A recent decision by the Delaware Superior Court serves as a reminder to carefully review both sponsor and portfolio company D&O insurance policies.
In Goggin v. National Union Fire Insurance Co., the Delaware Superior Court denied coverage under a D&O policy to two directors of a portfolio company who were also members/managers of the company's private equity sponsor. The D&O policy excluded coverage for any claim alleging wrongdoing based on a director serving in any capacity other than as officer or director of the portfolio company. The underlying claims against the directors related to alleged breaches of fiduciary duties. During the restructuring effort, the directors caused the portfolio company to enter into contracts that benefitted the investment vehicles to the detriment of the portfolio company. In denying coverage, the court held that it did not matter that the directors were being sued in their capacity as directors, as the claims "arose from" actions taken by them as conflicted members/managers of investment vehicles that were set up as part of a restructuring effort.
While this decision has been criticized and is under appeal, D&O policies of portfolio companies should be carefully reviewed in order to understand any capacity exclusions. Where capacity exclusions exist, you should consider whether any changes should be made to the policy in order to provide coverage for acting in multiple capacities. You should also ensure that sponsor D&O policies provide adequate coverage for claims against designees serving on portfolio company boards.
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