A ruling in favor of Starr Indemnity & Liability Co. in a dispute over a directors and officers liability insurance policy was affirmed in part and reversed in part by a federal appeals court Monday.

Scott G. Kelly and John T. DeWald operated a real estate investment and development firm that created numerous subsidiary entities to manage projects, assets and liabilities, according to Monday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Scott G. Kelly; John T. DeWald v. Starr Indemnity & Liability Co.

One of their investors, Kenneth Brehnan, loaned the plaintiffs’ companies about $359,875, and in August 2012 emailed plaintiffs a demand letter for repayment.

In May 2011, Mr. DeWald applied for a claims-made D&O policy with Starr that was effective from May 2011 to May 2012. In November 2011, Mr. Brehnan’s attorney sent a more detailed demand letter and warned Mr. Brehnan may bring claims of breach of contract, breach of fiduciary duties, fraud and securities fraud against the plaintiffs.

Starr, which at the time did not know of Mr. Brehnan’s demand, agreed to defend the claim subject to a reservation of rights while it investigated. Mr. Brehnan filed suit in August 2012 and Starr disclaimed coverage.

Mr. Kelly and Mr. DeWald settled with Mr. Brehnan for $350,000 and filed suit against Starr in U.S. District Court in Pasadena, alleging breach of contract and negligence, and claiming Starr had a duty to defend them in the action against Mr. Brehnan.

The U.S. District court concluded Mr. Brehnan’s demand was a claim made prior to the policy’s inception, and therefore Starr had no duty to defend or indemnify the claim.

The district court “erred in concluding that the Brehnan Demand constituted a claim made for a wrongful act,” said a unanimous three-judge appeals court panel, in reversing the district court’s grant of summary judgment in Starr’s favor.

“Instead, Brehnan demanded money owed pursuant to contracts with Plaintiffs’ companies, which at most establishes a question for fact whether the claim would be covered by the Policy,” the ruling said.

The district court also held that plaintiffs “have failed to establish that they are entitled to a ruling on the duty to defend. If Starr obtains evidence of nonexistent companies or material misrepresentations that predate the Policy, then Starr could potentially establish an entitlement to equitable reformation of the contract to exclude any claim made by Brehnan,” said the ruling.

“We therefore affirm the district court’s denial of Plaintiff’s motion for summary judgment and find no reason to enter either full or a partial judgment for either party,” said the ruling in remanding the case.

Mr. Kelly and Mr. DeWald’s attorney, Georg Capielo of Winters & Associates in La Mesa, California, said in a statement, “We are happy with the ruling. The 9th circuit panel got this one right.”

Starr’s attorneys did not respond to a request for comment. 

Earlier this month, a federal appeals court upheld dismissal of a case filed by a Starr unit that sought to be reimbursed for $10 million it paid a policyholder in connection with salmonella-contaminated raw chicken.