Earlier this month, an Illinois federal district court held that a liability insurer had no duty to defend or indemnify a property management company or its owner in lawsuits that included allegations of intentional conduct. The suits accused the owner of concealing financial information from and engaging in a scheme to increase tax liability and decrease profit distributions to a minority owner. This case reinforces the importance of maintaining D&O insurance as part of a comprehensive liability insurance program to protect against potential gaps in coverage that could result from allegations of intentional or knowing acts.

Background

The court in Old Guard Insurance Company v. Riverway Property Management, LLC et al., No. 1:23-cv-01098 (C.D. Ill. Sep. 6, 2024) was asked to determine whether Old Guard Insurance Co. was required to defend or indemnify Riverway Property Management LLC or its owner under two commercial general liability policies in relation to state court lawsuits. The lawsuits alleged that Riverway’s owner intentionally and improperly misappropriated funds and that the property management company knowingly and substantially assisted with this wrongful scheme.  

In ruling for the insurer, the court emphasized how the lawsuits arose out of what was alleged to be intentional conduct by the owner. Because the gravamen of the allegations was the owner’s alleged intentional conduct, the court found that the allegations did not fall within the definition of occurrence under the commercial general liability policies, which required “an accident.” The court reasoned that the allegations of intentional conduct were “inconsistent with the type of insurance contracted for,” exceeded the risks purchased by the insurer, and were “beyond the subject matter and overall purpose” of the commercial general liability policies.

Analysis

In all likelihood, the insureds would not have faced the same hurdle had they sought to recover under a D&O policy. Exclusions in D&O policies for acts of fraud, dishonesty, criminal, and deliberate or intentional conduct typically apply only after the offending conduct is proven, rather than merely alleged. These so-called “final adjudication” requirements are crucial to preserving coverage for alleged fraud, among other kinds of knowing and intentional conduct, and often result in funding thousands if not millions in legal fees and expenses incurred in defending against those claims. But the relative strengths of final adjudication language in exclusions can differ from policy to policy and will materially impact when and how those exclusions may be triggered.

Interestingly enough, the insurer in this case affirmatively pointed to the company’s failure to obtain D&O insurance in its complaint, alleging among its many defenses to coverage: “If an insured wants coverage to protect directors and officers of a business . . . from losses resulting from claims made against them for wrongful acts, errors, omissions, or breaches of duty, that insured should obtain [D&O] liability insurance or the directors and officers are without protection from those types of claims.”

There can be valid justifications for pursuing claims for alleged intentional conduct under other liability policies. The company’s D&O policy may have already been eroded. It could have a very high self-insured retention, making coverage effectively unavailable until significant covered losses accrue. Or coverage may not be available due to an uncommon exclusionary provision or due to the unique nature of the underlying allegations.

Conclusion

The Riverway decision nevertheless reinforces the significance of maintaining D&O insurance. Industry specific risks—like Riverway’s real estate business that could face legal threats from competitors, tenants, employees, lenders, regulators, competitors, and others—often require specialized products and coordination between many different kinds of coverages to avoid gaps and maximize recovery in the event of a claim. Regardless of an insured’s particular industry or trade, D&O coverage forms an essential part of any comprehensive liability insurance program by guarding against alleged intentional or knowing acts.

As demonstrated in this case, maintaining D&O coverage can be the difference between an insurer covering the costs of defense and the company being on the hook for significant, ongoing legal bills. And if the company is insolvent or not aligned with a particular director or officer to provide full advancement or indemnity, those individuals risk personal exposure if the company’s insurance program does not step in to fill those gaps. A legal defense is a central element of what a policyholder purchases through its premium, and that defense frequently proves to be the most valuable aspect of the policy. Given the potential costs of defense in complex litigation, maintaining D&O insurance certainly comports with the mantra of better to have it and not need it than to need it and not have it.