Carol Sauter v. Houston Casualty Company (Division 1, May 14, 2012), is quite a simple case, but it is important for any executive out there who is thinking about signing a guaranty in connection with a company transaction. Perhaps such an executive signs the guaranty thinking “Who cares! No risk to me! My D&O policy will cover me if anyone ever tries to enforce this guaranty!” Well, think again, buddy.
The Court of Appeals put it more succinctly than I could, so here you go folks:
Where an insurance policy explicitly provides coverage for
the personal liability of a corporate officer incurred for acts performed in his or her official capacity as such, the policy does not insure against losses incurred where the officer acts in his or her personal capacity. Moreover, a guaranty executed by a corporate officer that secures the indebtedness of the corporation is not executed in the officer’s official capacity. Such a circumstance would result in the corporation itself guaranteeing its own indebtedness, thus negating the very purpose of the guaranty.
The Court of Appeals also discussed whether, under the terms of the policy here at issue, the relevant “Loss” was the result of a “Claim” against the executive for a “Wrongful Act.” The Court concluded it was not. The executive’s alleged “loss” was not the result of his signing the guaranty itself — not the result of the alleged “Wrongful Act” of failing to pay the obligation when demanded. Accordingly, the policy did not provide coverage for the executive’s obligation under the guaranty.