A law firm asked us for advice a few months into a fast-moving intellectual property lawsuit.  The complaint alleged trademark and copyright infringement claims against the company and two of its officers.  They noted that while the defense was being provided under the D&O policy based on the allegations against the individual officers, plaintiff had only served the company.  The judge was now putting pressure on plaintiffs to “clean up the pleadings” and either serve the individuals or dismiss them. 

We immediately told defense counsel to call plaintiffs and offer to accept service on behalf of the individuals.  Why?  Because private company D&O policies provide broad coverage for the individuals, including for intellectual property claims.  For these claims, individuals are covered but the company is not.  A dismissal of the individuals would give the insurer an excuse to withdraw the defense.  Unfortunately, plaintiffs that same day had already filed a dismissal of the individuals without prejudice.  As expected, the insurer withdrew its defense over our protests.

With the individuals out of the case, should the insurer have continued defending?  Yes.  Gray v. Zurich long ago established that the duty to defend is triggered by the mere potential for covered liability and does not end until that potential is conclusively eliminated.  The dismissal of the individuals without prejudice left open the possibility that plaintiffs, after taking discovery, would move to add them back into the case.  Cases in California and elsewhere hold that if the only covered claim in a case is dismissed by court ruling, the duty to defend continues.  Later trial court or appellate rulings could reinstate the claim, so the potential for covered liability has not been eliminated.  Notably, we could not find a case applying this fundamental tenet of duty to defend law to the dismissal without prejudice of covered individuals, but the logic of the cases should apply.

We ultimately filed suit against the insurer and moved for summary adjudication on this issue.  The case settled for a substantial sum shortly thereafter.  But the case presents a lesson for counsel to consider carefully early in the case how the pleadings are framed through the lens of insurance, not just of an aggressive defense.