The Northern District of California has held that an insurer had a duty to defend a trustee against a suit by a trust beneficiary seeking his removal, even though the trustee was not specifically named as a defendant in the proceeding.  Jacobs v. Liberty Surplus Ins. Corp., 2021 WL 4243396 (N.D. Cal. Sept 17, 2021).  The court also found that because the insurer breached its duty to defend, the insured’s failure to obtain the insurer’s consent did not preclude coverage for an otherwise reasonable, covered settlement.

A trustee purchased a professional liability policy.  The policy defined a “Claim” as a “civil action, suit, proceeding, written monetary demand or written demand naming the Insured seeking Damages” or “nonmonetary relief including an injunction arising out of a Wrongful Act by the Insured.”  Trust beneficiaries alleged breach of fiduciary duties and sought the removal of the trustee and an accounting.  The insurer denied coverage on the basis that the petition did not name the trustee as a defendant.  The trustee subsequently settled the matter and sued the insurer.

The court held that the proceeding constituted a “Claim” under the policy.  The court reasoned that, although the petition did not actually name the trustee as a defendant in the caption of the suit, the petition alleged that the trustee committed wrongdoing and sought to hold the trustee personally liable for damages.  The court held that no reasonable layperson would read the policy language to mean that they needed to be formally named in the caption to obtain coverage under the circumstances, and it rejected the insurer’s interpretation as overly technical.

The insurer also argued that the underlying settlement was not covered because the trustee did not obtain its consent to the same.  The court held that because the insurer had denied coverage and breached its duty to defend, it could not then rely on its consent provision.  Rather, the insurer was liable for a reasonable settlement despite the trustee’s failure to obtain consent.  The court declined to adjudicate whether certain policy exclusions barred coverage, holding the issues needed further briefing and factual development.