Hunton Insurance Recovery Blog

Does the term "wrongful act" always require that the conduct at issue be "wrongful"? In at least one D&O insurance policy, the answer may not be as clear as it seems. A federal district court in Texas recently denied an insurer's motion to dismiss a company's coverage claim for nearly $5 million in costs the company incurred defending a statutory appraisal lawsuit filed by disgruntled shareholders, citing the D&O policy's "terribly" written definition of "wrongful act," which may have been written so broadly that it provides coverage for "acts" that are not actually "wrongful."

Recognizing that a more developed record was needed given the poorly worded policy, the court denied the insurer's motion to dismiss, which had been based on the insurer's argument that statutory appraisal was necessary to determine whether the amount of merger consideration paid was unfair and, if so, to determine the shares' "fair value." The court based its decision on its inability to decipher whether or not a "wrongful act" had been committed, under the terms of the policy, given the imprecise wording of the term's definition.

The court's bench ruling underscores the importance of precise drafting in insurance contracts and illustrates how courts will not accept insurer defenses where they are based on the insurer's favorable interpretation of unartfully drafted policy language (see prior posts on these issues here and here). Given the limited nature of the court's ruling at the early stage of the case, it seems likely that the parties will raise these issues again in further motions practice once discovery is completed. We will continue to monitor the case, CEC Entertainment Inc. v. Travelers Casualty and Surety Co. of America, No. 3:16-cv-02493-M (N.D. Tex.), for further developments.