A federal district court in the Eastern District of New York
recently held that a D&O policy's definition of
"Loss" that includes amounts an insured is "legally
obligated to pay" extends to consent judgments that forebear
collection by the underlying plaintiffs. In Intelligent Digital Systems, LLC, v. Beazley
Insurance Co., Inc., the court joined a majority of courts
in other jurisdictions that have addressed the issue and rejected
the insurer's argument that because individual directors and
officers had entered consent judgments in which the plaintiffs
agreed not to collect against them, they had not suffered any
"Loss" as defined by the policy. This ruling arose out of
a series of stipulated agreements made in an underlying lawsuit by
plaintiff Intelligent Systems, LLC against some former directors of
the surveillance technology company, Visual Management Systems,
Inc. In exchange for the directors' assigning their coverage
rights under their policy to Intelligent Systems, LLC, the
underlying plaintiff agreed to "unconditionally forebear"
its collection of the judgments against the insured directors. The
agreement, however, expressly provided that the insured directors
did not waive the right to assert a claim against the D&O
To reach this ruling, the Court considered a legal question of
first impression under New York law: Does a consent judgment, with
conditions effectively exculpating an insured from satisfying a
judgment for which he might otherwise be personally liable,
constitute an amount that the insured had become "legally
obligated" to pay?
The Court considered two competing
interpretations by other courts on the definition of a legal
obligation by an insured under like policies. The minority
position, advanced by the insurer, would require a condition
precedent to coverage that an insured be personally liable under an
The Court rejected this position, instead opting to follow the
majority of other courts holding that "the term 'legally
obligated to pay' encompasses the consent judgments against
[the insured], irrespective of the covenants not to enforce
those judgments." (emphasis added). However, before
adopting that position, the Court noted two important
qualifications in its application of the majority position to the
policy at hand: (1) the consent judgment made clear that nothing
about its terms had waived the insured director's right to
pursue coverage against the insurer; and (2) the policy's
definition of "Loss" excluded numerous categories of
damages, but did not provide the same for non-recourse
This decision is helpful to individual directors and officers
who may wish to resolve underlying actions by agreeing to consent
judgments, without forfeiting their right to indemnity
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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