First Circuit Rules that D&O Coverage Does Not Insure Corporate Liability
The U.S. Court of Appeals has ruled that a corporation cannot recover under a director and officer liability policy for complaints alleging wrongful conduct by the insured’s officers and directors. The Court stated that D&O policies “exist to fund indemnification covenants that protect corporate directors and officers from personal liability.” A contrary result, opined the First Circuit, would “transmogrify D&O policies into comprehensive corporate liability policies.” In the underlying case involving a suit by a former employee for disability discrimination, the plaintiff did not name any corporate officer or director as a defendant even though he alleged that their wrongful conduct created the defendant’s liability.
OUR TAKE: This case has significant implications in the fund industry where every corporate action is undertaken by third party officers and directors. The First Circuit reinforces that D&O coverage is intended to benefit the officers and directors (to provide protection against personal liability) and is not intended to benefit the fund. Fund sponsors should consider other types of insurance such as E&O coverage.