GTTC Prevails on “Insured Capacity” and “Major Security Holder” Exclusions in D&O Coverage Litigation

GTTC partner Frank Cordell recently obtained a notable ruling on two important and emerging issues in D&O coverage disputes: the “Insured Capacity” and “Major Security Holder” exclusions. GTTC represents the former directors and officers of Altierre Corporation in coverage litigation against their D&O insurer, Allied World. Kline Hill, a private equity firm that had invested in Altierre, sued the insured directors and officers, alleging that they had breached their fiduciary duties to Altierre and to Kline Hill as a minority shareholder of Altierre. Kline Hill alleged that the insureds’ allegedly wrongful acts were motivated by a desire to benefit a third company, Stratim Capital, with which some of the insureds also held executive positions.

The directors and officers tendered the Kline Hill case to Allied World, but the insurer denied coverage. Allied World contended that the underlying allegations that the insureds had acted with an intent to benefit a non-insured entity, Stratim, meant that the insureds were not acting in an insured capacity when they committed the allegedly wrongful acts. The insurer therefore claimed that the “Insured Capacity” exclusion applied to bar coverage. Allied World also argued that Kline Hill’s acquisition of more than 10 percent of Altierre’s stock, which acquisition did not occur until well after the start of the underlying litigation, triggered the policy’s exclusion for claims brought by “Major Security Holders.”

On behalf of the insureds, GTTC filed suit against Allied World in U.S. District Court for the Northern District of California. The insureds filed a motion for partial summary judgment, and on February 24, 2023, the court, by Judge Beth Labson Freeman, granted the motion. Judge Freeman held that where, as here, the basis of the insureds’ alleged liability is breach of fiduciary duties owed to the insured entity, an alleged motive to benefit another entity does not place the claims into the Insured Capacity exclusion. The court further ruled that the relevant date for determining Kline Hill’s “Major Security Holder” status was the date the insured “Claim” was first asserted. The decision, Abrams v. Allied World Assurance Co. (U.S.) Inc., 2023 WL 2214175 (N.D. Cal. Feb. 24, 2023), may be downloaded here.