With increased prosecutorial and regulatory focus directed at holding individuals to account and the steady drumbeat of private shareholder litigation aimed at individual defendants, adequate insurance coverage for officers and directors is indispensable for corporate executives and directors. But generous policy limits may provide false comfort. Southern District Judge Paul Engelmayer’s decision in XL Specialty Insurance v. Level Global Investors,1 serves as a warning that the conduct of a single covered individual can jeopardize coverage for the entire group of insureds in a way few might have anticipated.
In Level Global, the primary D&O insurer for Level Global and several of its officers (collectively, the Level Global parties) asserted that it was relieved of any duty to cover defense costs for the Level Global parties because of one "renegade" employee’s prior knowledge of undisclosed facts giving rise to a claim. The Level Global parties sought and obtained a preliminary injunction requiring the insurer to continue to advance defense costs. They prevailed only because the court found that the policy was ambiguous on the question of whether a single insured’s undisclosed knowledge was sufficient to void coverage for "innocent insureds" in connection with a related claim. Thus, despite the positive result for the insureds in Level Global, the case raises serious questions as to whether the very risk companies and their employees are trying to insure against in a D&O policy can result in forfeiture of that coverage.
