Unreported / Non-Citable
Background
RepairPal bought a Business and Management Indemnity Policy from Scottsdale Insurance Company for March 1, 2023 to March 1, 2024, with a directors and officers section. Insuring Clause A.2 covers the company's loss for which it has indemnified its directors and officers. Endorsement 28 extends that clause to indemnification required or permitted by applicable law, whether or not the indemnification is actually made. Aubrey Jackson Shelton, RepairPal's Vice President of Finance and Administration, was indicted in August 2023 on twelve counts of bank fraud, wire fraud, and tax evasion for allegedly defrauding RepairPal of $2.7 million. Scottsdale acknowledged a duty to defend him and appointed counsel, but Shelton kept his own firm.
RepairPal refused to indemnify Shelton, so he sued in the Delaware Court of Chancery for advancement of his defense costs. In May 2024 that court ordered RepairPal to advance costs on all counts except tax evasion. RepairPal tendered that suit to Scottsdale, which appointed counsel. The criminal case later ended in a mistrial and dismissal, RepairPal paid roughly 6.4 million dollars after negotiating Shelton's fees, and the advancement action was dismissed. Scottsdale sued for breach of contract and a declaration of no coverage, and RepairPal counterclaimed. Shelton never responded, the Clerk entered default, and the magistrate judge recommended denying default judgment without prejudice.
The Court’s Holding
Applying California insurance law, the court held that RepairPal met its initial burden. Clause A.2, broadened by Endorsement 28, covers indemnification of officers, and RepairPal was required or permitted to indemnify Shelton. Scottsdale argued that Clause A.3 governs because of the advancement order. That failed because the policy contemplates that two or more insuring clauses may cover one claim. The court did not decide whether Clause A.3 also applies.
The burden then shifted to Scottsdale on exclusions. The court agreed that the Insured v. Insured Exclusion reaches the advancement action, a suit by one insured against another. But Scottsdale did not show the indemnification was on account of that action. Under Delaware law, advancement is distinct from indemnification, and RepairPal's indemnity obligation arose from and depended on the outcome of the criminal case. Construed narrowly, the no voluntary payments provision bars coverage only for the insured that incurred costs or assumed obligations without consent, because the policy treats company loss separately from officer loss. Even if Scottsdale's reading were reasonable, the provision was at best ambiguous and was construed against the insurer. RepairPal was legally required to indemnify, so it did not voluntarily assume an obligation. The court expressly left open whether permitted but not required indemnification without consent would violate the provision.
The court denied Scottsdale summary judgment on RepairPal's bad faith counterclaim because the reasonableness of the coverage denial presents disputed fact questions. On default, reviewing de novo, it adopted the magistrate judge's recommendation and denied Scottsdale's motion without prejudice. A declaration that Shelton breached the policy could conflict with RepairPal's remaining counterclaim. Scottsdale may refile once the case concludes as to RepairPal. The order is interlocutory, not a final judgment. A case management conference is set for November 24, 2026.
Key Takeaways
- Where an endorsement extends Clause A.2 to indemnification required or permitted by law, a company's loss from indemnifying an officer falls within basic coverage, and more than one insuring clause can cover the same claim.
- Because Delaware law treats advancement as distinct from indemnification, the insured v. insured exclusion aimed at the advancement suit did not reach indemnification arising from the underlying criminal case.
- The no voluntary payments clause was read to bar coverage only for the insured that breached it, and language that is at best ambiguous is construed against the insurer.
- The court did not decide whether permitted but not required indemnification made without the insurer's consent would violate that clause.
- Default judgment against one defendant was postponed because it could produce results inconsistent with claims still pending against the other party.
Why It Matters
The order shows how a federal court applying California law treats a D&O endorsement that ties coverage to what indemnification law requires or permits. It also keeps exclusions tied to the claim that actually caused the loss.
It is an unpublished district court ruling and carries no precedential weight. Much remains open: the bad faith counterclaim, Scottsdale's claims against defaulted Shelton, and any recovery amount, which this order does not set. The court's statement that Scottsdale breached the policy was made in resolving the cross-motions. Appellate review would await final judgment.