Monday, October 26, 2009

U.S. District court holds that there is no coverage to indemnify officers and directors where there is no coverage elsewhere in the policy

In my last few posts I've been discussing Genzyme Corp. v. Fed. Ins. Co., 2009 WL 3101025.

The court held that, because there was no coverage elsewhere in the policy, there was also no coverage under a clause covering all loss for which the insured granted indemnification to its officers and directors. The ruling was based on the public policy that allowing coverage in such circumstances would lead to fraud and chicanery:

[I]t makes little sense to allow a corporation to sidestep coverage limitations in its insurance policy through the simple expedient of claiming that a settlement payment was made to indemnify its directors and officers. Since a corporation can only act through its corporate agents, it will often be the case that when a shareholder can bring a claim against the corporation, she can also bring one against its directors and officers. As the court concluded in the New York case of Reliance Group Holdings, Inc. v. National Union Fire Insurance Co., 188 A.D.2d 47, 54, 594 N.Y.S.2d 20 (N.Y.App.Div.1993), the approach supported by Genzyme would encourage fraud by insured corporations:

Under the construction urged by [the insured corporation and its officer], if an officer or director was sued together with the corporation, the corporation could make full or partial restitution of the embezzled or fraudulently obtained funds purportedly on behalf of its officer, adopt a resolution indemnifying the officer, and then successfully make claim against its D & O insurer for the full amount of the settlement.

The Court refuses to construe the Executive Protection Policy in a manner that would encourage such chicanery.

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