Ruling Highlights Potential Gaps In Directors and Officers (D&O) Insurance Coverage

Insurers often argue that government subpoenas are not covered under D&O policies because they do not allege any wrongful acts by insureds, and therefore cannot trigger insuring agreements requiring that demands for documents be “for Wrongful Acts.”

In a recent California case, AmTrust Int’l Underwriters DAC Plaintiff, v. 180 Life Sciences Corp., the insurers asserted that SEC subpoenas alleged wrongful acts simply because the document requests related to post-merger time periods.

The Hunton Insurance Recovery Blog explains that the issue was whether the policy’s advancement clause was triggered when claims are “potentially covered,” or was limited to “actually covered” claims.

The court considered policy language and relevant case law and found that, consistent with California law, the insurers were required to advance defense costs for potentially covered claims.

The issue then became whether the subpoenas were barred by the application of the Change in Control exclusion, which turns on when the alleged wrongful acts are alleged to have been committed or attempted.

Insurers must prove conclusively that an exclusion “applies in all possible worlds” in order to rely on it. In this case, it needed to show that the subpoenas alleged post-merger wrongful acts by the insureds.

The court acknowledged the problem with making that showing in the context of an SEC subpoena, which merely requests documents, as opposed to a civil complaint containing specific allegations of wrongdoing.

The insurers noted that the subpoenas requested documents relating to both pre and post-merger time periods. They asked the court to infer from those requests that both pre-merger and post-merger wrongful acts were alleged.

The court declined and concluded that the insurers failed to meet their burden of conclusively showing that the Change in Control exclusion applied.

The authors stress the importance of coordinating coverage in the context of M&A deals: examine the scope of exclusions; review liability policies covering directors and officers before and after closing; and look for continuity of coverage and unexpected gaps.