In a recent decision from a federal court in Georgia, Executive Risk Indem., Inc. v. AFC Enterprises, Inc., an insurer sought a declaratory judgment that it properly rescinded a D & O policy based on the insured's material misrepresentations in the application of insurance. The insured asserted counterclaims for breach of contract and a statutory bad faith penalty. The court held that the insurer was not entitled to rescind the policy, but also held that the insurer was not liable for bad faith penalties for improperly rescinding the policy.
There are very few reported decisions relating to allegations of bad faith in connection with D&O policies. Given the unique structure of D&O policies and the policyholders' near-total control of defense strategy and settlement in D&O litigation, the nature and scope of D&O insurers' obligations are often unclear. We see a growing trend for these issues and expectations are that there will be increased litigation of these issues, with the goal of securing court guidance for the parties' duties and obligations to each other in connection with D&O claims.