Director Conflict of Interest Negates D&O Coverage
Directors of a company involved in Chapter 7 bankruptcy proceedings filed a declaratory judgment action against their D&O insurer to clarify the scope of coverage of the company’s policy. The underlying litigation involves claims the directors breached their duties by scheming and engaging in self-interested dealings at the company’s expense. The insurer denied coverage invoking the D&O Policy’s “capacity” exclusion that allows the insurer to avoid coverage when the alleged wrongdoing was not “solely by reason of their status” as executives of the insured due to a conflict of interest with the non-insured investment entities. The Delaware court held since the underlying claims would not have been established “but for” the directors’ alleged misconduct with the investment entities, the exclusionary clause applied and extinguished the insurer’s obligation under the policy.