Goerner v. Axis Reinsurance Co., No. 09-55385, 2010 U.S. App. LEXIS 21624 (9th Cir. 2010).
Axis Reinsurance issued a D&O policy requiring it to defend and indemnify claims against the insured company’s officers for “any actual or alleged error” committed by an officer “in [his] capacity as such.” A lawsuit filed against the former CEO did not specifically allege the plaintiff’s damages stemmed from actions by the former CEO while acting in his capacity as such. The insurer argued, because the allegations did not allege the CEO was acting in his capacity as such but instead was based on allegations that the former CEO was acting on behalf of two other companies in the same industry, the policy was not triggered, relieving Axis of a duty to defend.
The court noted the “guiding principle” in determining whether an insurer has a duty to defend is whether the insured would “reasonable expect a defense” and an interpretation that defeats the very purpose of the insurance would not stand. The Court considered Axis’ argument but disagreed finding such an interpretation of the duty to defend would allow the insurer to avoid coverage for allegations that the former CEO engaged in activities he was directly ordered to do by his superiors merely because a third-party plaintiff failed to allege he did so in his capacity as CEO. The complaint at issue included allegations that the CEO’s company paid for his travels, an essential element of one cause of action against him, raising the potential for coverage under the D&O policy.
The court held Axis was required to defend because the complaint against the former CEO raised the “potential for coverage.” Because there was a potential for coverage, the underlying plaintiff’s failure to allege the CEO act in his capacity as CEO did not defeat coverage.
For a copy of the decision click here
Patrick Omilian and Joanna Roberto