The Devil Is in the Details
D&O Policy May Cover Judgment Against Company for Intentional Misrepresentations During Negotiations Leading To Asset Purchase Agreement
Rhode Island District Court Denies Insurer’s Motion to Dismiss
After a jury found that Versyss was liable to TranSched for breach of contract and intentional misrepresentation, TranSched sued Versyss’ directors and officers liability insurer, Federal, to collect on the judgment. Federal moved to dismiss in reliance on the D&O policy’s contract and fraud exclusions. It may sound like those policy exclusions would bar coverage, but, as often happens, a closer reading of the policy led to a different conclusion.
The judgment was based on evidence that a Versyss VP and its Chief Technology Officer made intentional misrepresentations during the negotiation and execution of an asset purchase agreement through which TranSched acquired Versyss’ transportation software assets. The fraud exclusion barred coverage to an insured based upon “any deliberately fraudulent act or omission . . . by such insured.” However, the policy also stated that only facts pertaining to and knowledge possessed by specified high-level corporate officers would be imputed to the company for purposes of the fraud exclusion. So, although the intentional fraudulent conduct of the VP and CTO were imputed to Versyss for purposes of establishing its liability to TranSched, they were not imputed to Versyss for purposes of coverage, and the Rhode Island federal District Court rejected Federal’s motion to dismiss based on the fraud exclusion.
The policy’s contract exclusion barred coverage for any claim “based upon, arising from, or in the consequence of any actual or alleged liability of an Insured Organization under any written contract or agreement, provided that this Exclusion . . . shall not apply to the extent that an Insured Organization would have been liable in the absence of the contract or agreement.” Federal relied on the broad “based upon, arising from, or in consequence of” language to argue that the exclusion encompassed an intentional misrepresentation based on representations madein negotiations leading to a contract. However, that language is undercut by the requirement that the claim arise out of “liability . . . under” a contract. Because Versyss’ liability was in part for conduct before the execution of the contract, and for misrepresentation, an independent tort, the Court also denied Federal’s notion to dismiss based on the contract exclusion.
The policy and the verdict slip were attached to the complaint, allowing the Court to address these coverage issues on a motion to dismiss. Technically, all that has been decided is that TranSched can proceed on its coverage claims, but the court has given a clear indication of how it reads the policy. Could filling in the details from the underlying trial change the coverage analysis?
The case is Transched Systems Limited v. Federal Ins. Co., United States District Court for the District of Rhode Island Civil Action No. 12-939-M (August 2, 2013).
Posted In: Directors & Officers