(Article from Insurance Law Alert, March 2016)
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In Weaver v. Axis Surplus Insurance Co., 2016 WL 860363 (2d Cir. Mar. 7, 2016), the Second Circuit ruled that an insurer was not obligated to defend a policyholder in an action brought by the Department of Justice (“DOJ”) because it related to a claim first made prior to the policy’s effective period.
Axis insured Multivend, a vending machine sales company, under a claims-made policy. The policy was in effect from 2010 to 2014, with a “Pending or Prior Claim” date of February 20, 2008. In 2007, the Office of the Attorney General of Maryland sent a letter to Multivend requesting information relating to potential statutory violations. The letter requested that Multivend immediately cease all offers and sales of business opportunities, noting that failure to respond could result in formal legal action. In 2012, Weaver, Multivend’s President/CEO, advised Axis that he had received a DOJ letter identifying him as a target of a grand jury investigation. Shortly thereafter, Weaver was indicted. Weaver sought coverage from Axis, which denied the claim. In ensuing coverage litigation, a New York federal district court granted Axis’s summary judgment motion, finding that the indictment was based on the same or “Interrelated Wrongful Acts” as the 2007 Maryland AG letter, and therefore constituted a claim “first made” prior to the policy period. The district court also ruled that the coverage was excluded because the 2007 Maryland AG letter constituted a “demand” made prior to the February 20, 2008 “Pending or Prior Claim” date. The Second Circuit, addressing only the latter holding, affirmed.
The policy excluded coverage for “any Claim . . . in any way involving . . . any demand, suit or other proceeding pending . . . against any Insured on or prior to [February 20, 2008], or any Wrongful Act, fact, circumstances or situation underlying or alleged therein.” The parties did not dispute that the DOJ action constituted a “claim” involving the same facts and circumstances as the 2007 Maryland AG letter. However, Weaver argued that the 2007 Maryland AG letter was not a “demand.” The court disagreed. Although the policy did not define “demand,” the court held that it requires “an imperative solicitation for that which is legally owed,” as opposed to a mere “request carrying no legal consequences.” The court concluded that the 2007 Maryland AG letter met this standard because it requested information, directed a cessation of business activities, and indicated that a failure to comply could result in formal legal action. In so ruling, the court noted that neither the polite tone nor the lack of “specific consequences” in the letter negated the “demand” status of the letter. Weaver filed a petition for rehearing to the Second Circuit on March 21.
An Arizona appellate court similarly denied D&O coverage based an exclusion for claims arising out of Interrelated Wrongful Acts alleged in a prior claim made outside the applicable policy period. SP Syntax LLC v. Federal Ins. Co., 2016 WL 831532 (Ariz. Ct. App. Mar. 3, 2016).
SBC, a television developer and distributer, was insured under two “towers” of D&O coverage. Tower 1 was effective from November 30, 2006 through November 30, 2007, and Tower 2 was effective from November 30, 2007 through November 30, 2008. Federal Insurance participated in two excess coverage layers in Tower 2 – an excess policy and a “Side A Policy.”
SBC was sued in a securities fraud class action on November 14, 2007. The Tower 1 insurers accepted coverage for this action. Approximately three months later, a second complaint was filed against SBC alleging fraud and misrepresentations in connection with a credit facility agreement. SBC tendered the second complaint to all its insurers. Federal and the other Tower 2 insurers denied coverage. An Arizona trial court dismissed SBC’s coverage claims against Federal, finding that exclusions in both Federal policies barred coverage. The appellate court affirmed.
Federal’s excess policy barred coverage for any claim “alleging, arising out of, based upon, attributable to or in any way related directly or indirectly, in part or in whole, to an Interrelated Wrongful Act.” The term “Interrelated Wrongful Act” included any wrongful act “which is the same as, similar, or related to” any wrongful act alleged in the prior securities fraud class action. The appellate court ruled that the exclusion applied because the second complaint included many of the same allegations set forth in the prior securities fraud class action. In so ruling, the court deemed it insignificant that the second complaint contained allegations not included in the first complaint, noting that all allegations were “related.” For the same reasons, the court ruled that coverage was unavailable under Federal’s Side A Policy, which provided that “[a]ll related claims shall be treated as a single Claim first made on the date the earliest of such Related Claims was first made.”
A California federal district court ruled that seven lawsuits pending against the policyholder constituted a single claim for the purposes of the per-claim limit in the applicable policy. Liberty Ins. Underwriters, Inc. v. Davies Lemmis Raphaely Law Corp., 2016 WL 741837 (C.D. Cal. Feb. 23, 2016).
Between 2011 and 2013, seven lawsuit were filed against a real estate firm (DLR) and a real estate investment broker (AMC). The suits alleged that DLR and AMC made fraudulent misrepresentations relating to commission payments in connection with property acquisitions. Each property acquisition was completed on a different date, purchased from a separate seller, and on different terms. Liberty, DLR’s professional liability insurer, funded the defense of the underlying actions. Liberty sought a declaration that all seven suits constituted a single claim under a 2010-2011 claims-made-and-reported policy, and were thus subject to a single per-claim limit. The court agreed and granted Liberty’s summary judgment motion.
The policy provided that “[c]laims alleging, based upon, arising out of or attributable to the same or related wrongful acts shall be treated as a single claim.” The court held that because the underlying suits arose out of 23 distinct transactions, they were not based on the “same” wrongful act. However, the court concluded that the underlying alleged wrongful acts were sufficiently “related” to be considered a single claim. In particular, the court reasoned that although each underlying suit was brought by a different plaintiff, “they all arise from a single course of conduct, a unified policy of making alleged misrepresentations to investors in order to induce them to invest in commercial real estate acquisitions facilitated by AMC.” The court therefore concluded that a single per-claim limit applied to all underlying claims.