The individual insured accused his insurer of breaching its duties under a directors and officers policy issued to FNEDC by denying him coverage for his defense costs incurred in an action against him entitled Imprimis Investors, LLC, et al. v. KPMG Peat Marwick LLP, et al., No. 99-5312 (Mass. Super. Ct., Suffolk 1999). The insurer denied coverage based on the policy’s so-called Insured versus Insured exclusion, which excluded from coverage any claim against a director or officer by “any security holder of [FNEDC] … unless the claim is instigated and continued totally independent and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any director or officer.” According to the insurer, Imprimis was a shareholder of FNEDC and four of FNEDC’s directors and officers “assisted or actively participated in Imprimis’s suit against [the individual insured].”
The individual insured countered that the exclusion did not apply because under the policy “security holder” means only holders of security interests in the assets of FNEDC — not shareholders. He also argued that even if the claimant was a “security holder” under the exclusion, the activities of the four directors and officers at issue did not rise to the degree of assistance or participation that would invoke the exclusion. In rejecting the indivisual insured’s first argument, the Court looked at the term “security holder” and concluded that it unambiguously referred to shareholders and not just holders of a security interest in the assets of FNEDC. Notably, the Court stated that the exclusion referred to derivative interests that could only exist with respect to the Company’s stock.
With respect to the individual insured’s second argument, the Court ruled that FNEDC directors and officers had clearly assisted and participated in the underlying litigation. The Court pointed out that one of the directors testified as the claimant’s Rule 30(b)(6) deposition witness, that he was represented by the claimant’s counsel during those depositions, that he spoke to the claimant’s counsel in the underlying litigation “often, [on] numerous occasions,” that he provided input with respect to the claimant’s responses to interrogatories, that he discussed case strategy with the claimant’s counsel, that he provided input into what allegations he believed were true and what witnesses would have knowledge helpful to the claimant and, finally, that of the people at the Claimant, he had the second-greatest level of interaction with its lawyers regarding the underlying litigation.
Based on these conclusions, the Court denied the individual insured’s motion for summary judgment and granted the insurer’s cross-motion seeking a declaration that coverage was not available. The Court denied the insurer’s motions seeking reimbursement of defense costs it had already advanced, but only because the insurer had not yet submitted a demand for reimbursement with respect to those costs. The Court, however, instructed the parties that it expects them to resolve any future demands for reimbursement in light of the Court’s ruling that coverage is not available under the policy.