Appeals court reverses Chubb unit’s win in D&O defense cost fight

A California appeals court said Tuesday a trial judge erred when awarding summary judgment to a Chubb Ltd. unit in a fight over the insurer’s obligation to reimburse defense costs paid by Maxim Integrated Products to its former chief financial officer.

A three-judge panel of the Court of Appeal of the State of California, Sixth Appellate District, said in Eric Jasper et al. v. Chubb National Insurance Co. et al. that repayment of the defense costs by Chubb unit Federal Insurance Co., to Maxim did not constitute “restitutionary damages.”

The appellate court also said California insurance law, which bars coverage for losses caused by willful, wrongful conduct, did not apply to the defense costs incurred by Maxim.

Mr. Jasper was Maxim’s CFO until 2007, and the parties had an indemnification agreement that required Maxim to cover and advance defense costs for any lawsuit brought against him in his capacity as a corporate officer. Mr. Jasper was required by the agreement to repay Maxim if it was determined that he was not entitled to coverage, court records show.

Maxim purchased a primary D&O policy from Arch Insurance Co. and Federal provided a “follow form” excess policy that provided an additional $15 million in coverage.

In 2007, the U.S. Securities and Exchange Commission filed a civil enforcement action against Mr. Jasper regarding stock option backdating and inaccurate regulatory filings. A jury found Mr. Jasper liable for fraudulent conduct, securities fraud and making knowingly false statements to the agency. Maxim shareholders then filed derivative lawsuits against the company and Mr. Jasper that were settled and covered by Arch and Federal, court records show.

Mr. Jasper sued Maxim, seeking stock options that were granted to him before his resignation, and the company filed a counterclaim for breach of the indemnification agreement. Mr. Jasper tendered the counterclaim to Federal, which denied coverage.

Maxim and Mr. Jasper then sued Chubb and Federal for bad faith and breach of contract. The trial judge awarded summary judgment to Federal, ruling that the defense costs were not covered under its policy and barred by California law. Maxim and Mr. Jasper appealed.

Representatives for the parties did not respond to requests for comment.