Washington Court Holds That A Corporate Officer's Breach Of Contract Is Not A Covered 'Loss' From A 'Wrongful Act' Under A D&O Policy

In a recent case, Sauter v. Houston Cas. Co., No. 66809-9-1, (May 14, 2012), a Washington appeals court analyzed a type of policy not often considered by Washington courts – a director and officer (D&O) policy. In its decision, the appeals court addressed important issues concerning limitations in coverage under a D&O policy for contract claims.

Sauter was an officer of a limited liability company (LLC). The LLC obtained a line of credit and Sauter signed the loan documents required by the bank. Sauter also signed a guarantee for the loan, pledging seven properties he owned as security. The LLC defaulted on the loan and the bank demanded payment from Sauter as the guarantor of the loan. Sauter demanded coverage from the insurer that issued a D&O policy to Sauter and other officers of the LLC.

The insuring agreement of the policy stated: "The Insurer shall pay on behalf of the Insured Persons Loss resulting from any Claim first made against the Insured Persons during the Policy Period for a Wrongful Act." The policy defined "wrongful act" in relevant part as an "act ... by ... any of the Insured Persons, while acting in their capacity as ... such on behalf of the Insured Organization."

The appeals court held there was no coverage for the bank's claim against Sauter under the guarantee. The court began by addressing a narrow factual question: was Sauter acting in his capacity as an officer of the LLC when he guaranteed the loan? There was coverage...