Washington, DC, Dec. 23—Patton Boggs won an important legal victory on behalf of Texas-based Julio & Sons Company and one of its individual directors against the insurance giant Travelers Casualty and Surety Company of America.
In an insurance coverage case of first impression, U.S. District Court Judge Richard J. Holwell ruled, in an order entered on December 22nd, that Travelers’ D & O policy covers a director who was sued for conduct undertaken in his capacity as a majority shareholder of the insured organization and before he became an officer or director. Ultimately, Travelers could be held liable for a seven-figure damage award.
The court held although this ruling was “somewhat anomalous,” the result was compelled by Travelers’ “ambiguous” insuring clause, which defined “future directors” as insured persons and promised coverage to insured persons who were sued “for” the wrongful acts of the insured organization. This clause, the court held, meant that claims of vicarious liability brought against a then-majority shareholder and future director were covered.
“Strict construction of insurance policies against the insurer has long been the practice of the courts,” Judge Holwell wrote in a 23-page opinion. “It is the insurer’s responsibility to draft its policies with sufficient precision to avoid ambiguities like the one found here.”
Judge Holwell also rejected Travelers’ position that the policy’s “contract exclusion” was triggered by the complaint simply because the same conduct that established the underlying “breach of contract” claim also established the “breach of fiduciary duty” alleged in the underlying complaint. He ruled that even under the liberal "but for" standard applied by Texas courts, because a claim for breach of fiduciary duty arises out of a “legal duty” and not a “contractual duty” that standard was not met and the exclusion was not triggered.
The court also held that because the scope of the duty to advance defense costs and the scope of the duty to defend were identical under Texas law, the insurer’s duty to advance defense costs extended to covered claims as well as uncovered claims, such as breach of contract, alleged in the suit.
By requiring its insured to litigate coverage issues upfront as a condition of making advances of defense costs, the insurer “effectively and irreparably denied the insured the benefit of an 'advance' clause,” said John W. Schryber, the founder of Patton Boggs’ cost recovery and indemnification practice group, and who argued the motion for the policyholder.
“To quote the court,” Schryber said, the “whole purpose of advancing legal expenses rather than reimbursing them at the conclusion of the litigation is that insured organization may not have the cash on hand to finance their own defense.”