Claims against corporate directors and officers for negligent misrepresentation: Is there coverage?

Abstract

Environmental liabilities often give rise to corporate disclosure obligations by directors and officers in 10‐Ks, 10‐Qs, annual reports, and other financial reporting documents. What happens if an environmental disclosure ultimately proves to be wrong? Where litigation results from an inadequate or misleading disclosure, directors and officers will turn to their director‐ and officer‐liability insurance policies for defense and indemnity. After all, the very purpose of D&O liability insurance is to provide this sort of protection. Fraud, of course, is not covered; it is excluded under the express provisions of the insurance contract and is subject to a public policy bar of coverage under the law of most states. But what about negligent misrepresentation by corporate directors or officers in reporting on environmental liabilities? Negligent misrepresentation is not fraud. Surely coverage exists for negligence in the disclosure context, directors and officers may think, but they may be in for an unpleasant surprise. Numerous cases have held that no coverage exists. The law on insurance coverage for negligent misrepresentation claims is in a state of flux. In this article, we will discuss California law on this subject. The California Supreme Court spoke to the issue of insurance coverage for negligent misrepresentation in Randi W. v. Muroc Joint Unified School District, 14 Cal.4th 1066 (1997). The Supreme Court said that: “we may assume that standard business liability insurance is available to cover instances of negligent misrepresentation or nondisclosure. “Randi W., supra, 14 Cal.4th at 1078. However, the issue of such coverage was not squarely before the Court. So, the question arises: Is negligent misrepresentation covered, or isn't it? We consider the competing California law arguments of insurers and insureds in this article.