Court Sees Interrelated Acts as Single Act in Director and Officer Liability Case

When Can Insurance Companies Refuse to Pay D&O Liability Insurance Claims?

A recent lawsuit in a Maryland federal court over insurance coverage for litigation costs raises important director and officer liability insurance issues. Because of the court’s view of the meaning of “interrelated” wrongful acts, the D&O liability insurance policy in question did not apply, and the insurer did not have to pay the claim.

The lawsuit involved the issue of whether Continental Casualty was required to cover defense costs in a 2010 lawsuit brought by a trustee of International Benefits Group (IBG) against Haymount Limited Partnership.

The 2010 case was the second case brought by IBG against Haymount. The first was in 2006, when IBG claimed that Haymount had committed breach of contract in failing to honor a $3 million finders fee agreement. The 2006 proceeding led to a judgment of $4.4 million against Haymount.

IBG was not able to recover these damages, however, and sued in Haymount and its owner, Edward J. Miller Jr., in 2010 alleging that they conspired to fraudulently transfer assets to avoid paying the multi-million-dollar judgment.

Miller later sued Continental Casualty to recover the defense costs incurred in litigating the 2010 case. Continental’s policy covered directors, officers and the corporate entity for claims filed between 2010 and 2011. The policy stated that only claims during this period would be covered and that interrelated wrongful acts would be counted as a single claim.

It defined interrelated wrongful acts as being logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.

The court in the 2014 case concluded that the 2010 case was based on wrongful acts interrelated with those of the 2006 case and that they all stemmed from the same common scheme or nexusHaymount and Miller’s effort to avoid paying the finder’s fee to IBG. Because the dispute over these interrelated wrongful acts began in 2006, the court concluded that the 2010-2011 policy coverage did not apply.

The case could have important implications for directors, officers, and corporate counsel over whether their director and officer liability insurance will protect them. While the “interrelatedness” of the wrongful acts here may seem somewhat clear, there can be instances when it may be less so. In those situations, directors and officers will need to determine whether their current actions are linked to others years before in a way that might mean that their current coverage is not applicable.

An experienced business lawyer can advise you on all aspects of your potential liability as a member of a board of directors or corporate officer and help you minimize your exposure to risk. The corporate attorneys at Longman & Van Grack counsel all types of businesses, large and small, public and private, on a wide range of corporate governance and litigation issues. Call us in Bethesda or Rockville, Maryland at (301) 291-5027 for a confidential consultation today.