Second Circuit Affirms Ruling That Excess D&O Insurer Is Not Required to Advance Defense Costs

The U.S. Court of Appeals for the Second Circuit, applying New York law, held that a former director is not entitled to injunctive relief requiring an excess D&O insurer to pay his defense costs because the director has not shown that he would suffer irreparable harm in the absence of the injunction. Daileader v. Certain Underwriters at Lloyds London Syndicate 1861, 2023 WL 7648381 (2d Cir. Nov. 15, 2023).

In July 2018, the insured person was appointed as the sole director of a medical center, which later filed for bankruptcy. In 2021, the bankruptcy trustee filed a series of complaints against the director alleging, among other things, that the director made no attempt to coordinate a sale or refinance the medical center and wrongfully caused the medical center to incur millions in unnecessary professional fees.

The medical center reported the trustee complaints to its D&O insurer. Although the primary insurer agreed to defend the director and paid its $1 million limit, the first excess insurer refused to pay defense costs because it argued that a bankruptcy/insolvency exclusion precluded coverage. The director commenced a coverage action against the excess insurers and sought a preliminary injunction requiring the excess insurers to pay defense costs.

In ruling on the request for an injunction, the court found that the director had not shown that he would suffer “irreparable harm” in the absence of an injunction. For example, the court stated that there is “no evidentiary basis ... to find that the [director] is unable to pay his defense costs” or to demonstrate that defense counsel would withdraw from representation if the excess insurers did not advance defense costs. While the court rejected the injunction request given the lack of irreparable harm, it also noted that the director had not shown a clear likelihood of success on the merits – another required element – because the bankruptcy/insolvency exclusion likely barred coverage.

The Second Circuit affirmed on appeal, holding that the director had not established irreparable harm, which, under Second Circuit precedent, “is the single most important prerequisite for the issuance of a preliminary injunction.”