Chubb Unit Has No Defense Obligation For $8.5 Million Suit, Contract Exclusion In D&O Policy Precludes Coverage

• Published date: 09 February 2022
• Subject Matter: Corporate/Commercial Law, Employment and HR, Insurance, Directors and Officers, Contracts and Commercial Law, Contract of Employment, Insurance Laws and Products
• Law Firm: Duane Morris LLP
• Author: Ms Michelle N. Khoury

On January 28, a California federal judge issued a summary judgment ruling that Federal Insurance Company (a Chubb unit) has no duty to defend investment firm TriPacific Capital Advisors LLC in an $8.5 million suit because the contract exclusion in Chubb's policy precludes coverage for the firm's liabilities stemming from contractual agreements.

U.S. District Judge James V. Selna of California's Central District determined that former TriPacific employee Tom Mahathirath's claims against TriPacific, its affiliated entity, and its president arose out of an agreement over his role, compensation, and bonus calculation.

Mahathirath filed a complaint in state court, alleging that he was owed at least $8.5 million and bringing causes of action including breach of fiduciary duties, breach of contract, failure to pay earned wages, and equitable claims. Mahathirath alleged that the investment firm offered him various benefits in the summer of 2015 to persuade him to stay at the firm. Mahathirath and the firm's president reached in oral agreement including a promotion and change in compensation, such that Mahathirath would become entitled to 50% of the net profits that the firm received from the investments Mahathirath managed, effectively converting the relationship to a joint venture. In January 2016, Mahathirath and the firm entered into a revised employment agreement reflecting the increase in his salary and the change in his bonus calculation. As a member of the joint venture, Mahathirath claimed that the firm and its president owed to him fiduciary duties.

Chubb denied coverage to TriPacific for the underlying suit based on the D&O policy's contract exclusion, which provides:

In addition to the Exclusions in Section III. above, the Company shall not be liable under Insuring Clause (C), Entity Liability Coverage, for Loss on account of any Claim made against any Organization: . . . (B) based upon, arising from, or in consequence of any Insured's liability under any contract or agreement regardless of whether such liability is direct or assumed; provided this Exclusion IV.(B) shall not apply to liability that would attach to an Insured even in the absence of a contract or agreement.

In the insurance coverage action, the firm argued that Chubb must defend the breach of fiduciary duty claim because it was potentially covered under its D&O policy. Although the firm did not argue that the contractual duty extends to the other causes of action, it argued Chubb is...