Hunton Insurance Recovery Blog

In a recent client alert, Hunton insurance attorneys Geoffrey B. Fehling and Charlotte E. Leszinske discuss D&O insurance considerations for shareholder derivative liability claims.  A recent complaint filed in the federal court alleges that an opportunistic investor used his status as a shareholder to pressure the company into business deals that would benefit him personally, on threat of a derivative action.  See Maddox Defense, Inc. v. Envirotech Vehicles, Inc. v. Diveroli, et al., No. 26-cv-2992.  The shareholder is alleged to have held himself out as the company’s representative in a lucrative government contract, and when things went south, sued.  He then allegedly offered to drop the lawsuit if the company entered into different contracts to its detriment and his benefit.

The decision underscores the importance of maintaining D&O liability insurance to protect against shareholder lawsuits, especially those brought derivatively on behalf of the company, as those claims can pose unique challenges on indemnification, exclusions, and other coverage issues. 

The Delaware Chancery Court recently held that the duty of oversight extended to corporate officers. The important decision came after McDonald’s shareholders sued the company’s former head of human resources, alleging that the officer breached his duty of oversight by “allowing a corporate culture to develop that condoned sexual harassment and misconduct.” In that same decision, Vice Chancellor Laster also determined that acts of sexual harassment can constitute a breach of fiduciary duty. Officers are rightly focused on the potential ramifications on their personal liability following the ruling. But that potential increased exposure also raises several insurance implications for companies to consider while procuring and renewing directors and officers insurance coverage.

Earlier this month, current and former Boeing Company directors agreed to a $237.5 million settlement to resolve claims that they ignored safety issues concerning Boeing’s 737 MAX aircraft. While the settlement, which came quickly on the heels of the Delaware Chancery Court’s September denial of the defendants’ motion to dismiss, ranks as one of the largest derivative settlements of all time, the silver lining for the directors and officers named in the suit is that the entire settlement is to be funded by the company’s D&O insurers. The Boeing case is yet another example of the necessity for public companies to purchase sufficient D&O liability coverage, particularly “Side A” insurance coverage, to protect officers and directors implicated in derivative claims, securities class actions, enforcement actions, and similar claims. Because many states, including Delaware, prohibit companies from indemnifying officers and directors for payments made to the company in settlement of stockholder derivative claims or other suits brought on behalf of the company, securing Side A coverage to protect individuals for non-indemnified loss is essential.