Massachusetts Courts Limits D&O Coverage

Posted on November 15, 2009 by Mike Aylward

A federal district court has ruled in Genzyme Corp. v. Federal Ins. Co., No. 08CV10988 (D. Mass. September 28, 2009) that a shareholder class action in which the plaintiffs alleged that Genzyme’s directors and officers had schemed to depress the market value of a subsidiary so that it could fold it into the corporation in a manner favorable to other shareholders failed to trigger coverage under a Directors & Officers policy.

Judge Gertner ruled that the sums that Genzyme had paid to settle these claims were not an insurable loss both because the policy should not insure directors and officers for being forced to disgorge monies to which they were not entitled and by reasons of public policy.

The District Court distinguished cases in which other courts had refused to find coverage for restitution, archly observing that in this case, “Genzyme was less a Butch Cassidy than a Robin Hood as its thefts were for the benefit of others, not for itself.” The court ruled that, “Genzyme should not be able to divide the benefits of equity ownership among its shareholders one way, redistribute those benefits, and then demand indemnification from its insurer for the re-division.”

In any event, the court ruled that these claims were subject to a “bump up” provision in the Federal policy which stated that there was no coverage for that part of loss arising out of any payment of “allegedly inadequate consideration in connection with [the insured’s] purchase of securities issued by any insured organization.”
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Oregon Federal Court Rejects Outrageous Conduct Claim by Insured

Posted on January 22, 2009 by Diane Polscer

In Mancuso v. American Family Muutal Insurance Company, (D. Or. January 16, 2009), 2009 U.S. Dist. LEXIS 3361, the court found that an insured had not presented facts sufficient to show outrageous conduct on the part of the insurer in denying an insurance claim for goods destroyed by a fire. In May 2005, a fire destroyed Mr. Mancuso’s shared 10’ x 20’ storage unit.  When initially asked about the value of the contents, Mr. Mancuso replied it was somewhere between $25,000 and $50,000.  Six months after the fire Mancuso had not actually filed a claim so the insurer closed its file.  Approximately one year after the fire, Mancuso submitted a claim form that was 500 pages long and claimed a loss of more than $750,000. The claim was referred to the insurer’s fraud unit for investigation. Investigators interviewed Mr. Mancuso and his ex-wife.  The insurer denied the claim in total based on its conclusion that every item on the claim form was false.  The insurer also offered to settle the claim, but Mancuso did not respond to an offer. Mancuso brought claims for breach of contract, attorney fees, Outrageous Conduct, Intentional Infliction of Emotional Distress (“IIED”), and defamation. The decision involves the insurer’s partial summary judgment motion against the claims for Outrageous Conduct, IIED and defamation.

Under Oregon law, IIED and Outrageous Conduct are not separate torts. To prevail on a claim for IIED, a party must show that the defendant intended to cause emotional distress, the defendant engaged in outrageous conduct, and the action did result in severe emotional distress. The Court focused on the second element, noting that the claim required conduct “outrageous in the extreme.” In reviewing the facts, the Court noted that there was no outrageous conduct, only “an ordinary investigation of an extraordinary insurance claim.” The Court noted that even if the allegations could be considered deceit by the insurer, this was not outrageous conduct because the investigator did not misrepresent his role, threaten criminal action, or induce Mancuso to take any action to his detriment. The Court also rejected the defamation claim because the investigator did not actually accuse Mancuso of fraud when the investigator spoke to Mancuso’s ex-wife.
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