Montana Court Holds D&O Insurer Had Duty to Advance Costs

In its recent decision in Johnson v. Federal Rural Electric Ins. Ex., 2016 U.S. Dist. LEXIS 173037 (D. Mont. Dec. 14, 2016), the United States District Court for the District of Montana had occasion to consider a D&O insurer’s defense obligations under a duty to advance policy.

Federated insured Global Net, Inc. under a directors, officers and management liability policy.  One of Global’s officers, Scott Johnson, was sued in connection with a business-related dispute which among other things included a claim for conversion.  Federal agreed to provide a defense under a reservation of rights and reimbursed defense costs as they were incurred.  When the underlying plaintiff was granted summary judgment against Johnson on the conversion claim amounting to some $14,000, Federal denied coverage for this loss and also asserted that per the terms of its policy, it was not obligated to reimburse defense costs until after the end of the underlying suit at which time it would be determined whether any damages sought in the case qualified for coverage.

In an ensuing coverage litigation, Federated argued that its policy was not a duty to defend policy, but instead a duty to reimburse policy, and that as such, it was not required to reimburse its insured for defense costs as they were incurred.  Notably, the Federated policy expressly stated that Federated “does not under the terms of this policy, assume any duty to defend” and that “costs, charges and expenses of defense payable by the Company are a part of, and not in addition to, the Limit of Liability.”

In considering this issue, the court noted that there was no Montana guidance on insurance policies containing a duty to indemnify defense costs.  The court agreed that general duty to defend case law was inapplicable, and therefore looked to Ninth Circuit case law for guidance on the issue.  From this case law, the court concluded that the Federated policy imposed a duty to advance defense costs associated with all potentially covered claims.  While Federated contended that its duty to pay defense costs could wait until the conclusion of the underlying suit, the court disagreed, concluding that Federated was obligated to pay defense costs as they were incurred.  As the court explained, “Federated is obligated to pay defense costs at the time they are incurred because that is when Johnson is legally obligated to pay them.”

The court agreed that the policy exclusion applicable to ill-gotten gains precluded coverage for the underlying conversion claim.  It nevertheless concluded that the exclusion did not plainly apply to several of the other claims asserted in underlying suit that had not been resolved on motion for summary judgment.  The court concluded, therefore, that Federated had an ongoing to to advance defense costs associated with the remaining claims in the underlying suit pending resolution as to whether or not those claims were excluded from coverage under the Federated policy.

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