Gross v. Scottsdale Insurance Company

Background

Scottsdale issued Flora Bioscience, Inc. a business and management indemnity policy for June 2018 through June 2019. The policy included directors-and-officers coverage but excluded claims brought or maintained by any insured in any capacity. The policy defined an insured to include a person who was, is, or later becomes a Flora director.

Gross, a Flora shareholder, demanded that Flora sue director John Alderete for alleged mismanagement and breach of fiduciary duties. He later identified directors Robert Robbins and Mark Stoll as allegedly involved. Gross became a Flora director for three weeks in May and June 2019, then resigned. Scottsdale denied the claim, asserting that Gross was an insured because he had been a Flora director. Gross later sued the underlying defendants individually and on Flora’s behalf, settled with Robbins and Stoll, and received an assignment of their rights against Scottsdale. He then brought this action against Scottsdale.

Scottsdale moved for summary judgment on claims for breach of contract, breach of the implied covenant of good faith and fair dealing, bad-faith denial of insurance coverage, and punitive damages.

Breach of Contract

The court held that the policy’s insured-versus-insured exclusion barred coverage. The exclusion applied to claims brought or maintained by any insured, and the definition of insured included anyone who was or became a Flora director. The court found that the policy imposed no time limit on that definition. Once Gross became a director, he was an insured, and the exclusion applied to his claim, including claims he had filed or would file.

The court rejected Gross’s argument that the policy’s exception for derivative actions preserved coverage. That exception applied only when a derivative claim was continued totally independently of any insured. Once Gross became a director and therefore an insured, his claim could no longer satisfy that requirement.

The court also rejected Gross’s argument that the exclusion should apply only to collusive suits. The policy expressly stated that the exclusion applied whether or not a claim was collusive. The court therefore found the existence or absence of collusion immaterial.

Gross also argued that a Scottsdale claims specialist had represented that becoming a director would not affect his claim and that he relied on that representation. The court found that the factual dispute over the alleged statement was not material. An oral representation could not create coverage for a claim expressly excluded by the policy. The court therefore granted Scottsdale summary judgment on the breach-of-contract claim and held that Scottsdale did not owe a duty to defend or indemnify the directors and officers involved in Gross’s claim.

Implied Covenant and Bad Faith

The court explained that claims for breach of the implied covenant of good faith and fair dealing and bad-faith denial of coverage require a contractual entitlement to policy benefits. Because the policy did not require Scottsdale to cover Gross’s claim, those claims failed. The court granted Scottsdale’s motion for summary judgment on both claims.

Punitive Damages

The court held that punitive damages required clear and convincing evidence that Scottsdale unreasonably denied coverage and acted with malice, oppression, or fraud. Because the policy did not require coverage, the court found that Scottsdale’s denial was not unreasonable. It granted Scottsdale’s motion for summary judgment on the punitive-damages claim.

Disposition

The court found no material dispute that the policy did not cover Gross’s claim. It concluded that Scottsdale did not breach the policy, breach the implied covenant, or act in bad faith, and granted summary judgment to Scottsdale on all claims.