No Coverage for Affirmative Lawsuit Challenging Distribution of Proceeds From Sale of Investment Assets

Applying Oklahoma law, the United States District Court for the Western District of Oklahoma has held that no coverage is available for a lawsuit involving an equity holder in an investment agreement because the action did not involve a “Wrongful Act” in an individual’s capacity as “an Insured Person.”  Turner v. XL Specialty Ins. Co., 2020 WL 3547954 (W.D. Okla. June 10, 2020).  The court further held that the insured did not satisfy his burden of proving that his legal costs were “Defense Expenses” even though he was nominally a “defendant” in the suit.

The insured served as Chief Investment Officer for a corporation and sought coverage for defense expenses under a management liability policy after he was named in a lawsuit.  The suit was filed by a party to an investment agreement to challenge the distribution of proceeds from the sale of certain assets following the sudden death of one of the other parties to the agreement.  The insured participated in the investment agreement along with the plaintiff, the decedent, the corporation, and various other individuals and entities.  The insured either admitted or did not dispute the allegations in the suit, but filed counterclaims, cross-claims, and third-party claims seeking the same relief as plaintiff.  The insurer denied coverage, and the insured sued the carrier for breaching its duty to defend and its implied duty of good faith and fair dealing.  The insurer and insured both filed motions for summary judgment.

In granting the carrier’s motion, the court held that there was no coverage because the insured was not involved in the lawsuit by reason of his status as an “Insured Person.”  The policy afforded coverage for a “Wrongful Act,” which was defined as a “matter asserted against . . . an Insured Person by reason of his or her status as an Insured Person.”  Here, the suit was brought against the insured in his capacity as an individual equity holder under the investment agreement, not because of his status as an officer of the corporation.  The court also noted that the terms “capacity” and “status” were interchangeable in this context.

The court further held that, even if the insured was sued by reason of his status as an “Insured Person,” his legal costs did not constitute covered “Loss.”  The policy defined “Loss” as “damages, judgments, payments, settlements, relief or other amounts . . . and Defense Expenses[.]”  The term “defense” was undefined.  Applying a dictionary definition, the court defined “defense” as “[a] defendant’s stated reason why the plaintiff or prosecutor has no valid case . . . that which is alleged by a party proceeded against in an action or suit, as a reason why the plaintiff would not recover or establish that which he seeks by his complaint or petition.”  While the insured was nominally a “defendant” in the suit, he was not placed in a defensive posture.  Rather, the insured did not dispute any of the plaintiff’s material facts, nor did he dispute any of the plaintiff’s requested relief.  Thus, the legal fees incurred by the insured for his affirmative claims did not constitute covered “Loss” under the Policy.