Insurance Law

Kentucky Court Holds D&O Policy Not Triggered By Suit Against Condo Board

In its recent decision in State Auto Prop. & Cas. Ins. Co. v. Highland Terrace Counsel of Co-Owners, Inc., 2015 U.S. Dist. LEXIS 59663 (W.D. Ky. May 7, 2015), [enhanced version available to lexis.com subscribers], the United States District Court for the Western District of Kentucky had occasion to consider the scope of coverage afforded under a directors and officers coverage policy issued to a condominium board.

The board – the Highland Terrace Counsel of Co-Owners – was insured under a general liability policy issued by State Auto. The policy contained a Directors, Officers and Trustees Liability Coverage endorsement providing that:

a. [State Auto] will pay on behalf of the named insured all “loss” in excess of the deductible shown in the Declarations for which the named insured may be required or permitted to indemnify its directors, officers, or trustees, individually or collectively, arising out of their “wrongful acts.”

b. [State Auto] will pay on behalf of directors, officers, and trustees “loss” arising from any claims made against them, individually or collectively, by reason of their “wrongful acts.”

Highland Terrace was named as a defendant in a lawsuit brought by a unit owner seeking to block a $700,000 assessment approved by the board. Notably, the suit did not name any of the individual board members as defendants, but instead was brought solely against the board. Highland Terrace tendered the claim to State Auto, which denied coverage under both of the policy’s coverage.

On motion for summary judgment, the court agreed that the underlying suit pertaining to the assessment was not a claim for damages as a result of bodily injury or property damage resulting from an occurrence, and thus not one that could trigger the policy’s general liability coverage part.

The court further held that the underlying suit did not have the potential to trigger either of the insuring clauses in the D&O form. Central to the court’s decision was that the underlying suit did not allege any claims against the individual members of Highland Terrace for which the entity could have an indemnity obligation under insuring agreement a., nor was there a claim against any of the individuals that for which State Auto had a direct coverage obligation under insuring agreement b.

Central to the court’s decision was that the State Auto D&O form did not afford entity coverage to Highland Terrace. As such, the court observed that its ruling was “consistent with the spirit” of D&O policies, since such policies exist to fund the covenants that protect corporate directors and officers for personal liability, not to protect the entity itself. As the court explained:

Though the directors, and not the corporation, literally performed the allegedly unlawful acts, no evidence suggests they could be personally liable in the state court action. As such, the D & O Policy does not require State Auto to provide a legal defense.

    Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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