(Article from Insurance Law Alert, February 2020)
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A Pennsylvania federal district court ruled that a D&O insurer was obligated to defend a shareholder derivative suit, finding that a “related acts” provision and a “prior acts” exclusion did not bar coverage. Vito v. RSUI Indem. Co., 2020 WL 424592 (E.D. Pa. Jan. 27, 2020).
In April 2017, a minority shareholder of Unequal Technologies Company sent the company an inspection of records demand. In June 2018, the shareholder filed suit against the company, two directors and other affiliated entities. The complaint alleged that the shareholder was deprived of an elected seat on the board and that one of the directors engaged in various acts of fraud. RSUI, the company’s D&O insurer, refused to defend. The insurer argued that another shareholder’s 2015 demand letter and 2016 derivative suit were “prior related acts” that, together with the 2018 action, constitute one interrelated claim that was first made prior to RSUI’s 2017-2018 policy period. In support of this assertion, RSUI pointed to eight overlapping allegations between the two law suits. Alternatively, the insurer argued that the 2018 shareholder suit was based on wrongful acts that occurred before the first policy was issued in 2013.
The court rejected these assertions. The court acknowledged the similarities between the 2016 action and the current suit, but concluded that “significant differences” rendered them separate claims. In particular, the court noted that the prior action sought different relief, involved different parties and was based on a more limited set of factual allegations. Moreover, the court noted that “at its core,” the later suit was based on the company’s alleged refusal to give the minority shareholder a seat on the board in 2017—an issue not raised in the 2016 shareholder suit.
In addition, the court dismissed RSUI’s argument that the “prior acts” exclusion barred coverage because numerous events pre-dating the first policy (issued in 2013) formed the basis of the 2018 suit. The court deemed it irrelevant that some counts in the 2018 action were based on conduct that occurred prior to 2013, emphasizing that much of the alleged wrongdoing occurred during or after 2017 and that the pre-2013 conduct was “not a necessary ‘but for’ cause of the [2017] election claims.”