decline of the business because of the chief executive’s erratic behaviour.

The court held that the so-called ‘insured-v-insured’ exclusion unambiguously bars coverage for a claim such as that because the ex-directors qualified as insureds under the policy and actively participated in the litigation.

This form of exclusion is common in D&O policies and the same result would follow in South Africa.

Although there was an exception to the insured-v-insured exclusion for shareholder derivative actions, the exception did not apply because the claim was by the company itself even though it was pursued by ex-directors who were also minority shareholders. Despite the gross mismanagement and breaches of fiduciary duties no claim was possible under the policy.

This form of exclusion is common in D&O policies and the same result would follow in South Africa.

(The case is Sunrise Specialty Co. Inc. v Scottsdale Insurance Co., case number 3:16-cv-01461, in the US District Court for the Northern District of California, San Francisco Division).

First published by: Financial Institutions Legal Snapshot