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

By: 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 required to provide a defense for the entirety of the underlying action under Buss v. Superior Court, 16 Cal. 4th 35, 48 (1997), because of the potential for coverage for the breach of fiduciary duty claim.

In opposition to Chubb’s motion for summary judgment, the firm argued that Chubb must defend the breach of fiduciary duty claim because that claim cannot arise from liability under the employment agreements as a matter of law, as employers do not owe fiduciary duties to employees. The firm also asserted that Mahatharith does not allege that any fiduciary duties arose out of the employment agreements.

Chubb argued that all of the claims in the underlying action, including the breach of fiduciary duty claim, are “based upon, arising from, or in consequence of” the firm’s liability under the employment agreements. In support of its argument, Chubb cited California law holding that the phrase “arising from” in a policy exclusion is construed broadly.

Following California authority consistently giving a broad interpretation to the terms “arising out of”’ or “arising from,” the Court agreed with Chubb that the contract exclusion applied to the underlying action. Under the breach of fiduciary duty cause of action, Mahathirath alleged that by virtue of their 50/50 split of the profits following execution of the 2016 employment agreement, Mahathirath and the firm’s president were joint venturers and/or partners and that the firm and its president owed Mahathirath fiduciary duties, which were breached. The Court explained: “To the extent that there is uncertainty about the source of those fiduciary duties, the only two potential sources are either the alleged oral agreement in the summer of 2015 or the 2016 Employment Agreement.” Therefore, the source of any fiduciary duty would be a “contract or agreement.”  Absent these agreements with Mahathirath that allegedly created the fiduciary duty, no liability would exist.

The Court wrote that “[t]he relationship between the claims and the agreement constitutes the ‘minimal causal connection’ necessary to be considered as ‘arising from’ the contractual liability owed.”

Because the contract exclusion applies to the breach of fiduciary duty claim and the other claims alleged in the underlying action, the Court determined that the underlying action is not covered under the Chubb policy and Chubb did not have a duty to defend the firm.

The Court granted Chubb’s motion for summary judgment in full.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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