Federal Court Rejects D&O Insurer’s Interpretation of “Loss” and Extends Coverage to Non-Recourse Judgment Against Individual Insureds

A federal district court in the Eastern District of New York recently held that a D&O policy’s definition of “Loss” that includes amounts an insured is “legally obligated to pay” extends to consent judgments that forebear collection by the underlying plaintiffs. In Intelligent Digital Systems, LLC, v. Beazley Insurance Co., Inc., the court joined a majority of courts in other jurisdictions that have addressed the issue and rejected the insurer’s argument that because individual directors and officers had entered consent judgments in which the plaintiffs agreed not to collect against them, they had not suffered any “Loss” as defined by the policy. This ruling arose out of a series of stipulated agreements made in an underlying lawsuit by plaintiff Intelligent Systems, LLC against some former directors of the surveillance technology company, Visual Management Systems, Inc. In exchange for the directors’ assigning their coverage rights under their policy to Intelligent Systems, LLC, the underlying plaintiff agreed to “unconditionally forebear” its collection of the judgments against the insured directors. The agreement, however, expressly provided that the insured directors did not waive the right to assert a claim against the D&O insurer.

To reach this ruling, the Court considered a legal question of first impression under New York law: Does a consent judgment, with conditions effectively exculpating an insured from satisfying a judgment for which he might otherwise be personally liable, constitute an amount that the insured had become “legally obligated” to pay?

The Court considered two competing interpretations by other courts on the definition of a legal obligation by an insured under like policies. The minority position, advanced by the insurer, would require a condition precedent to coverage that an insured be personally liable under an enforceable judgment.

The Court rejected this position, instead opting to follow the majority of other courts holding that “the term ‘legally obligated to pay’ encompasses the consent judgments against [the insured], irrespective of the covenants not to enforce those judgments.” (emphasis added). However, before adopting that position, the Court noted two important qualifications in its application of the majority position to the policy at hand: (1) the consent judgment made clear that nothing about its terms had waived the insured director’s right to pursue coverage against the insurer; and (2) the policy’s definition of “Loss” excluded numerous categories of damages, but did not provide the same for non-recourse judgments.

This decision is helpful to individual directors and officers who may wish to resolve underlying actions by agreeing to consent judgments, without forfeiting their right to indemnity coverage.