Insurer on the Hook for Defense of Shareholders in Underlying Fraud Claim
In July 2015, Hestia B.V. sold its outstanding shares, as well as its company Aegis U.S., to GardaWorld Consulting Limited.
In the purchase and sales agreement, GardaWorld paid shareholders of Hestia approximately $130 million in cash at closing, with an additional earnout payment promised in later years “if the acquired Aegis businesses satisfied certain profit hurdle(s) specified.”
In 2017, former Hestia shareholders as well as Aegis shareholders sued GardaWorld, claiming the company failed to properly interpret and apply the terms of the earnout provision.
GardaWorld filed counterclaims specifically against the Aegis shareholders, asserting these individuals “engaged in fraud and aided and abetted fraud” related to Hestia’s acquisition.
Aegis shareholders notified insurer National Union Fire Insurance Company of Pittsburgh, through which Aegis held D&O coverage at the time of the acquisition. According to the policy, coverage would be provided to “individual insureds” in the incident a D&O dispute arose.
National Union would “pay the loss of the company arising from a … claim made against an individual insured, for any wrongful act.”
The policy would not “be liable to make any payment for loss in connection with any claim made against an insured … arising out of, based upon or attributable to any actual or alleged act or omission of an individual insured serving in any capacity, other than as an executive or employee of a company.”
National Union denied coverage for the underlying counterclaims based on the policy’s above exclusion.
The Aegis shareholders fought back. They alleged that the counterclaims brought forth by GardaWorld “explicitly target” them in their “capacities as executives or employees of Aegis.” Therefore, they should be provided defense under the policy. They sought declaratory judgment.
Upon review, however, the court was torn.
The court determined that it was unable to conclude with certainty that the Aegis shareholders’ alleged actions were within the scope of their roles as executives or employees.
Scorecard: Because the court could not conclude with certainty, it granted the Aegis shareholders’ motion for declaratory judgment. National Union will have to defend them in the underlying suit.
Takeaway: Policy language can be dicey if not written with absolute clarity. Best chances to avoid mishap would be to review endorsements, exclusions and the like with legal counsel to guarantee the policy says what it’s meant to say. &