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Delaware Superior Court Applies “Capacity” Exclusion to Deny Coverage Under D&O Policy

Directors and Officers Alert | December 4, 2018
By: Marc Casarino and John McCarrick

In Goggin v. National Union Fire Insurance Company of Pittsburgh, PA, the Delaware Superior Court denied the insured directors’ motion for judgment on the pleadings after construing an exclusion in the applicable D&O insurance policy to exclude coverage where the claim against the directors arose from their roles as investors of the company – even though the allegations also related to their duties as directors.


Goggin and Goodwin began their relationship with U.S. Coal Corporation starting in 2007 as investors. They became directors of U.S. Coal in 2009, until their resignations in 2012 and 2014, respectively. During their tenure as directors, they formed two investment companies to purportedly reinvigorate a struggling U.S. Coal through debt repurchase and other capital restructuring. U.S. Coal was put into involuntary bankruptcy in 2014 by its creditors. On March 24, 2015 a complaint was filed in the bankruptcy case against Goggin, Goodwin, and their investment companies, alleging, among other things, breach of fiduciary duties and other misconduct favoring their own personal interests.

National Union issued a D&O policy that covered U.S. Coal and its officers for the period of November 10, 2013 through May 10, 2015. National Union did not dispute that Goggin and Goodwin were individually insured under the policy. However, after initially defending the bankruptcy action subject to a reservation of rights, National Union denied coverage to Goggin and Goodwin on the ground that the causes of action alleging breach of fiduciary duty arose from alleged wrongdoing not solely by reason of their status as U.S. Coal executives. The specific exclusion relied upon by National Union, referred to as a “capacity exclusion,” read:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an insured:

(g) alleging, arising out of, based upon or attributable to any actual or alleged act or omission of an Individual Insured serving in any capacity, other than as an Executive or Employee of a Company, or as an Outside Entity Executive of an Outside Entity[.]

Goggin and Goodwin filed a complaint in the Delaware Superior Court seeking a declaratory judgment of coverage under the National Union policy for the claim asserted against them in the bankruptcy complaint. After National Union answered the complaint in the declaratory judgment action, Goggin and Goodwin moved for judgment on the pleadings.

Court’s Analysis

Goggin and Goodwin argued that the exclusion eliminated coverage only where their alleged wrongful action was performed solely in a capacity other than as directors of U.S. Coal. National Union argued that application of the exclusion turned on interpretation of the term “arising out of,” and whether the sued-upon conduct arose out of any capacity other than that of U.S. Coal’s directors. The court concluded that the capacity exclusion’s language was clear and unambiguous, despite the parties’ conflicting interpretations. It was accordingly appropriate for the court to interpret and apply the capacity exclusion as a matter of law.

The court first identified that the phrase “arising out of” has been interpreted in Delaware to be broader than “caused by,” and effectively means “incident to, or having connection with.” The court then reasoned that in establishing the line between “arising out of” and “not arising out of” in the insurance policy context, the outcome should turn on an application of the traditionally tort-oriented “but for” test. Specifically, the court said, “the question is whether the underlying claim would have failed ‘but for’ the purportedly excluded conduct.” Said differently, the “claim does not ‘arise out of’ a circumstance or conduct if, independent of that circumstance or conduct, the claim is still valid.”

The court then evaluated the substance of the claims for relief in the bankruptcy complaint. After finding that the underlying claims for relief were “largely based” upon Goggin and Goodwin’s self-interested dealings on behalf of their investment companies and themselves, the court concluded that the bankruptcy complaint would fail without such facts. The court therefore held that the underlying claims for relief arose from Goggin and Goodwin’s misconduct in a capacity other than as directors of U.S. Coal, even though the claims for relief also may have related to their duties as directors. Accordingly, the court concluded that the capacity exclusion applied.

Key Takeaways

This decision appears to be the first in Delaware to apply the “but for” standard to determine whether conduct by a director or officer arises from a corporate duty or some other capacity. Key to this holding was the court’s careful analysis of the claims for relief in the underlying bankruptcy litigation. The bottom line, however, appears to be that under Delaware law, a capacity exclusion may apply to preclude coverage even if the underlying claims for relief implicate the individual’s role as a corporate officer or director, as long as the core of the claims for relief arise from misconduct in a capacity other than as a director or officer.

If you have questions or would like additional information, please contact Marc Casarino (; 302.467.4520) or John McCarrick (; 212.714.3072).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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