No Coverage For Board Member’s Promise To Guarantee Stock Redemption Price

A promise to redeem resigning employees’ stock prices at a certain level was an uncovered breach of contract, not a covered wrongful employment act, the U.S. District Court for the Eastern District of Wisconsin ruled.  The case is Krueger International v. Royal Indemnity Co., 2006 WL 1440852 (May 19, 2006).  

A jury in the underlying case found a company official promised four employees if they quit before December 31, their stock would be redeemed at the share price effective for September 30.  Instead, the company paid them the value as of December 31, which was a lot lower.  The jury found the official had authority to bind the company, and awarded damages of about $4 million.

In the coverage case, the company argued the officer’s promise was covered under the plain terms of the policy’s definition of "Employment Wrongful Act," which included breaches of employment contracts and employment-related misrepresentation.  The court disagreed, and found the type of breach of contract at issue in the underlying case is not related to employment.  The court said that ordinary breaches of contract are usually not covered by insurance, because it would encourage people to do the very thing covered by insurance.  I think the court’s analysis was basically sound, but obviously, the policy plainly does cover some breaches of contract (it is in the definition above), so the court could have better explained the difference between employment-practices breaches and ordinary course of business breaches.

1 Comment

Filed under Duty to Indemnify, Liability Policies

One Response to No Coverage For Board Member’s Promise To Guarantee Stock Redemption Price

  1. Dennis Ferraro

    Have you seen any cases where EPLI provides coverage for a law firm for a suit by a partner who is asked to leave the firm by the other partners?