Directors and officers indemnification and liability insurance: An overview of legal and practical issues

Business Lawyer

Volumn 51, Issue 2, 1996, Pages 576-618

  Monteleone, Joseph P ^a   Conca, Nicholas J ^b  

^a Reliance Group Holdings Company

^b Reliance National

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EID: 4243172495     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (214)

1. For a more in depth discussion of indemnification issues, the reader is referred to James J. Hanks, Evaluating Recent State Legislation on Director and Officer Liability Limitation and Indemnification, 43 BUS. LAW. 1207 (1988), and Karen L. Valihura & Robert J. Valihura Jr., A Delaware Perspective on Advancing Directors' and Officers' Litigation Expenses, BANK & CORP. GOVERNANCE L. REP. (Mar. 1994). There are several more exhaustive works in the area of D&O insurance which also discuss in detail indemnification issues. See JOSEPH W. BISHOP, LAW OF CORPORATE OFFICERS AND DIRECTORS: INDEMNIFICATION AND INSURANCE (1994); WILLIAM E. KNEPPER & DAN A. BAILEY, LIABILITY OF CORPORATE OFFICERS AND DIRECTORS (5th ed. 1993); JOHN OLSON & JOSIAH HATCH, DIRECTOR AND OFFICER LIABILITY: INDEMNIFICATION AND INSURANCE (1995).
2. For a more in depth discussion of indemnification issues, the reader is referred to James J. Hanks, Evaluating Recent State Legislation on Director and Officer Liability Limitation and Indemnification, 43 BUS. LAW. 1207 (1988), and Karen L. Valihura & Robert J. Valihura Jr., A Delaware Perspective on Advancing Directors' and Officers' Litigation Expenses, BANK & CORP. GOVERNANCE L. REP. (Mar. 1994). There are several more exhaustive works in the area of D&O insurance which also discuss in detail indemnification issues. See JOSEPH W. BISHOP, LAW OF CORPORATE OFFICERS AND DIRECTORS: INDEMNIFICATION AND INSURANCE (1994); WILLIAM E. KNEPPER & DAN A. BAILEY, LIABILITY OF CORPORATE OFFICERS AND DIRECTORS (5th ed. 1993); JOHN OLSON & JOSIAH HATCH, DIRECTOR AND OFFICER LIABILITY: INDEMNIFICATION AND INSURANCE (1995).
3. McLean v. International Harvester Co., 902 F.2d 372 (5th Cir. 1990).
4. DEL. CODE ANN. tit. 8, § 145 (1995).
5. Id. § 145(c).
6. Id. § 145(a)-(b).
7. Id.
8. Id. § 145(c).
9. Id.
10. Green v. Westcap, 492 A.2d 260 (Del. Super. Ct. 1985) (concluding that an officer who was acquitted of criminal charges was entitled to mandatory indemnification of expenses incurred in connection with that proceeding); Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 (Del. Super. Ct. 1980) (holding, in a criminal proceeding, that "any result other than conviction must be considered success" for purposes of § 145(c)); Stewart v. Continental Copper & Steel Indus., Inc., 414 N.Y.S.2d 910 (N.Y. App. Div. 1979) (stating that the decision of a grand jury not to return an indictment meant that person to be indemnified was "successful" within the meaning of DEL. CODE ANN. tit. 8, § 145(c)).
11. Safeway Stores, Inc. v. National Union Fire Ins. Co., 64 F.3d 1282, 1290 n.24 (9th Cir. 1995); Wisener v. Air Express Int'l Corp., 583 F.2d 579 (2d Cir. 1978).
12. Galdi v. Berg, 359 F. Supp. 698 (D. Del. 1973).
13. E.g., N.C. GEN. STAT. § 55-8-52 (1990).
14. DEL. CODE ANN. tit. 8, § 145(c) (1995).
15. E.g., Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 (Del. Super. Ct. 1974).
16. See id.
17. MCI Telecommunications Corp. v. Wanzer, Nos. 89C-MR-216 & 89C-SE26, 1990 WL 91100 (Del. Super. Ct. June 19, 1990); see also Merritt-Chapman & Scott Corp. v. Wolfson, 264 A.2d 358 (Del. Super. Ct. 1970) (finding that the directors were entitled to mandatory indemnification for litigation expenses and attorneys' fees for counts which did not result in convictions, but could not recover such amounts with respect to charges which resulted in guilty verdicts).
18. DEL. CODE ANN. tit. 8, § 145(a) (1995).
19. Id.
20. APSB Bancorp v. Grant, 31 Cal. Rptr. 2d 736 (Cal. Ct. App. 1994).
21. Id.
22. Kauffman v. CBS, Inc., 514 N.Y.S.2d 620 (N. Y. Civ. Ct. 1987).
23. Id.
24. Heffernan v. Pacific Dunlop GNS Corp., 965 F.2d 369 (7th Cir. 1992); see also Witco Corp. v. Beekhuis, No. 92-301-RPM, 1993 WL 749596, at *3 (D. Del. Oct. 22, 1993) (stating "[a]n officer or director is protected by § 145(c), even where personal liability is alleged, if there is a close nexus between the litigation and the defendant's corporate status"), aff'd, 38 F.3d 682 (3d Cir. 1994); United States v. Lowe, 29 F.3d 1005 (5th Cir. 1994).
25. Heffernan, 965 F.2d at 375.
26. See, e.g., Grove v. Daniel Valve Co., 874 S.W.2d 150 (Tex. Ct. App. 1994).
27. DEL. CODE ANN. tit. 8, § 145(a) (1995).
28. National Union Fire Ins. Co. v. Emhart Corp., 11 F.3d 1524 (10th Cir. 1993) (applying Virginia law).
29. Grove, 874 S.W.2d at 153.
30. DEL. CODE ANN. tit. 8, § 145(h) (1995).
31. Witco Corp. v. Beekhuis, 38 F.3d 682, 690 n.1 (3d Cir. 1994).
32. Bear in mind that Witco and Emhart, which appear to be completely inconsistent judicial decisions, were decided under different bodies of law and under different factual settings.
33. DEL. CODE ANN. tit. 8, § 145(a) (1995).
34. See id.
35. Id.
36. Id.
37. Id.
38. See Macmillan, Inc. v. Federal Ins. Co., 741 F. Supp. 1079 (S.D.N.Y. 1990).
39. DEL. CODE ANN. tit. 8, § 145(b) (1995).
40. Id. § 145(a).
41. See id.
42. See id.
43. Id.
44. See id.
45. N.Y. BUS. CORP. LAW § 722(c) (McKinney 1986 & Supp. 1996).
46. Adams v. Resolution Trust Co., 831 F. Supp. 1471 (D. Minn.), aff'd, 10 F.3d 568 (8th Cir. 1993).
47. DEL. CODE ANN. tit. 8, § 145(a)-(b) (1995).
48. Id. § 145(d).
49. Id.
50. 833 F. Supp. 302 (S.D.N.Y. 1993).
51. Id. at 311-13.
52. 640 F. Supp. 656, 661 (S.D.N.Y. 1986).
53. Id.; see also Macmillan, Inc. v. Federal Ins. Co., 741 F. Supp. 1079 (S.D.N.Y. 1990) (deciding statutory due diligence procedures govern absent a bylaw provision to the contrary).
54. DEL. CODE ANN. tit. 8, § 145(e) (1995).
55. Id.
56. Id. § 145(f).
57. Id.
58. PepsiCo, Inc. v. Continental Casualty Co., 640 F. Supp. 656, 661 (S.D.N.Y. 1986).
59. Id. at 660-61.
60. 833 F. Supp. 302 (S.D.N.Y. 1993).
61. Id. at 307-09.
62. Id. at 308-09.
63. Id. at 309.
64. Id. at 306-09.
65. See Heffernan v. Pacific Dunlop GNB Corp., No. 91-C-2494, 1993 U.S. Dist. LEXIS 5 (N.D. Ill. Jan. 5, 1993).
66. See N.Y. BUS. CORP. LAW § 722(c) (McKinney 1986).
67. See, e.g., 17 C.F.R. § 229.512(h)(3) (1995).
68. 418 F.2d 1276 (2d Cir. 1969), cert. denied, 397 U.S. 913 (1970).
69. Id. at 1288; see also Eichenholtz v. Brennan, 52 F.3d 478 (3d Cir. 1995) (stating that indemnification "runs counter to the policies underlying the 1933 and 1934 Acts").
70. Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170 (N.D. Cal. 1994).
71. Id. at 1177.
72. Id.
73. See, e.g., Federal Ins. Co. v. Oak Indus., Inc., No. 85-985-G(M) (S.D. Cal. Feb. 5, 1986) (concluding insurer waived right to rescind after waiting two years after it was placed on notice of misrepresentations).
74. 334 F. Supp. 255 (E.D. Pa. 1971).
75. 341 F. Supp. 291 (E.D. Pa. 1972).
76. Bird, 334 F. Supp. at 255. But see Zaremba v. National Union Fire Ins. Co., 1979 Fire & Casualty Cas. (CCH) 1302 (N.D. Ohio Sept. 29, 1978) (determining an agency relationship only existed between the application signatory and the corporation, but not with other officers and directors).
77. 584 F. Supp. 1245 (D. Mass. 1984).
78. Id.
79. note.
80. 616 F. Supp. 900 (D. Mass. 1984).
81. Id. at 902.
82. See also Mazur v. Gaudet, 826 F. Supp. 188 (E.D. La. 1992) (regarding fiduciary liability policy); Wedtech Corp. v. Federal Ins. Co., 740 F. Supp. 214 (S.D.N.Y. 1990) (deciding severability provision in a D&O policy precluded the insurer from rescinding policy as to "innocent" insureds). A number of other cases have dealt with the rescission issue in the context of a D&O policy. See Atlantic Permanent Fed. Sav. & Loan Ass'n v. American Casualty Co., 839 F.2d 212 (4th Cir.), cert. denied, 486 U.S. 1056 (1988); FSLIC v. Burdette, 718 F. Supp. 649 (E.D. Tenn. 1989); National Union Fire Ins. Co. v. SeaFirst Corp., No. C85-396R, 1987 U.S. Dist. LEXIS 14394 (W.D. Wash. Dec. 23, 1987).
83. See MGIC Indem. Corp. v. Home State Sav. Ass'n, 797 F.2d 285 (6th Cir. 1986); Macmillan, Inc. v. Federal Ins. Co., 741 F. Supp. 1079 (S.D.N.Y. 1990); cf. Safeway Stores, Inc. v. National Union Fire Ins. Co., 64 F.3d 1282 (9th Cir. 1995).
84. Mt. Hawley Ins. v. FSLIC, 695 F. Supp. 469, 479 (C.D. Cal. 1987).
85. Winkler v. National Union Fire Ins. Co., 930 F.2d 1364 (9th Cir. 1991); In re Ambassador Group, Inc. Litig., 830 F. Supp. 147 (E.D.N.Y. 1993).
86. See Bendis v. Federal Ins. Co., 958 F.2d 960 (10th Cir. 1991); Abifadel v. Cigna, 9 Cal. Rptr. 2d 910 (Cal. Ct. App. 1992).
87. See, e.g., Pacific Ins. Co. v. Cordova Chem. Co., No. 87-23270-CK (Mich. Cir. Ct. Jan. 20, 1989) (discussing letter from EPA notifying the insured of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) constituting a "claim" under a general liability policy).
88. Polychron v. Crum & Forster Ins. Cos., 916 F.2d 461 (8th Cir. 1990). A contrary result was reached in MGIC Indem. Corp. v. Home State Sav. Assocs., 797 F.2d 285 (6th Cir. 1986) (discussing a letter identifying officers as targets of a grand jury investigation and the determination that it did not constitute a "claim").
89. California Union Ins. Co. v. American Diversified Sav. Bank, 914 F.2d 1271 (9th Cir. 1990), cert. denied, 498 U.S. 1088 (1991) (discussing letters and a cease-and-desist order from the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp. and determining they were not "claims"); Harbor Ins. Co. v. Continental Illinois Corp., No. 85 C 7081, 1989 U.S. Dist. LEXIS 14300 (N.D. Ill. Nov. 27, 1989) (concluding that the SEC's issuance of an order of private investigation was a "claim"); Mt. Hawley Ins. Co. v. FSLIC, 695 F. Supp. 469 (C.D. Cal. 1987) (deeming letters from Federal Home Loan Bank Board to be "claims"); Bensalem Township v. Western World Ins. Co., 609 F. Supp. 1343 (E.D. Pa. 1985) (concluding letter from the Equal Employment Opportunity Commission (EEOC) was not a "claim"); Campbell Soup v. Liberty Mutual Ins. Co., 571 A.2d 969 (N.J. Super. Ct.), cert. denied, 584 A.2d 230 (N.J. 1990) (deciding an EEOC reasonable cause determination did not constitute a "claim"); Chalk v. Trans Power Mfg., 451 N.W.2d 770 (Wis. Ct. App. 1989) (concluding letters from the Internal Revenue Service were not "claims").
90. No. C-91-1506-FMS, 1992 U.S. Dist. LEXIS 16836 (N.D. Cal. Oct. 15, 1992).
91. Id. at *5-*6.
92. LA. REV. STAT. ANN. § 22:655 (West 1995).
93. See Williams v. Lemaire, 655 So.2d 765 (La. Ct. App.), appeal denied, 660 So.2d 481 (La. 1995).
94. This policy covers all claims stemming from occurrences within the policy period regardless of when notice is given or a claim made.
95. W.R. Grace v. Maryland Casualty Co., 600 N.E.2d 176 (Mass. 1992); see also California Union Ins. Co. v. American Diversified Sav. Bank, 948 F.2d 556 (9th Cir. 1991) (deciding that a cease-and-desist order that did not describe circumstances which might give rise to director liability was not adequate notice). But see Branning v. CNA Ins. Co., 721 F. Supp. 1180 (W.D. Wash. 1989) (concluding that a cease-and-desist order attached to a renewal application was adequate notice).
96. See also FDIC v. Caplan, 838 F. Supp. 1125 (W.D. La. 1993) (concluding that a letter from the Federal Deposit Insurance Corp. was not sufficient notice as it neither identified wrongful acts, the directors and officers involved in the purported wrongful conduct, nor the relevant time period).
97. See LaForge v. American Casualty Co., 37 F.3d 580 (10th Cir. 1994) (determining that materials submitted in connection with an application for coverage did not provide adequate notice of an occurrence); Resolution Trust Co. v. Ayo, 31 F.3d 285 (5th Cir. 1994) (applying an objective standard, the court held that the submission of regulatory reports did not constitute sufficient notice of an occurrence); FDIC v. Mijalis, 15 F.3d 1314 (5th Cir. 1994) (finding that the notice to the insurer of a cease-and-desist order and the insured's deteriorating financial condition did not trigger coverage under the notice of potential claim provision).
98. See American Casualty Co. v. FDIC, 958 F.2d 324 (10th Cir. 1992) (finding notice of an occurrence or potential claim can only trigger coverage if it is given during the policy period); see also FDIC v. American Casualty Co., 528 N.W.2d 605 (Iowa 1995). But see McCuen v. American Casualty Co., 946 F.2d 1401 (8th Cir. 1991); Slaughter v. American Casualty Co., 842 F. Supp. 376 (E.D. Ark. 1993), rev'd, 37 F.3d 385 (8th Cir. 1994) (concluding notice of a potential claim may be given in either the policy period or optional extension period).
99. See Helfand v. National Union Fire Ins. Co., 13 Cal. Rptr. 2d 295 (Cal. Ct. App. 1992).
100. A number of other decisions hold for a contemporaneous duty to pay. See McCuen v. American Casualty Co., 946 F.2d 1401 (8th Cir. 1991); Gon v. First State Ins. Co., 871 F.2d 863 (9th Cir. 1989); Okada v. MGIC Indem. Corp., 823 F.2d 276 (9th Cir. 1987); FDIC v. Booth, 824 F. Supp. 76 (M.D. La. 1993); Wedtech Corp. v. Federal Ins. Co., 740 F. Supp. 214 (S.D.N.Y. 1990); FSLIC v. Burdette, 718 F. Supp. 649 (E.D. Tenn. 1989); Mt. Hawley Ins. Co. v. FSLIC, 695 F. Supp. 469 (C.D. Cal. 1987); American Casualty Co. v. Bank System, 675 F. Supp. 538 (D. Minn. 1987); Little v. MGIC Indem. Corp., 649 F. Supp. 1460 (W.D. Pa. 1986), aff'd on other grounds, 836 F.2d 789 (3d Cir. 1987); Western Line Consol. Sch. Dist. v. Continental Casualty Co., 632 F. Supp. 295 (N.D. Miss. 1986); Quinlan v. Liberty Bank & Trust Co., 545 So.2d 1140 (La. Ct. App. 1991). A number of other decisions follow the line of reasoning in Zaborac v. American Casualty Co., 663 F. Supp. 330 (C.D. Ill. 1987), in holding that the D&O insurer has no obligation to pay defense expenses at the time they are incurred. See Resolution Trust Corp. v. Miramon, No. 92-2672, 1993 U.S. Dist. LEXIS 8361 (E.D. La. May 27, 1993); Corabi v. CNA Ins. Cos., No. C-2-87-674, 1988 U.S. Dist. LEXIS 18424 (S.D. Ohio June 21, 1988); Continental Cas. Co. v. Allen, No. CA-5-86-252 (N.D. Tex. Feb. 16, 1988) (on file with The Business Lawyer, University of Maryland School of Law); Harristown Dev. Corp. v. International Ins. Co., No. 87-1380, 1988 U.S. Dist. LEXIS 12791 (M.D. Pa. Nov. 15, 1988); American Casualty Co. v. FDIC, 677 F. Supp. 600 (N.D. Iowa 1987); Continental Cas. Co. v. McAllen Sch. Dist., No. B-86-007, 1987 U.S. Dist. LEXIS 14150 (S.D. Tex. May 19, 1987); Luther v. Fidelity & Deposit Co., 679 F. Supp. 1092 (S.D. Fla. 1986); Bank of Commerce & Trust Co. v. National Union Fire Ins. Co., 651 F. Supp. 474 (N.D. Okla. 1986); Enzmeiler v. Fidelity & Deposit Co., No. 85-99, 1986 WL 20444 (E.D. Ky. May 13, 1986); Farmers & Merchants Bank v. Home Ins. Co., 514 So.2d 825 (Ala. 1987); Continental Casualty Co. v. Board of Ed., 489 A.2d 536 (Md. 1985); Amrep Corp. v. American Home Assurance Co., 440 N.Y.S.2d 244 (N.Y. App. Div. 1991); National Union Fire Ins. Co. v. Ambassador Group, Inc., 556 N.Y.S.2d 549 (N.Y. App. Div. 1990); Faulkner v. American Cas. Co., 584 A.2d 734 (Md. Ct. Spec. App.), cert. denied, 590 A.2d 158 (Md. 1991); National Union Fire Ins. Co. v. Goldman, 548 So.2d 790 (Fla. Dist. Ct. App. 1989).
101. 640 F. Supp. 656 (S.D.N.Y. 1986).
102. Board of Ed. v. CNA Ins. Co., 647 F. Supp. 1495 (S.D.N.Y. 1986), aff'd, 839 F.2d 14 (2d Cir. 1988).
103. McGinnis v. Employers Reinsurance Corp., 648 F. Supp. 1263 (S.D.N.Y. 1986).
104. 738 F. Supp. 57 (E.D.N.Y. 1990).
105. Id. at 61-62.
106. Id. at 64.
107. 136 B.R. 59 (S.D.N.Y. 1992) (holding no duty to pay contemporaneously unless specifically provided for in policy).
108. Id. at 63.
109. 787 F. Supp. 1424 (S.D. Fla.), aff'd mem., 963 F.2d 385 (11th Cir. 1992).
110. Id. at 1429-30.
111. Kenai, 136 B.R. at 63-64.
112. 823 F.2d 276 (9th Cir. 1987).
113. See Clause 9 of the National Union Fire Insurance policy form, wherein it is stated: "Under Coverage B, the Insurer assumes no duty to reimburse Defense Costs prior to the final disposition of the claim."
114. In a form introduced in April 1995 as an alternative to and/or replacement of this 1988 form, National Union now provides for contemporaneous payment of defense expenses under all aspects of the policy.
115. In an interesting opinion rendered in Faulkner v. American Casualty Co., 584 A.2d 734 (Md. 1991), it was held that a D&O insurer had an obligation to pay defense costs as they were incurred but, recognizing an earlier Maryland decision on allocation between covered and noncovered claims, found that the insurer only had the obligation to advance defense costs for claims otherwise covered under the policy. Id. at 745. Ruling on a related interpleader issue, the Faulkner court rejected the notion traditionally applied to "duty to defend" policies that the defense obligation is broader than any duty to indemnify for covered loss. Id. at 749-50. Recognizing that there is no duty to defend on the part of a D&O insurer, the court held that the "obligation to pay defense costs . . . is coextensive with . . . the obligation to indemnify." Id. at 750. Thus, while other courts have addressed the issues of allocation and advancement in a single opinion, Faulkner is perhaps the first to demonstrate the relationship of these issues and the fact that one cannot meaningfully address the advancement issue without first resolving any allocation problem that may be presented by the facts of the claim.
116. An exemplar of such guidelines utilized by Reliance National is attached as Appendix A to this Article.
117. Macmillan, Inc. v. Federal Ins. Co., 141 F.R.D. 241 (S.D.N.Y. 1992).
118. Reliance National, Directors and Officers Liability Policy Including Company Reimbursement, at 2 (emphasis added) [hereinafter D&O Liability Policy] (on file with The Business Lawyer, University of Maryland School of Law).
119. Id.
120. No. Civ. 90-1221 (D. Ariz. Dec. 12, 1994) (on file with The Business Lawyer, University of Maryland School of Law).
121. Id. at 3-4; see also Beck v. American Casualty Co., No. MO-88-CA-303, 1990 WL 598573 (W.D. Tex. Apr. 12, 1990); Olson v. Federal Ins. Co., 219 Cal. App. 3d 252 (Cal. Ct. App. 1990) (concluding no coverage for individual who was sued in his capacity as a shareholder, rather than as a director or officer).
122. Tichenor v. Roman Catholic Church, 32 F.3d 953, 960 (5th Cir. 1994).
123. Id.
124. 550 N.E.2d 1052 (Ill. App. Ct. 1990).
125. Id. at 1059-60; see also Macmillan, Inc. v. Federal Ins. Co., 764 F. Supp. 38 (S.D.N.Y. 1991).
126. D&O Liability Policy, supra note 117, at 3.
127. Id.
128. See First Nat'l Bank Holding Co. v. Fidelity Deposit Co., 885 F. Supp. 1533 (N.D. Fla. 1995) (concluding guilty plea was a final adjudication for purposes of dishonesty exclusion); see also Atlantic Permanent Fed. Sav. & Loan Ass'n. v. American Casualty Co., 839 F.2d 212 (4th Cir.), cert. denied, 486 U.S. 1056 (1988); National Union Fire Ins. Co. v. Continental Illinois Corp., 666 F. Supp. 1180 (N.D. Ill. 1987); PepsiCo, Inc. v. Continental Casualty Co., 640 F. Supp. 656 (S.D.N.Y. 1986).
129. See Stargatt v. Avenell, 434 F. Supp. 234 (D. Del. 1977).
130. See American Casualty Go. v. United S. Bank, 950 F.2d 250 (5th Cir. 1992).
131. 864 F.2d 964 (2d Cir. 1988), cert. denied, 109 S. Ct. 3160 (1989).
132. Id.
133. See Country Manors Ass'n, Inc. v. Master Antenna Sys., Inc., 534 So.2d 1187 (Fla. Dist. Ct. App. 1988) (finding that even though claim asserted against the insureds did not require a finding of dishonesty, the record supported such a finding, and hence, the dishonesty exclusion was applicable).
134. 583 F.2d 1281 (5th Cir. 1978).
135. Id. at 1285.
136. Id. at 1288.
137. D&O Liability Policy, supra note 117, at 3.
138. See Federal Ins. Co. v. Sheldon, 186 B.R. 364 (S.D.N.Y. 1995); National Union Fire Ins. Co. v. Continental Illinois Corp., 666 F. Supp. 1180 (N.D. Ill. 1987); Gardner v. Cumis Ins. Society, Inc., 582 So.2d 1094 (Ala. 1991).
139. Gardner, 582 So.2d at 1094.
140. Id. at 1096.
141. Id. at 1095.
142. International Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989).
143. D&O Liability Policy, supra note 117, at 3.
144. There is a well-developed body of case law dealing with "other insurance" disputes that is beyond the scope of this Article.
145. D&O Liability Policy, supra note 117, at 3.
146. Id.
147. See High Voltage Eng'g Corp. v. Federal Ins. Co., 981 F.2d 596 (1st Cir. 1992); Employers Ins. v. Duplan Corp., 899 F. Supp 1112 (S.D.N.Y. 1995); Prudential-LMI Commercial Ins. Co. v. Meadowood Condominium Ass'n, No. 91-3848, 1992 WL 189490 (E.D. Pa. Aug. 3, 1992).
148. D&O Liability Policy, supra note 117, at 3.
149. See Appendix B of this Article for a listing of the decisions and results in this area.
150. See Reliance Ins. Co. v. Weis, 5 F.3d 532 (8th Cir. 1993), cert. denied, 114 S. Ct. 1066 (1994); Levy v. National Union Fire Ins. Co., 889 F.2d 433 (2d Cir. 1989); Bendis v. Federal Ins. Co., 1989 WL 161437 (D. Kan. Dec. 4, 1989), aff'd, 958 F.2d 960 (10th Cir. 1991).
151. Appendix B to this Article sets forth an extensive listing of decisions interpreting the regulatory exclusion, the insured v. insured exclusion, or both, together with a brief indication of the result and reasoning.
152. Other than those cases specifically discussed below, the following decisions address the allocation issue: Continental Casualty Co. v. Canadian Universal Ins., 924 F.2d 370 (1st Cir. 1991); PLM, Inc. v. National Union Fire Ins. Co., 848 F.2d 1243 (9th Cir. 1988); Society Corp. v. American Casualty Co., No. 1:91 CV 0327, 1991 WL 346302 (N.D. Ohio July 24, 1992); Prime Computer, Inc. v. Chubb Corp., No. 89-2554-H, 1990 WL 117990 (D. Mass. Jan. 3, 1990); Perini Corp. v. National Union Fire Ins. Co., No. 86-3522-S, 1988 WL 192453 (D. Mass. June 2, 1988); Farmers & Merchants Bank v. Home Ins. Co., 514 So.2d825 (Ala. 1987); Ratcliffe v. International Surplus Lines Ins. Co., 550 N.E.2d 1052 (Ill. App. Ct. 1990).
153. 489 A.2d 536 (Md. 1985).
154. Id. at 543-44.
155. Id. at 545; see also Apollo Indus., Inc. v. Associated Int'l Ins., No. 153902 (Mich. Ct. App. Apr. 13, 1995) (applying reasonable relationship test) (on file with The Business Lawyer, University of Maryland School of Law).
156. Other cases that have addressed allocation between covered and noncovered counts include Gon v. First State Ins. Co., 871 F.2d 863 (9th Cir. 1989), and Harristown Dev. Corp. v. International Ins. Co., No. 87-1380, 1988 U.S. Dist. LEXIS 12791 (M.D. Pa. Nov. 15, 1988).
157. PepsiCo, Inc. v. Continental Casualty Co., 640 F. Supp. 656, 662 (S.D.N.Y. 1986).
158. Id.; see also American Casualty Co. v. Sierra Chem. Co., No. C-89-1800 (N.D. Cal. 1990) (applying a relative exposure analysis) (on file with The Business Lawyer, University of Maryland School of Law).
159. Another New York decision that addressed allocation as between covered versus noncovered parties (except in the context of determining an allocation for defense costs) was Health-Chem v. National Union Fire Ins. Co., 559 N.Y.S.2d 435 (N.Y. Sup. Ct. 1990). In that case, the court was called upon to determine the appropriate allocation of defense costs, incurred in a securities class action, between a corporation, its directors and officers, and its investment banking firm. Adhering to the standard set forth in PepsiCo, the court held that upon prima facie proof of an expense incurred in the defense of a covered party, the burden of showing that all or a specific portion of that expense was incurred in the defense of a non-covered party falls on the D&O insurer. Id. at 438.
160. A good example of the wide ranging application of these standards is reflected in the court's discussion in Federal Realty Inv. Trust v. Pacific Ins. Co., 760 F. Supp. 533 (D. Md. 1991), in which the court had to consider both allocation between parties and among covered versus noncovered claims and, in so doing, applied both the "relative fault/exposure" test of PepsiCo (as to the allocation of the settlement) and the "reasonable relationship" standard of Charles County (as to the allocation of defense costs).
161. 715 F. Supp. 1458 (W.D. Mo. 1989).
162. Id. at 1461.
163. Id. at 1464.
164. Id.
165. Id. at 1466.
166. Id.; see also Vicorp Restaurants, Inc. v. Federal Ins. Co., No. 92-C-751 (D. Colo. Aug. 10, 1994) (acknowledging that derivative corporate liability could not support an allocation) (on file with The Business Lawyer, University of Maryland School of Law). In an earlier decision, the Vicorp court stated that a corporation's liability exposure in a securities class action is not necessarily wholly derived from the acts of the directors and officers. Vicorp Restaurants, Inc. v. Federal Ins. Co., No. 92-C-751, 1993 U.S. Dist. LEXIS 20294 (D. Colo. June 30, 1994).
167. Nodaway, 715 F. Supp. at 1461.
168. No. 90-1866, 1994 U.S. Dist. LEXIS 3977 (E.D. Pa. Mar. 30, 1994). But see Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170 (N.D. Cal. 1994); Ameriwood Indus. Int'l Co. v. American Casualty Co., No. 1:92-CV-658, 1994 U.S. Dist. LEXIS 10554 (W.D. Mich. July 26, 1994) (adopting the larger settlement rule).
169. Bancorp, 1994 U.S. Dist. LEXIS 3977 at *12-*13.
170. See Musick, Peeler & Garrett v. Employers Ins., 113 S. Ct. 2085 (1993); see also First Nat'l Bank v. American Casualty Co., No. 2:94-CV-306 (W.D. Mich. Sept. 11, 1995) (rejecting the notion that derivative corporate liability defeats allocation) (on file with The Business Lawyer, University of Maryland School of Law).
171. 922 F.2d 357 (7th Cir. 1990).
172. Id. at 367-68.
173. 54 F.3d 1424 (9th Cir. 1995).
174. Id. at 1433 (emphasis added).
175. 62 F.3d 955 (7th Cir. 1995).
176. Id. at 960-61.
177. Id. at 961.
178. Id. at 959-61.
179. Id. at 962.
180. Id. at 961.
181. Id. at 962.
182. Id.
183. An interesting footnote to the Caterpillar case stated that, although the case generally is perceived as being negative from a D&O insurers' standpoint, Caterpillar, not the D&O insurer, petitioned the Seventh Circuit for a rehearing on the appeal. Perhaps this suggests that the "larger settlement rule" is not quite the magical elixir that every D&O policyholder seeks.
184. 64 F. 3d 1282 (9th Cir. 1995).
185. Id. at 1286-87.
186. Id. at 1287.
187. Id. at 1288.
188. Id. at 1289.
189. Id.
190. Id. at 1288 (emphasis added).
191. Id. at 1288-89.
192. Id. at 1289.
193. Id.
194. Id.
195. 991 F.2d 497 (9th Cir. 1993).
196. Id. at 500-01.
197. 871 F.2d 863 (9th Cir. 1989).
198. 17 C.F.R. § 240.10b-5 (1995).
199. Gon, 871 F.2d at 868.
200. Id.
201. Id.
202. The cases placing the burden of proof with the insurer include PepsiCo, Health-Chem and Harbor. Cases holding to the contrary, with the burden on the insured, are Atlantic Permanent Fed. Sav. & Loan v. American Casualty Co., 839 F.2d 212 (4th Cir. 1988); Kaufman & Broad, Inc., v. Continental Casualty Co., CV 88-1329 (C.D. Cal. Sept. 27, 1989) (on file with The Business Lawyer, University of Maryland School of Law); John Hancock Healthplan of Penn., Inc. v. Lexington Ins. Co., No. 88-2308, 1989 U.S. Dist. LEXIS 11019 (E.D. Pa. Sept. 11, 1989).
203. Harristown Dev. Corp. v. International Ins. Co., No. 87-1380, 1988 WL 123149 (N.D. Pa. 1988).
204. 805 F. Supp. 1484 (N.D. Cal. 1992).
205. Id. at 1491-92.
206. 1 F.3d 912 (9th Cir. 1993).
207. Id. at 918-19.
208. Id. at 915.
209. Id. at 912.
210. Id. at 919-20.
211. See id. at 916.
212. Id.
213. Id. at 918-19.
214. Id. For a further discussion on bad faith as respects allocation issues, see Carnation Co. v. Continental Casualty Co., CV 88-4018 (C.D. Cal. 1990) (concluding that in the absence of proof of wrongdoing, a D&O insurer's dispute over allocation did not constitute bad faith) (on file with The Business Lawyer, University of Maryland School of Law).