Interpreting Hawaii law, the federal district court held that the standard for triggering the duty to defend is the same as the standard for the duty to advance costs under a D&O policy. Maui Land & Pineapple Co. v. Liberty Ins. Underwriters, 2018 U.S. Dist. LEXIS 56949 (D. Haw. April 3, 2018).
The underlying plaintiffs sued 22 defendants, including Maui Land Pineapple (MLP) and Ryan L. Churchill, concerning a residential development project known as The Ritz-Carlton Club & Residences. The underlying complaint alleged that MLP "directly or indirectly through wholly owned subsidiaries exerts control" over Kapalua Bay, LLC, the defendant in the underlying lawsuit. Kapalua Bay, LLC was created as a joint venture of which MLP held 51%. Churchill was a senior executive officer of MLP, President of Kapalua Bay, and an executive officer of Kapalua Realty, which participated in all aspects of the Project, such as financing, development, and construction.
In their second amended complaint, the underlying plaintiffs alleged nine Counts against the defendants, including breach of fiduciary duty. It was alleged that defendants were not transparent and kept owners in the dark regarding the status of the project. Several allegations named Churchill individually and described his alleged material misrepresentations to the underlying plaintiffs regarding the project's financing.
MLP had an indemnification agreement with its officer and director Churchill. The agreement obligated MLP to indemnify Churchill for costs incurring in a proceeding if Churchill acted in good faith and was not opposed to the interests of MLP. The agreement was of no effect, however, if MLP secured a D&O policy.
Liberty issued an Executive Advantage policy to Churchill and MLP. The policy obligated Liberty to provide coverage to "Insured Persons." The policy provided that the duty to defend was the duty of the insureds. Liberty, however, would advance on a current basis covered defense costs incurred by the insureds. The policy also provided MLP with coverage for its own wrongful conduct occurring "as a result of a Securities Action."
Liberty denied coverage for the underlying suit. MLP filed suit. Cross-motions for summary judgment were filed. Liberty argued that because Churchill was sued by the underlying plaintiffs in his capacity as director of the AOAO, rather than in his capacity as an officer of MLP, the Outside Service Exclusion was triggered. This exclusion barred coverage for an Loss arising from an Insured Person serving as a director or officer of any entity other than the Insured Organization. Liberty also argued that the underlying suit was not a Securities Action for which the policy provided coverage for MLP.
The court first ruled that the policy provided a defense for Churchill. Liberty argued that its duty to advance defense costs required that the insured establish that the underlying claims were within the basic scope of coverage. MLP, on the other hand, asserted that the general standard for triggering the duty to defend was the same as the standard to trigger the duty to advance costs under the policy. The court noted that the duty to advance defense costs would be illusory if the insured had to wait for a determination of actual coverage to obtain the necessary funding for its defense. Therefore, the standard for triggering the duty to defend was the same as the standard for triggering the duty to advance costs.
In the underlying suit, Churchill was sued both in his capacity as an officer of MLP and in his capacity as a director of the AOAO. Therefore, the allegations raised the possibility of coverage, triggering MLP's duty to advance defense costs. Liberty agreed that it provided excess coverage to Churchill in his capacity as an AOAO director. Liberty declined, however, to advance defense costs to indemnify Churchill for claims arising from his conduct as an MLP officer.
Liberty argued that no claims were directed at Churchill in the underlying lawsuit in his capacity as an MLP officer. But the second amended complaint alleged breach of fiduciary duty against all defendants, which included Churchill. The court in the underlying action had not made any finding that none of the allegations against Churchill were made in his capacity as an MLP officer and nothing in the record supported this.
Further, the Outside Service Exclusion was not applicable. The AOAO was MLP's subsidiary under the terms of the policy and was therefore an "Insured Organization." So even if Churchill was acting in his capacity as a director of the AOAO, the AOAO was not "another, uninsured entity." Therefore, the exclusion did not bar defense costs for Churchill.
The court next addressed coverage for MLP and whether the underlying action was a "Securities Action." To qualify as a Securities Action under the policy, the underling claim had to involve the purchase or sale of securities, or had to be brought by securities holders. The theory of the underlying lawsuit was that MLP, as developer of the project, hid the truth and misrepresented the status of the project, and its financial state, thereby injuring the underlying plaintiffs. The court agreed with Liberty that such a theory prevented characterization of the underlying lawsuit as an action "arising from or sale of, or offer to purchase or sell, any securities issued by the Insured Organization."
Accordingly, Liberty's Motion for Summary Judgment and MLP's Motion for Partial Summary Judgment were granted in part, denied in part.