Directors and officers can expect their company’s D&O insurance policy to provide them with a claim defense, but only for claims against them for actions made while they are acting in an "insured capacity." The question is whether the determination of the capacity in which the individual was acting depends on the claimant’s allegations, or does it depend on the individual’s actions, regardless of what may be alleged?


An October 20, 2010 unpublished Ninth Circuit opinion (here) held that "an insured would reasonably expect coverage for actions taken in the capacity of director or officer of an insured company, whether or not that capacity was alleged by the third-party plaintiff."


Frederick Goerner was CEO of TransDimension, and was insured under the company’s D&O insurance policy, which provided coverage for claims against insured persons for "any actual or alleged error" committed by an insured individual "in [his] capacity as such".


In litigation to determine whether the company’s D&O insurer had an obligation to provide a defense to Goerner for claims that had been asserted against him, the district court had held that the because the underlying complaint did not specifically allege that Goerner had been acting in his capacity as TransDimension CEO, but rather asserted that he action on behalf of two other industries in the same industry, coverage under the policy was not triggered. Goerner appealed.


On appeal, the carrier argued that because the underlying complaint did not specifically allege that the claimant’s losses resulted from action Goerner took in his capacity as TransDimension’s CEO, there was no coverage.


A three-judge panel of the Ninth Circuit held that, because the carrier’s position, if valid, would preclude coverage even for actions in his insured capacity if the claimant failed to allege in the complaint that the actions were in an insured capacity, the carrier’s position "defeats the purpose of the insurance coverage."


The Ninth Circuit said that the guiding consideration is whether "the insured would reasonably expect a defense by the insurer," and that the specific question here is whether the actions at issue in the complaint "could have been taken by Goerner in his capacity as CEO of TransDimension."


Finding that Goerner had shown that TransDimension had business dealings "with all of the individuals and companies at issue in the underlying complaint" and that TransDimension’s board "authorized and paid for Goerner’s travels to meet with those two companies in Asia," the Ninth Circuit concluded that Goerner had presented facts that "give rise to the possibility of coverage" and that the carrier therefore was obligated to provide Goerner with a defense.



Questions of insured capacity are not infrequent in litigation involved senior corporate officials, particularly where the individuals involved wear multiple hats. A not uncommon question, for example, is whether an individual, who is affiliated with a private equity firm and who is serving on the board of the PE firm’s portfolio company, was acting in a capacity for which the individual is insured under the portfolio company’s policy.


The Ninth Circuit’s decision in this case clarifies that the allegations in the complaint alone are not conclusive of the issue. Rather, courts should look at what is reasonable to expect under the circumstances given the nature of the misconduct alleged against an individual defendant.


The Ninth Circuit’s ruling ensures that an insured person’s rights under a D&O policy are not subject to the vagaries involved with a third-party plaintiffs’ pleading peculiarities. Basically, insured persons ought to be able to count on their insurance to respond in the kinds of situations for which the insurance was intended to respond. The problem of course is that at the outset of a claim, often all there is to go on is the complaint. Answering the capacity question at the outset may require parties to be flexible and keep an open mind, in order to avoid protracted disputes of the kind involved here.


It is worth noting that the Ninth Circuit’s opinion in this case was designation "not for publication." Nevertheless the opinion may still be cited. Under Federal Rule of Civil Procedure 32.1, circuit courts may no longer prohibit the citation to opinions designated, inter alia, "not for publication."


A November 17, 2010 memo from the McGuire Woods law firm discussing this case can be found here.


The recurring issue of insured capacity is one of the basic coverage issues that can complicate claims handling. Readers interested in getting a handle on the basics of D&O insurance coverage may want to refer to my multipart-series on the nuts and bolts of D&O insurance, which can be accessed here.


D&O Liability Insurance Conference: On November 30 and December 1, 2010, I will be co-chairing with my friend Michael Early of the Chicago Underwriting Group the American Conference Institute’s 16th Annual Summit on D&O Liability in New York. The D&O Diary is a media partner for this event. The conference brochure can be found here. I hope readers who will be attending the event will make a point of greeting me at the conference, particularly if we have not previously met.