The recent decision in Britt v. Twin City Fire Insurance Co., C.A. No. 8SACV 12-1355-JST (JPRx), slip op. (C.D. Cal. June 26, 2013), highlights some important insurance considerations for private equity funds and the individuals they place as directors or officers at portfolio companies. The decision demonstrates potential gaps in coverage that can arise when a private equity firm relies solely on the insurance coverage purchased by its portfolio companies to protect the individuals it places as directors or officers. In this case, Christopher Britt; as well as Marwit Capital Partners II, LP; and Marwit Partners, LLC (collectively, "Marwit") sought coverage under directors and officers insurance policies sold to two companies, TCSC and SSAC, in which Marwit owned controlling interests. Britt was a manager of Marwit, and also served as a director and officer of both TCSC and SSAC. Slip op. at 2. Britt and Marwit sought coverage under these policies for an underlying action alleging that Britt, on behalf of Marwit, breached an oral agreement to purchase stock from the claimant. Slip op. at 4. The complaint alleged that this oral agreement was made by Britt, on behalf of Marwit, after an earlier agreement between the claimant and Britt, on behalf of SSAC, had fallen through. Slip op. at 4. The insurance company ultimately denied coverage for this underlying action, leading to the coverage dispute. Id. The policies provided that managers and employees of TCSC or SSAC were covered as "Insured Persons" for liability for wrongful acts committed "in their capacity as such," or when brought "solely by reason of their serving in such capacity." Slip op. at 3. While Britt was an officer and employee of both TCSC and SSAC, the court held that the underlying complaint alleged wrongful conduct by Britt only in his capacity as a manager of Marwit. Slip op. at 10-11. The court reached this decision even though the complaint alleged some conduct by Britt on behalf of SSAC (the original agreement that fell through), because the alleged agreement actually sued upon allegedly was made by Britt acting on behalf of Marwit. Id. (The court also rejected an argument that the insurance company had conceded coverage for Britt in correspondence. Id. at 12-14.)
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