Monday, July 9, 2001
Former Officers Sued by Corporation May Get Defense Under Its Insurance Policy, Appeals Court Rules
By a MetNews Staff Writer
Former officers sued by a corporation for allegedly disparaging it before they were removed may be entitled to a defense as additional insureds under the corporation’s comprehensive general liability policy, the Fourth District Court of Appeal has ruled.
In a June 4 ruling, certified Thursday for publication, Div. One reinstated a suit by Albert Barnett and Gloria Mayer against Fireman’s Fund Insurance Company. Barnett and Mayer claim Fireman’s Fund wrongfully refused to defend them against a suit by MedPartners, Inc.
Barnett, a physician, and Mayer, a registered nurse, became officers of MedPartners, a large medical practice management company, in 1996 after it acquired Caremark Physician Services, Inc.
Barnett was involved with Caremark through Southern California Medical Corporation, which Barnett founded. SCMC, as a physician-run company, provided services to health maintenance organizations, with Caremark managing the operations.
Barnett and Mayer clashed with MedPartners managers, whom they accused of violating state laws prohibiting the practice of medicine by corporations. MedPartners responded by ousting the pair, along with Mayer’s physician-husband, who was an employee but not an officer of the corporation.
MedPartners and SCMC then sued Barnett and the Mayers, claiming they had disparaged and defrauded the company and breached fiduciary duties.
Firemans’ Fund for a defense under MedPartners’ CGL policy, saying their was a potentially covered claim for personal injury and/or advertising injury. They argued that they has been acting in the corporation’s interest in attempting to insulate it from potential sanctions for violating the corporate-practice ban.
Firemans’ Fund declined to defend or indemnify, and Barnett and the Mayers sued the insurer. Orange Superior Court Judge Randell Wilkinson dismissed the suit, saying there was no possibility of coverage because Barnett and the Mayers weren’t insureds.
But Justice Alex McDonald, writing for Div. One, said that as ex-officers accused of having engaged in misconduct while acting in their corporate capacities, Barnett and Gloria Mayer may be entitled to coverage as additional insureds.
An officer or employee of a named insured, McDonald explained, is covered as an additional insured—subject to any applicable exclusion—if the person sued “was acting in an insured capacity when allegedly engaged in the injury-producing conduct.”
The justice rejected the insurer’s argument that there can be no coverage for an officer or employee accused of acting to the detriment of the named insured.
McDonald distinguished Milazo v. Gulf Ins. Co. (1990) 224 Cal.App.3d 1528, in which the court held where a partnership prevailed in a suit against one of the partners for misappropriating a partnership opportunity, the defendant was not entitled to indemnification under the partnership’s policy.
The cases are different, McDonald said, because Milazo—in which the insurer defended under a reservation of rights—dealt with the issue of indemnification after a trial, not with whether the defendant was entitled to a defense.
“In contrast,” the justice wrote, “Firemans’s duty to defend is tested by whether there was any potential that Barnett’s and [Gloria] Mayer’s alleged conduct was committed with respect to their duties as executive officers.”
Fireman’s Fund need not defend Thomas Mayer against MedPartner’s complaint, the panel went on to say, because he was an employee rather than an officer and defamation coverage for employees was excluded.
The case is Barnett v. Fireman’s Fund Insurance Company, 01 S.O.S. 3257.
Copyright 2001, Metropolitan News Company