FEDERAL COURT HOLDS THAT A DIRECTOR AND OMISSIONS LIABILITY POLICY MAY NOT BE TRANSFORMED INTO A POLICY THAT PROVIDES COVERAGE FOR THE POLICYHOLDER’S OWN LOSS

Judge Fitzwater from the United State District Court for the Northern District of Texas granted Zurich American Insurance Company’s (“Zurich”) Motion to Dismiss pursuant Rule 12(b)(6) in American Construction Benefits Group, LLC v. Zurich American Insurance Company, No. 3:12-CV-2726-D, 2013 WL 1797942, (N.D. Tex. April 29, 2013).

American Construction Benefits Group (“ACBG”) provided reinsurance to its member company, J.D. Abrams, L.P. (“Abrams”). ACBG obtained reinsurance from Presidio Excess Insurance Services, Inc. (“Presido”). During the policy-renewal negotiations with Presidio, ACBG’s president, Seven J Heussner, accepted a coverage exclusion for the cost of a heart transplant operation incurred in the treatment of the child of an Abrams employee. As such, Presidio declined to provide reinsurance coverage for the transplant claim, and ACBG was responsible for the cost of the heart transplant.

ACBG alleged that its president’s actions relating to the coverage exclusion he negotiated constituted a “wrongful act” under its Director’s and Omissions Policy (“D&O Policy”) and that Zurich was responsible for the approximately $1.2 million cost for the heart transplant. After several months of negotiations, ACBG sued Zurich for breach of contract based on its failure to pay the claim. ACBG also alleged that Zurich violated the DTPA and Texas Insurance Code.

The court refused to permit ACBG to recover under the D&O Policy. The Court noted that ACBG was attempting to transform its D&O liability policy into a first-party policy to provide coverage for its own loss. The Court further explained that ACBG is not alleging that Abrams made a claim against ACBG for injury caused by its president’s wrongful acts. Instead, ACBG is alleging that it was injured because its president committed a wrongful act that left it without reinsurance from Presidio to cover Abrams’ claim for the expenses of the transplant. The Court ultimately determined that ACBG’s complaint against Zurich failed to allege that Abrams made a claim against ACBG for a wrongful act of a director, officer, or employee of ACBG, and failed to state a plausible claim for which relief may be granted. As such, the court determined that ACBG’s breach of contract and Texas Insurance Code’s claims are dismissed.