Corporate Officers and Directors Denied Coverage for Allegedly Wrongful Acts Committed When Acting as Trustees

June 30, 2015

The U.S. Court of Appeals for the Eleventh Circuit, affirming a decision by the U.S. District Court for the Northern District of Georgia, has ruled that an exclusion in a director’s and officer’s (“D&O”) insurance policy barred coverage for an underlying complaint that alleged that wrongful acts of officers and directors of a family-owned corporation “arose out of” their allegedly wrongful acts as trustees of a family trust.

The Case

Beneficiaries of a family trust sued their family-owned corporation, The Langdale Company (“TLC”),  and two individual family members who served simultaneously as directors or officers of the corporation and as trustees of the trust, which held large amounts of the corporation’s stock. The beneficiaries alleged violations of duties owed to and by the corporation, and violations of duties owed to the trust.

National Union Fire Insurance Company of Pittsburgh, PA, which had issued a D&O policy to TLC, asserted that it was not obligated to provide a defense to the beneficiaries’ lawsuit because of the director-misconduct allegations in the beneficiaries’ complaint. The insurer relied on the policy’s exclusion for alleged misconduct committed in a capacity other than as a corporate officer or director.

After TLC sued National Union, the district court found no coverage under the policy. It relied on Georgia court decisions holding that the phrase “arising out of” in a policy exclusion triggered a but-for causation standard. After reviewing the allegations in the beneficiaries’ complaint, the district court held that “the genesis of the underlying plaintiffs’ claims involved the acts of the trustees.”

TLC appealed to the U.S. Court of Appeals for the Eleventh Circuit.

The Circuit Court’s Decision

The Eleventh Circuit affirmed.

In its decision, the circuit court pointed out that the policy excluded coverage for “any Claim” made against “an Insured” (such as TLC) arising out of the alleged wrongdoing by “an Individual Insured” committed in any capacity other than as a director or officer. The circuit court then ruled that the policy did not provide coverage because the beneficiaries’ complaint alleged that officers or directors of TLC had committed wrongful acts as trustees of the family trust.

The circuit court found that the causes of action alleged against TLC could not have existed in the absence of the claims that the individual defendants had committed wrongful acts in their uninsured capacity as trustees.

Simply put, the Eleventh Circuit decided that although the individual defendants were TLC directors, their allegedly wrongful acts as TLC directors “arose out of” their allegedly wrongful acts as trustees of the trust. To the extent that they allegedly were acting as directors and officers, their alleged misconduct “was so inextricably entwined with their alleged misconduct as trustees that the duty to advance defense costs was not triggered,” the circuit court concluded.

The case is Langdale Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 14-12723 (11th Cir. June 22, 2015).

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  • Robert Tugander





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