Slottow v. American Casualty Company

United States Court of Appeals for the Ninth Circuit · 1993 · Corporations

1 F.3d 912 (1993)

Updated August 22, 2026

CorporationsDirectors and officers liability insuranceCorporate indemnificationAlter egoPunitive damagesInsurance bad faithD&O policyindemnification

Facts

Fidelity National Trust, a subsidiary of Fidelity Federal Bank, served as trustee for investors in loan pools, and Ralph Slottow, FNT's president and also a bank officer and director, was sued along with FNT and the bank after investors alleged lax enforcement of trust agreements. Slottow and FNT settled the underlying suit for $4.75 million, and the bank indemnified Slottow and paid FNT's share, with the bank's board allocating 96% of the settlement to Slottow, 4% to FNT, and 0% to the bank. The bank then sought reimbursement from American under the D&O policy, but American denied coverage based on its positions that Slottow's conduct at FNT was not covered, the retention was not exhausted, and the allocation to Slottow was excessive. The district court found coverage, interpreted the retention as $10,000, largely accepted the allocation, found bad faith, and awarded punitive damages.

Issue

Whether the D&O policy required American to reimburse the bank for indemnifying Slottow for acts performed as president of the subsidiary FNT; whether the settlement allocation and retention were proper; and whether American's refusal to pay justified punitive damages for bad faith. The principal question was under what circumstances punitive damages may be awarded against an insurer for contesting coverage.

Rule

A D&O insurer must reimburse the insured association when, under the association's bylaws as incorporated by governing regulation and the policy's definition of the association to include subsidiaries, the association is required or permitted to indemnify an officer for acts performed in an official capacity for a subsidiary. Settlement allocation must reasonably reflect the parties' comparative liability and is not given presumptive effect when it is not the product of truly adverse negotiation. Ambiguous policy language is construed against the drafter. Punitive damages for refusal to provide coverage are unavailable where the insurer's position rests on bona fide, reasonable, good-faith arguments and does not amount to oppression, fraud, or malice.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Granite Harbor Bank, a large regional lender based in Seattle, sought reimbursement under a directors-and-officers policy issued by Cascadia Shield Insurance after the bank indemnified one of its executives. Cascadia denied coverage based on a plausible reading of the policy text and a colorable argument about the bank’s deductible; both sides were represented by experienced counsel throughout the dispute.

If the bank proves Cascadia breached the policy, are punitive damages most likely available?

Explanation. Punitive damages require more than a wrongful refusal to pay. They require oppression, fraud, or malice—conduct amounting to an intent to vex, injure, or annoy. The majority emphasized that where the dispute is an ordinary commercial coverage dispute between sophisticated parties of roughly equal power, and the insurer’s arguments are reasonable and made in good faith, punitive damages are not available even if the insurer loses on coverage.