The United States District Court for the Southern District of California, applying California law, has held that an exception within an insured vs. insured (I v. I) exclusion of a D&O policy restored coverage for a suit between insured directors alleging that the defendant insured unfairly diluted shares granted to the plaintiff insureds as part of a merger. Scottsdale Ins. Co. v. Hamerslag, 2025 WL 1736873 (S.D. Cal. Jun. 23, 2025).
The policy provided D&O coverage to the insured corporation and its officers, directors, and their spouses. One of the directors ran a venture capital firm that invested heavily in the insured corporation and another company, BitTitan. As a result of those investments, the venture capitalist was given directorships with both companies and successfully negotiated a merger between them. Under the merger agreement, BitTitan would purchase all equity in the insured corporation, and the founder and CEO of the insured corporation would receive a 5% interest in BitTitan on the merger date and an additional 3% interest to vest according to a predetermined schedule.
Shortly after the merger, the director who arranged the deal agreed to sell 100% of BitTitan for cash based on a lower valuation than that used for the merger, lowering the cash value of the shares the insured's CEO received and preventing his future shares from vesting. The CEO and his family, as holders of BitTitan shares after the merger, filed suit against the director. The complaint broadly asserted that the director exploited his position as director of the insured corporation to his own benefit and to the detriment of the CEO's family, which resulted in the unfair dilution of the BitTitan shares they received in the merger. The insured corporation's D&O insurer denied coverage for the claim based on the policy's insured vs. insured exclusion, and coverage litigation followed.
The court granted the director's summary judgment motion, finding that even if the underlying suit was excluded by the I v. I exclusion, an exception to that exclusion restored coverage. That exception applied to suits between insureds brought "solely in [the insured's] capacity as a securities holder of the Company and where such Claim is solely based upon and arising out of any actual or alleged unfair dilution of such securities holder's securities interest." Under California law, the court observed, the word "solely" was not interpreted literally, but captured allegations in the underlying complaint that bore incidentally on the insured CEO's role or roles other than as securities holder. The court found that the underlying complaint was brought solely in the plaintiffs' capacities as shareholders and was based solely on the alleged unfair dilution of securities because the entire chain of events outlined in the complaint flowed directly from the CEO's stake in the insured corporation's shares.
The court rejected the insurer's argument that the underlying complaint was not brought solely in the CEO's capacity as a shareholder of the insured corporation because the allegations also implicated his capacity as a shareholder and later employee of BitTitan. The insurer had argued that the director's alleged acts persisted beyond the closing date of the merger, implicating the CEO's role as a BitTitan shareholder and employee. But the court held that this did not render the exception to the I v. I exclusion inapplicable because it was the director's own purported wrongdoing that led the CEO to become a shareholder and employee of BitTitan.
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