D&O LIMITS FOR POLICY YEARS WHEN CLAIMS WERE REPORTED HELD APPLICABLE TO OCCURRENCES IN TWO PRIOR POLICY YEARS 361_C004
D&O LIMITS FOR POLICY YEARS WHEN CLAIMS WERE REPORTED HELD APPLICABLE TO OCCURRENCES IN TWO PRIOR POLICY YEARS

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, $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 major 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 that were 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 individual directors (5) of the association.

Apart from the aforementioned lawsuit, the insurer and one of the directors filed cross-motions for summary judgment to determine whether the maximum coverage of the policy 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 year and in the second year 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.)