Former Director Not Covered for Wrongful Acts Committed in Uninsured Capacity

The U.S. District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, has held that a former board member of a company is not entitled to coverage when the company was dismissed with prejudice from the underlying action. Palmer v. Twin City Fire Ins. Co., 2017 WL 5571051 (E.D. Pa. Nov. 20, 2017).

A company purchased a D&O policy that provided specified coverage to individuals for wrongful acts “committed by an Insured Person, solely by reason of their serving in such capacity.” An individual, who previously served on the insured company’s board of directors, and a third party jointly filed a conservatorship petition regarding real property. The individual, the third party, and the insured company were then sued as a result of the petition. The underlying plaintiffs alleged claims for, among other things, improper use of civil proceedings, concert of action, and conspiracy. The underlying complaint alleged that the former director filed the conservatorship action with the “tacit approval” of the insured company.

The insurer provided a defense to the insured company and initially denied coverage for the former director, though it later opted to provide a defense under a reservation of rights. The insured company filed preliminary objections claiming that it was not involved in the conservatorship suit and was dismissed with prejudice. Following the insured company’s dismissal, the former director answered the complaint and asserted that his involvement with the insured company was “not relevant for the purposes of Plaintiffs’ claim[.]” The insurer then withdrew its defense of the former director, causing the individual to institute a coverage action for breach of contract and bad faith.

The court granted the insurer’s motion for summary judgment and held that the dismissal with prejudice of the insured company from the underlying litigation “constitut[ed] ‘absolutely clear’ evidence that there is no possibility that [the former director] was covered[.]” The court reasoned that “[b]y sustaining [the insured company’s] preliminary objections, and dismissing it from the case, the court [in the underlying action] could only have found that [the insured company] was not liable for any wrongful conduct,” and therefore rejected the theory that the insured was liable for any “tacit approval” of the petition. The court further noted that that the former director’s “wrongful acts were not taken ‘solely by reason of [his] serving’ as a member of the Board[.]” The court also held that the policy’s dual services exclusion provided an independent bar to coverage because the former director was the president and owner of the third party that participated in the filing of the conservatorship action.