Just because a series of merger documents assert something to be true does not necessarily make it so, particularly when it comes to insurance coverage.  That was the lesson an excess-layer D&O carrier learned when it attempted to assert insured-versus-insured and fraud exclusions to defeat a claim to policy proceeds by the purchaser of a corporation in Wojtunik v. Kealy, No. 03-cv-02161 (D.Ariz. Mar. 31, 2011).  A copy of the court’s decision is available here.

The named plaintiff won an $8 million stipulated judgment against a corporation that he purchased and various of its officers and directors, on grounds that they had engaged in accounting fraud that rendered the consideration for the transaction worthless.  Neither the corporate defendant nor the individual directors and officers had any assets, save a series of insurance policies that they assigned over to the plaintiff.  Following a coverage suit, the primary D&O carrier paid its limits.

The first-layer excess carrier, however, took the position that the closing documents had made the plaintiff an officer of the merged corporation, so the insured-versus-insured exclusion forbade the carrier from providing coverage.  The court rejected the carrier’s argument, stating that what mattered were official acts of the corporation – and, the employment agreement and merger documents notwithstanding, the corporation’s official books never established that the plaintiff had been “duly elected or appointed” an officer.  The court also rejected out of hand arguments that the policy’s fraud exclusion barred coverage, because there had been no final adjudication on the underlying claims.

The court’s decision was not an unmitigated victory for the plaintiff, as it held that there had to be factual hearings on whether the policy’s cooperation clause had been honored and whether the amount of the stipulated judgment was reasonable.  But the court’s focus on corporate records suggests an unwillingness to let merger documents trump corporate formalities, at least when it comes to claims under D&O insurance policies.