By Dennis Smith, Esq.
Many corporate by-laws contain provisions that obligate corporations to advance litigation expenses to corporate officers and directors who are sued by reason of their corporate position in advance of the final disposition of the litigation upon a promise to repay the sums advanced if it is determined that the officer or director is not entitled to indemnification (for example if they are found guilty or liable for the conduct alleged). These advancement provisions typically are thought about in the context of a company paying to defend its officers against claims by third parties.
However, the language in common advancement provisions also would require the company to advance defense costs in actions by the corporation against the officer. Why is this type of provision significant? If a corporation sues an officer or director for breach of fiduciary duty the officer can turn around and request that the corporation advance him his defense costs pending resolution of the lawsuit. Thus a corporation can wind up paying a lawyer for its affirmative action and also pay the lawyer defending the corporate officer it sued. Similarly, if the officer sues the corporation and the corporation counterclaims that the officer breached his fiduciary duty the corporation may have to advance the officer’s costs for defending the counterclaim. Now if the corporation ultimately succeeds in the lawsuit, it can try to recoup its defense expenses; however, the officer may not have the financial capacity to reimburse.
Under Delaware law (which New Jersey court’s look to for guidance) the question of entitlement to advancement is generally handled in a summary fashion—usually involving briefing and argument before the court. Thus, it is important for corporations to carefully review the advancement provisions of their by-laws and not rely upon boilerplate language. Also before contemplating suing an officer or director you may want to engage counsel to review the corporation’s bylaws so that you can be fully informed on claims subject to advancement and the potential financial ramifications of bringing suit.
By Dennis Smith, Esq.
When you or your company is sued it is important to have someone carefully review your liability insurance coverages to determine whether the carrier is obligated to provide you with a defense. In New Jersey, the duty to defend is broader than the duty to indemnity (the payment of money to satisfy a judgment entered against you) and defense costs could be the most significant financial exposure a company faces especially if it has meritorious defenses to the underlying lawsuit. In determining whether an insurer has a duty to defend, New Jersey courts will review the allegations of the complaint along with the policy language and if the claim potentially falls within coverage there is a duty to defend regardless of whether the claim is baseless or fraudulent. Even if a comparison fails to reveal whether the allegations fit within the four corners of the policy, an insured can introduce evidence outside of the complaint to support an argument that a claim is covered under the policy. However, an insurer is not allowed to introduce evidence to support a claim that there is no duty to defend so long as the allegations of the complaint bring the claim potentially within coverage.
Sometimes, whether coverage potentially exists, may depend on the meaning of a policy term. If the term is undefined, courts will look to dictionary definitions to ascertain the meaning of the word or term. If it is susceptible to two meanings, one favoring coverage and one not, courts generally will adopt the meaning favoring coverage because it is the insurer as the drafter of the policy that has ability to clarify the meaning of a word or term by defining it in the policy. For example in Auto Lenders v. Gentilini Ford, 181 N.J. 245, 270 (2004) the New Jersey Supreme court was called upon to interpret the term “manifest intent” in connection with an employee dishonesty claim under an employee dishonesty policy. The court held:
We are mindful that when a court construes an ambiguous clause in an insurance policy, it ‘should consider whether more precise language by the insurer, had such language been included in the policy, would have put the matter beyond reasonable question. . .
. . . For further guidance, we note that had Ohio Casualty wanted to insure that coverage under this policy would be limited to circumstances where the employee acted with the specific intent to harm the employer and benefit himself or another, it could have done so by replacing the term “manifest intent” with the phrase “specific intent or desire.” That language would have left no ambiguity that it intended to provide coverage only when it was an employee’s conscious object of desire to bring about the resulting benefit and harm.
Practically speaking, if you or your business is sued and you believe that coverage exists for the claim, you should promptly notify your broker to place the carrier on notice or do so internally. If the insurance company refuses to defend, do not accept it at face value. Engaging coverage counsel for an opinion on the merits of the disclaimer could potentially lead to a reversal of the carrier’s decision saving the company substantial litigation costs. Alternatively, a lawsuit seeking a declaration that the claim is covered under the policy can be filed, immediately followed by a motion for partial summary judgment on the duty to defend which typically can be decided as a matter of law. As a final note, if you obtain a ruling that the carrier owes you a defense, you would be entitled to recover the attorney fees you spent on the declaratory judgment action. The policy rational for this is that an insured should not have to be out of pocket more than the premium to have the insurer do what it is obligated to under the policy.