No “Wrongful Act” Where Claim Did Not Involve Conduct “Solely” in Individual’s Capacity as a Director or Officer of an Insured Entity

A Maryland intermediate appellate court has ruled that a claim did not allege a “wrongful act” because the claim was not made against an individual “solely” in his capacity as a director or officer of an insured entity. Feldman v. Fidelity & Deposit Co. of Md., 2016 WL 885041 (Md. Ct. Spec. App. Mar. 7, 2016).

An insurer issued a D&O policy to a bank. An individual serving as a director and officer of the bank notified the insurer of an investigation by the Office of Thrift Supervision (OTS) and other regulatory agencies into certain transactions the individual had been involved in during the policy period. The OTS later issued a Notice of Charges, which alleged that the individual had engaged in misconduct as a member of an unrelated LLC. The individual later settled the OTS claim without an admission of wrongdoing, though he did agree to pay certain monetary penalties. The insured bank’s D&O carrier denied coverage to the individual, who brought suit to recover attorneys’ fees and a settlement payment in connection with the investigation. The trial court ruled in favor of the insurer, and the individual appealed.

The appellate court affirmed the ruling in favor of the insurer. In so doing, the court noted that the only issue presented was whether the OTS claim against the individual alleged a “wrongful act.” The policy at issue defined “wrongful act” to mean “any matter claimed against a Director or Officer solely by reason of his or her status as a director or officer” of the insured bank. The individual claimed that, because the OTS only had jurisdiction over him due to his status as an officer of the insured bank, the “wrongful act” definition was satisfied. The court disagreed, noting that there were two reasons the OTS was able to initiate the proceedings against him—(1) his role at the insured bank; and (2) his conduct as a member of an outside LLC—and the court therefore reasoned that his status as an officer was not the “sole” reason for the OTS claim. The court also rejected the individual’s argument that he was entitled to coverage given that he always maintained his innocence, noting that the absence of an adjudication of wrongdoing did “not render the alleged wrongdoing meaningless.”