Washington Court of Appeals holds that a directors' and officers' policy does not cover a corporate officer's execution of a guaranty that secured the indebtedness of the corporation

In Sauter v. Houston Casualty Co., No. 66809–9–I (Wash. App. May 14, 2012), the insurer issued a directors’ and officers’ liability policy to named insured S-J Management, LLC (“SJM”).  SJM’s directors and officers were also insureds “while acting in [their] capacity … as such on behalf of the Insured Organization.”  Michael Sauter (“Sauter”) was SJM’s CEO and manager.  Sauter was the guarantor on a line of credit to SJM and secured his guaranty with real property that he personally owned.  When SJM defaulted on the line of credit, the bank demanded payment from Sauter, who also failed to pay.  SJM’s board agreed to indemnify Sauter but, because it was insolvent, SJM could not do so.  SJM’s counsel then tendered to the insurer claiming that Sauter’s guaranty obligation was covered.  The insurer denied coverage.

Sauter filed suit against the insurer.  Sauter contended that he had executed the guaranty in his capacity as CEO and manager of SJM and that his failure to satisfy the obligation was a “Wrongful Act” under the policy.  The trial court granted summary judgment in favor of the insurer.

The Court of Appeals affirmed and held that the insurer had no duty to indemnify.  It reasoned that Sauter had acted in his personal capacity, rather than in his capacity as an officer or director of SJM, because (1) he signed the guaranty in his own name rather than as an officer of SJM, (2) he personally owned the real estate that was the collateral and (3) as a legal matter, SJM could not be the guarantor of its own obligation.  The court also reasoned that, if Sauter had executed the guaranty as SJM’s officer/director, then SJM, and not he, would have been liable.

The Court of Appeals then addressed whether Sauter’s assumption of the guaranty was a “loss” under the policy.  It noted that other jurisdictions have rejected the contention, as here, that a voluntary contractual obligation can be a “loss.”  However, the court did not resolve this issue because Sauter’s contention failed on another ground.  Under the policy, the “loss” must result from a claim for a “Wrongful Act.”  Here, the purported loss did not result from a “Wrongful Act” because the purported loss was Sauter’s assumption of the guaranty agreement and not his failure to satisfy his obligation under the guaranty.