Ninth Circuit Finds Breach of Fiduciary Duty Claim Seeks Damages, Not Restitution

The United States Court of Appeals for the Ninth Circuit, applying California law in a decision marked not for publication, has held that, while claims for restitution are uninsurable under California law, the underlying action asserted claims for breach of fiduciary duty seeking potentially covered “damages.”  Dobson v. Twin City Fire Ins. Co., 2015 WL 191526 (9th Cir. Jan. 15, 2015).  The court further held that a prior notice exclusion did not bar coverage for the claims against the directors and officers of the insured and that the insured did not breach the consent to settle provision in the policy by settling an underlying claim without insurer consent where the insurer wrongfully disclaimed coverage prior to the settlement.

Three individual insureds were involved in underlying litigation arising out of the bankruptcy of a limited liability company.  In the bankruptcy action, the official committee of unsecured creditors demanded $9.5 million from the insured persons based on allegations that they “received cash and benefits aggregating at least $62 million” as a result of fraudulent transfers.  Additionally, the creditor committee’s trustee sued the individual insureds in an action including counts for actual or constructive fraud and one cause of action alleging breach of fiduciary duty.  The trustee sought “to recover payment of” millions of dollars and property “fraudulently . . . transferred” to the individuals.  The individuals gave notice of the action to their D&O insurer, but the carrier advised the individuals that the underlying action was not covered by the relevant policy.  While reserving its rights, the insurer agreed to advance 10% of the reasonable covered defense costs subject to the satisfaction of the retention under the policy.  The individuals ultimately settled the underlying action, but none of them notified the insurer of the settlement in advance or requested its consent to the settlement.  After the insurer refused to pay for additional sums per the individuals’ demands, the individuals’ expenses were paid by a separate insurer, and the individuals assigned their rights as against the defendant insurer to the second insurer, leading to this coverage action.  On cross-motions for summary judgment, the court granted summary judgment to the defendant insurer, holding that claims for restitutionary relief are uninsurable as a matter of law and that that individual insureds breached the policy’s no-voluntary payment provision by settling an underlying claim without insurer consent and that the insureds’ breach was not excused by the carrier’s failure to advance defense costs.

On appeal, the Ninth Circuit reversed the district court’s ruling.  In so doing, the court first recognized that claims seeking restitutionary relief, “[t]o the extent the claims are based on allegations of ‘willful act[s]’ by, rather than negligence of, the Insureds . . . [are] not insurable.”  The court noted, however, that “the breach of fiduciary duty claim does not seek specific restitution, but rather ‘damages’ for many overarching breaches of duty allegedly committed by the Insureds . . . . [that] is within coverage as alleging ‘wrongful acts.’”

Next, the court held that neither the policy’s “prior notice” exclusion nor “claim first made” exclusion barred coverage for the instant claim, explaining that those exclusions only applied “to claims based on or related to prior claims that were the subject of ‘any notice given under any other directors and officers, management liability, or similar insurance policy.’”  The prior claims at issue here, the court concluded, involved claims submitted by the insured entity to its general liability carrier, and not by the individual insureds under a “directors and officers . . . or similar insurance policy.”

Finally, the court reversed the district court’s holding that the individual insureds had materially breached the insurance contract by settling the underlying litigation without the carrier’s consent.  The court held that the insurer’s “wrongful denial of coverage was an antecedent breach, excusing the Insureds’ failure to obtain [the defendant insurer’s] consent prior to any settlement.”