Insurer Liable For Losses Not Wrongful Acts
Commercial Liability |
Three Year Policy |
Directors & Officers |
Breach of Fiduciary Duty |
A savings and loan association prepaid a three-year premium for a
directors and officers liability policy. The three-year policy provided three
separate annual limits of liability, the declarations showing "$20,000,000
each Loss, and $20,000,000 Aggregate Limit of Liability each policy year for
each Director and Officer."
The
association adopted an aggressive lending program in the first year of the
insurance policy. Five directors made over 200 loans during that year and the
second policy year, resulting in significant losses to the association. The
insured gave written notice during the third year of the policy period to the
insurer, detailing potential claims that could arise from several loans made
during the first two years of the policy period. A lawsuit was filed that
alleged breach of fiduciary duty, negligence and mismanagement against the association's
individual directors (5).
Apart
from the lawsuit above, the insurer and one of the directors filed
cross-motions for summary judgment to determine whether the policy's maximum
coverage was $100 million, as claimed by the insurer, or $200 million, as
claimed by the director. The insurance company argued that only the limitation
for year three of the policy applied to the claims "because this was the
year in which notice was given and when all claims were later deemed to have
been made."
The
director sought a declaration that the insurer was liable for two full years of
insurance coverage. He maintained that two separate yearly limitations were
applicable because the loans were made in the first and second years of the
policy period.
The
court took issue with the contention of the association director that "the
annual limits of liability are triggered when wrongful acts occur." It
concluded that "there can be no 'loss' until a claim is made and the legal
obligation to pay is determined." It observed that "wrongful
acts" were allegedly committed during the first two policy years but that
no "loss" had occurred during that time.
In
summary, the court said: "Under the terms of the policy . . . . the
insurer is liable only for 'losses' and not 'wrongful acts.' This being the
case, it is irrelevant when the wrong acts occurred. What matters is when a
loss occurs, and losses by definition can only occur when a claim is made. . .
."
Accordingly,
the court found that the maximum exposure of the insurance company was for one
yearly limit of liability; i.e., $20 million per director for a total amount of
$100 million. The director's motion for summary judgment was denied; the
insurer's cross-motion for summary judgment was granted.
Gilliam, Plaintiff V.
American Casualty Co. Of Reading, Pennsylvania, Defendant. Federal Deposit Ins.
Corp. Et Al., Intervenors, Plaintiffs v. American Casualty Co. Of Reading, Pa, Defendant.
United States District Court, Northern District of CA. Nos. C-89-3813 WHO,
C-86-1245 WHO, C-89-3167 WHO. March 26, 1990. Amended April 17, 1990. 735 F.
Supp. 345 CCH 1990 Fire and Casualty Cases, Paragraph 2639.