Abrams v. Allied World Assurance Company Inc.

Background

This insurance-coverage dispute concerns a directors-and-officers liability policy that Allied issued to Altierre Corporation. The five plaintiffs—Zachary Abrams, Rhett Ohlson, Simon Jones, Craig Such, and Robert Crane—were Altierre officers or directors at various times and were insured persons under the policy.

Kline Hill, an Altierre shareholder, first filed a state-court proceeding seeking access to Altierre’s books and records. It later filed the underlying action against the five plaintiffs, alleging breaches of fiduciary duties and asserting related claims against Stratim-related companies. The underlying allegations included that Abrams took control of Altierre’s board and that the plaintiffs took actions benefiting Stratim and related companies while harming Altierre and its shareholders.

The plaintiffs tendered both matters to Allied. Allied accepted coverage for the books-and-records proceeding but denied coverage for the underlying action. The plaintiffs then sued Allied for declaratory judgment, breach of contract, and bad faith. Allied counterclaimed for a declaration that it had no duty to defend or indemnify the plaintiffs in the underlying action.

The Motion and Legal Standard

The plaintiffs moved for partial summary judgment, which asks the court to decide specified issues when there is no genuine dispute about material facts and the moving party is entitled to judgment under the law. They asked the court to rule that two exclusions did not bar coverage of the underlying action.

Because the case was based on diversity jurisdiction, the court applied California insurance law. Under that law, insurance policies are interpreted according to their clear and ordinary meaning, and exclusions are read narrowly against the insurer.

Insured Capacity Exclusion

The Insured Capacity Exclusion barred coverage for loss arising from an act or omission by an insured person serving in a capacity other than as an Altierre executive. The plaintiffs argued that the underlying claims arose from acts taken in their capacities as Altierre executives. Allied argued that the claims also arose from the plaintiffs’ roles as agents or executives of Stratim and related companies.

The court concluded that the underlying complaint asserted breach-of-fiduciary-duty claims based on duties the plaintiffs owed because of their positions as Altierre executives. Although their positions with Stratim-related companies allegedly supplied a motive for their actions, the plaintiffs were not sued for breaching fiduciary duties arising from their roles as Stratim executives. The court therefore ruled that the Insured Capacity Exclusion did not exclude coverage of the underlying action.

Major Security Holder Claims Exclusion

The Major Security Holder Claims Exclusion barred coverage for a claim made by or on behalf of a security holder who owned or had owned at least a 10% equity interest in Altierre as of the date of the claim. The parties agreed that Kline Hill owned less than 10% when it filed the books-and-records proceeding on March 30, 2020. They also agreed that the policy treated the books-and-records proceeding and the underlying action as related claims, making the underlying action a claim deemed first made in March 2020.

Kline Hill later acquired additional stock, bringing its ownership to approximately 48.8% of Altierre. Allied argued that this later acquisition triggered the exclusion. The court rejected that argument, concluding that the policy’s wording tied the ownership requirement to the date of the claim and did not suggest that later stock acquisitions could change coverage. The court also stated that, even if Allied’s interpretation were plausible, the exclusion would at least be ambiguous and therefore would be interpreted narrowly against Allied under California law.

Ruling

The court granted the plaintiffs’ motion for partial summary judgment in both respects. It granted the motion that the Insured Capacity Exclusion did not exclude coverage of the underlying action, and it granted the motion that the Major Security Holder Claims Exclusion did not exclude coverage of the underlying action.

The court stated that the motion’s scope was limited to those two exclusion issues. The order did not decide the broader questions whether Allied was obligated to defend or indemnify the plaintiffs or whether Allied breached the contract by declining coverage. The order terminated docket entry 35.