D&O Coverage Available for Executive Sued in Insured Capacity, But Not for Insured Entity

Applying Hawaii law, the U.S. District Court for the District of Hawaii has held that, while an executive was entitled to coverage because he was sued in his insured capacity, the insured entity was not covered because the underlying lawsuit did not fall within the D&O policy’s definition of “Securities Action.”  Maui Land & Pineapple Co., Inc. v. Liberty Ins. Underwriters Inc., 2018 WL 1613777 (D. Haw. Apr. 3, 2018).

The insured entity owned a joint venture that participated in a condominium development project, and one of its executives represented the insured entity on the board of the project.  They were both sued by condominium purchasers for breaches of fiduciary duties due to their alleged failure to take action with respect to the project’s dire financial condition.  The entity and executive then sought coverage for the suit under the entity’s D&O policy.  The insurer denied coverage for the executive on the grounds that he was sued in his capacity as a director of the project’s board rather than in his capacity as an officer of the insured entity, and as such the policy’s exclusion for outside service applied.  As to the insured entity, coverage was limited to a “Securities Action” and the insurer denied coverage on the ground that the suit did not constitute such an action within the meaning of the policy.

In the coverage litigation that followed, the court first determined that the executive was entitled to coverage because he was sued in his insured capacity.  In so holding, the court found that the complaint in the underlying lawsuit made no distinction between the executive’s actions in his capacity as an officer of the insured entity or as a director of the board of the project.  The court also found that the allegations in the complaint were broad, and did not limit the claims against the executive to his capacity as a director for the project.  The court further concluded that the policy’s exclusion for outside service did not apply, as the insured entity owned 51% of the voting rights on the board of the project on which the executive served.  The project thus fell within the policy’s definition of “Subsidiary,” which only required that the insured entity own 50% of the voting rights.

Next, the court held that the policy did not afford coverage for the entity because the suit did not constitute a “Securities Action,” which the policy defined as an action that either involved the purchase or sale of securities, or was brought by a securities holder.  The suit was not brought by shareholders and the court rejected the insured entity’s argument that the relationship between a condominium purchaser and its board was the same as that of a shareholder and a corporation.  The court further found that the claims in the underlying action were not based on interests in securities, but rather on misrepresentations and omissions by those responsible for the building and marketing of the condominium.  Thus, the court determined that the underlying lawsuit did not constitute a “Securities Action.”