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1st Circuit: Individual Parties Must Be Named for D&O Coverage to Apply
The National Law Journal
October 12, 2009
The 1st U.S. Circuit Court of Appeals recently ruled that companies cannot recover the cost of fighting lawsuits or administrative cases alleging wrongful director or officer conduct unless the cases name the individuals as parties.
In a Thursday ruling in Medical Mutual Insurance Co. of Maine v. Indian Harbor Insurance Co., Judge Bruce Selya affirmed the District of Maine's summary judgment for Indian Harbor.
Selya wrote that directors and officers (D&O) policies exist to protect corporate directors and officers, not corporations, from personal liability from lawsuits.
"The position advanced by the company in this case -- extending coverage to situations in which the directors and officers are not themselves the actual targets of the claims made -- would if accepted transmogrify D&O policies into comprehensive corporate liability policies," Selya wrote.
The district court case stemmed from Indian Harbor's refusal to reimburse Medical Mutual for its $325,000 settlement of another District of Maine case filed by former chief executive officer Patrick Dowling against the company, Dowling v. Medical Mutual Insurance Co. of Maine Inc. Dowling sued Medical Mutual for disability discrimination, breach of contract and intentional and negligent infliction of emotional distress. Although Dowling's case alleged that Medical Mutual's directors and their agents engaged in wrongful conduct, it did not name any directors and officers as defendants.
This case is different from other disputes involving the reach of D&O coverage because the insurance policy at issue defined a claim as "any civil proceeding," said Jeffrey Edwards, a litigation partner at Portland, Maine-based Preti Flaherty Beliveau & Pachios who represented Medical Mutual.
"If Indian Harbor's policy had defined a claim as any civil proceeding that included directors and officers as named defendants in the caption with a claim for financial relief, if the claim had been that explicitly defined, this coverage litigation would not have ensued," Edwards said. "They left that vague and clunky."
Leslie Ahari, a Tyson's Corner, Va., D&O and professional liability partner at Atlanta-based Troutman Sanders and Louise Thomas, a litigation partner at Portland, Maine-based Pierce Atwood, represented Indian Harbor. Neither could be reached for comment.
D&O policies frequently have a corporate liability section, but it appears from the 1st Circuit opinion that Medical Mutual did not have that type of coverage, said Michael Duffy, managing partner at Boston's Peabody & Arnold, who specializes in insurance coverage. Duffy was not involved in the case.
"[The ruling] restates what is the generally accepted rule, which is that corporate indemnification coverage under a D&O policy is not implicated unless you have individual directors and officers named as defendants," said Duffy.
