The First U.S. Circuit Court of Appeals recently ruled that companies cannot recover under their director and officer liability insurance the cost of defending lawsuits or administrative complaints alleging director or officer misconduct unless the individuals are themselves named as parties. In Medical Mutual Insurance Company of Maine v. Indian Harbor Insurance Company, 2009 WL 3210599 (1st Cir. 2009), Medical Mutual Insurance Company (“MMIC”) sought reimbursement from Indian Harbor Insurance Company (“Indian Harbor”) under its D&O liability insurance policy for a settlement paid to MMIC’s former CEO, Patrick Dowling, to resolve an employment discrimination claim. MMIC had sought reimbursement under the D&O policy despite the fact that Dowling had asserted his claims against MMIC alone, and not against any of MMIC’s directors or officers.

In April 2005, MMIC removed Dowling as CEO after he had suffered a stroke. Dowling filed an administrative complaint with the EEOC and the Maine Human Rights Commission, charging MMIC with disability discrimination. Upon receiving right to sue letters, Dowling sued MMIC in federal court. MMIC settled the case, paying Dowling $325,000.00. MMIC then made a claim for reimbursement under its D&O policy.

MMIC’s D&O policy included a standard “Side B” insuring agreement that provided, in relevant part:

The Insurer should pay on behalf of the Company Loss which the Company is required or permitted to pay as indemnification to any of the Insured Persons resulting from a claim first made against the Insured Persons during the Policy Period ... for a Wrongful Act or Employment Practices Wrongful Act.

The policy defined “Insured Person” as “any past, present, or future director or officer, or member of the Board of Managers of the Company.” Additionally the policy defined “claim” to include “any civil proceeding” or an “administrative regulatory proceeding ... including any proceeding before the [EEOC].”

MMIC’s claim rested on the premise that Dowling, in both his EEOC claim and civil complaint, had made general allegations of misconduct by MMIC’s directors and officers. MMIC contended that even though the sole defendant was the corporation, the policy applied because Dowling’s general allegations of wrongful acts by MMIC’s directors and officers constituted “claims against Insured Persons.” Rejecting this argument, the Court held that pursuant to plain language and common usage, a “claim made against” an insured person must name the insured person as a defendant. The Court reasoned, in pertinent part:

D&O policies exist to fund indemnification covenants that protect corporate directors and officers from personal liability, not to protect the corporation by which they are employed. The position advanced by [MMIC] 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.... (emphasis added)

Overall, the Court’s ruling underscores the generally accepted rule that corporate indemnification coverage under a D&O policy cannot be implicated unless individual directors and officers are named as defendants. The reach of D&O coverage is limited to “any civil proceeding” that must include directors and officers as named defendants. Otherwise, efforts to obtain reimbursement under a D&O policy should be rejected as an attempted “transmogrification” of the D&O policy into a comprehensive corporate liability policy.

If you would like a full text of the Court’s opinion, or have any questions regarding these issues, please feel free to contact one of our practice group members.

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