No Allocation for Defense Costs Incurred in Lawsuit Comprised of Covered and Uncovered “Claims”

The U.S. District Court for the Northern District of California, applying California law, has held that, under a duty to defend policy, an insurer was required to pay defense costs incurred in a lawsuit where the lawsuit contained both covered and uncovered “claims.” Stem, Inc. v. Scottsdale Ins. Co., 2021 WL 3271265 (N.D. Cal. July 30, 2021). 

The insured, a technology company, sought coverage under its directors and officers policy for a shareholder lawsuit (“2017 Lawsuit”) based on a 2013 stock financing round (“2013 Stock Financing”) and a 2017 loan to the company by a member of the board of directors (“2017 Loan”).  The court concluded that the interrelated wrongful act exclusion barred coverage for the 2013 Stock Financing “Claim,” but that coverage was available for the 2017 Loan “Claim” because it did not relate back to an earlier dispute.

The insured then moved for partial summary judgment on the measure of damages. The insured argued that, pursuant to the insurer’s duty to defend, the insurer was required to cover all defense costs incurred in the 2017 Lawsuit, even though the lawsuit contained both covered and uncovered “claims.” The insurer argued that the court should apply the policy’s allocation provision to cover only defense costs related to the 2017 Loan.

The court held that the insurer was required to cover defense costs incurred for the entire 2017 Lawsuit. The court reasoned that, even if an allocation provision applies where there is a duty to defend, in the instant matter, there was not “undeniable evidence of the allocability of specific expenses because the 2017 [L]awsuit is ongoing” and the insured had “taken steps to defend against the [2017 Loan Claim]” for which the insurer’s “proposed allocation does not account.”