Flash! Ninth Circuit Gives Second Chance to D&O Insureds in Coverage Dispute
Insurance Law Flash
Holds fact issues preclude summary judgment in favor of insurer based on exclusions for “willful acts” and restitutionary remedies.
In Unified Western Grocers, Inc. (“Unified”) v. Twin City Fire Ins. Co., 06 C.D.O.S. 7436 (9th Cir. August 14, 2006), the Ninth Circuit, applying California law, reversed a district court order granting summary judgment in favor of a D&O insurer. The Ninth Circuit held that genuine issues of material fact as to: (1) whether the underlying action asserted a covered claim separable from allegations of willful conduct, and (2) whether the underlying action sought “restitution” or damages from the insureds, precluded summary judgment.
In Unified, officers and/or directors of Unified (“Appellants”) sought insurance coverage for an underlying lawsuit brought by the bankruptcy trustee of HGS, a former subsidiary of Unified. The underlying complaint asserted that, after Unified decided to sell HGS, it appointed Appellants to act as officers and/or directors of HGS. Appellants approved a leveraged buy-out transaction for HGS to sell the common shares of HGS. Unified funded the transaction through a $4.5 million line of credit, secured by the assets of HGS. At the same time, appellants secured a promissory note from HGS to Unified, converting Unified’s equity investment into HGS into a secured debt, and issued preferred stock of HGS to Unified. Appellants then resigned their positions with HGS.
The underlying complaint alleged three causes of action for “restitution” -- breach of fiduciary duty, aiding and abetting, and civil conspiracy. The district court granted the insurer’s motion for summary judgment, holding that coverage was properly denied based on section 533 of the California Insurance Code, precluding indemnification for claims resulting from willful acts, and that a public policy exclusion under California law precluded indemnification for restitutionary relief or disgorgement of ill-gotten gains.
On appeal, the Ninth Circuit reversed. It held that “[e]ven when faced with allegations that paint a broad picture of fraudulent schemes and conspiracies, the application of section 533, made on summary judgment without evidence of the insured’s actual conduct, should consider whether any asserted claim may allow for liability based on alleged conduct that has a lower degree of culpability.”
The court found that the claim for breach of fiduciary duties did not necessarily involve willful conduct and rejected the insurer’s argument that any negligent conduct sufficient to establish liability for breach of fiduciary duty was “inseparably intertwined” with the willful conduct. Acknowledging that California law precludes indemnification for restitution claims, the Ninth Circuit held that “[t]he label of ‘restitution’ or ‘damages’ does not dictate whether a loss is insurable.” (Emphasis in original.) It found that “the allegations and asserted claims in the Underlying Complaint do not necessarily restrict all potential recovery to restitution” and that there was a genuine issue of material fact as to the extent the underlying claim sought restitution, as opposed to damages. The case was remanded to the district court for further proceedings.