A recent court ruling serves as a reminder that the smallest of words — an, the, any or such — may determine whether a D&O policy exclusion applies to a policyholder's claim. In TranSched Sys. Ltd. v. Fed. Ins. Co., CA 12-939-M, 2013 WL 3974134 (D.R.I. Aug. 2), the court considered whether a jury verdict of intentional misrepresentation triggered a D&O policy's fraud exclusion. The policy excluded coverage "based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by such Insured . . . ." The court focused in part on the specific language that excluded coverage for the enumerated acts by "such Insured." The court concluded that the modifier "such" limited the application of the exclusion to the specific insured who was subject to the jury verdict, and therefore the triggering of the exclusion would not preclude coverage for other insureds.
The TranSched case provides yet another example of the difference that seemingly minor changes in D&O policy language can have on coverage, particularly in the case of the application of so-called "bad acts" exclusions (generally for fraud, criminal acts or illegal profit). Thus, whether the bad acts of one insured operate to preclude coverage for other innocent insureds may turn on whether the insured, an insured or any insured first triggered the bad acts exclusion. See e.g. Chacon v. American Family Mut. Ins., 788 P.2d 748, 751 (CO 1990) (holding that "unlike the phrase 'the insured,' the phrase 'any insured' unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent co-insured."); Michael Carbone, Inc., v. General Accident Ins. Co., 937 F.Supp. 413, 419 (E.D.Pa. 1996) (holding that "the punchline is this: the term 'the insured' means, and means only, the person claiming coverage, or [to put it another way] only the person coverage for whom is the issue."); Medill v. Westport Ins. Corp., 49 Cal.Rptr.3d 570, 580 (Cal. 2nd Dist. Ct. App. 2006) (California cases have determined that the phrases "any insured" or "an insured" unambiguously preclude coverage to all persons covered by the policy if any one of them engages in excludable conduct.).
The existence of severability provisions in D&O policies may also provide false comfort against the risk of coverage potentially being eliminated for innocent insureds through the use of "small" words in a bad acts exclusion. A typical severability provision generally precludes imputation of one insured's knowledge or acts to another for the purposes of determining whether coverage exists under the policy. Frequently, severability provisions may not specifically apply to a bad acts exclusion but rather are a general policy provision. Thus, while a policyholder may assume that a severability provision protects innocent insureds from imputation of another insured's bad acts, insurance companies have argued that the more specific exclusionary language in a bad acts exclusion trumps a more general severability clause.
Good arguments exist against that position, and at least one court, Premier Ins. Co. v. Adams, 632 So.2d 1054, 1057 (Fla. Dist. 5 Ct. App. 1994), has correctly noted that application of "any insured" language to trigger a bad acts exclusion, so as to preclude coverage for all insureds, would render a severability clause meaningless. Nonetheless, policyholders should ensure that the language in their D&O policy's bad acts exclusions tracks the policy's severability provision, and that only the bad acts of the insured — not an or any insured — will trigger the exclusions.
When reviewing D&O policies, policyholders should pay particular attention to the small (and frequently overlooked) words in the exclusionary language. Those words can often determine whether the exclusion precludes coverage for all insureds, or only the insured whose conduct triggered the exclusion.
About Anderson Kill
Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estate, Trusts and Tax Services, Corporate and Securities, Antitrust, Bankruptcy, Real Estate and Construction, Public Law, Government Affairs, Anti-Counterfeiting, Employment and Labor Law, Captives, Intellectual Property, Corporate Tax and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes – with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Ventura, CA, Stamford, CT, Washington, DC, Newark, NJ and Philadelphia, PA.
Alexander D. Hardiman is an experienced litigator, focusing on insurance coverage litigation and dispute resolution, with an emphasis on commercial general liability insurance, directors' and officers' (D&O) insurance, fiduciary liability insurance, errors and omissions (E&O) insurance, as well as property insurance issues. (212) 278-1588 | ahardiman@andersonkill.com
This article was originally published in the Policyholder Advisor, Volume 22, Issue 3 (July/August 2013)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
