Insurer must face D&O coverage claims over $1.77M judgment

An AmTrust Financial Services unit that issued a private company management liability policy to a North Carolina health care firm cannot avoid a coverage dispute over a $1.77 million judgment entered against two of the firm’s executives, a federal judge ruled.

In Associated Industries Insurance Company, Inc. v. Woody et al., decided May 20 in the U.S. District Court for the Western District of North Carolina, Chief Judge Martin Reidinger denied a motion by Associated Industries Insurance Company to dismiss counterclaims brought by HE Inc., a company seeking to collect on the judgment.

The underlying dispute traces to a deal gone wrong. HE alleged that Stephen Woody and David Fann, the CEO and president respectively of Asheville-based Avadim Health made misrepresentations to induce HE to convert $1.39 million of Avadim’s debt into stock and defer collection of another $1.8 million pending an initial public offering that never materialized.

A Buncombe County jury found in HE’s favor on claims of negligent misrepresentation and unfair and deceptive trade practices, and in March 2025 entered a judgment of $1.77 million — including treble damages — against Mr. Woody and Mr. Fann.

The executives sought coverage under Avadim’s directors and officers liability policy. The insurer refused to pay and filed suit seeking a declaration that it owed nothing, arguing three policy defenses: an improper advantage exclusion, a carve-out from the definition of “loss” for restitution and disgorgement and a separate carve-out for contractually owed amounts.

The court rejected all three. On the improper advantage exclusion — which requires a final adjudication that the policyholder gained something to which it was not entitled — the judge found that “nothing in the judgment or verdict in the underlying action indicates” that Mr. Woody or Mr. Fann personally profited from their misrepresentations.

On the restitution carve-out, the court noted that “the Judgment itself explicitly labeled the damage award as ‘compensatory,’ not restitutionary.”

On the contract exclusion, the court found that HE never claimed that the executive’s conduct resulted in a breach of an agreement with Avadim when negotiating the debt settlement.