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Lawsuit Deemed to Constitute Multiple “Claims” For Purposes of Determining Applicable Policy Period Under D&O Policy

On November 27, 2020, Justice Masley of the New York County Commercial Division issued a decision in Alvarez v. XL Specialty Ins. Co., 2020 NY Slip Op 33917(U), holding that a lawsuit against the insureds was not wholly excluded from coverage under a D&O policy where only one part of the lawsuit involved “Wrongful Acts” at issue in an earlier lawsuit that was covered under a prior policy period.

The underlying lawsuit in Alvarez was an action by the Creditors’ Committee of Sears Holdings Corp. against former officers and directors, alleging 35 causes of action, arising from three transactions, one of which (the "Seritage Transaction") was the subject of an earlier shareholder derivative action for which the insurer (XL Specialty) had provided defense coverage under a D&O policy in place from 2015-16.  XL Specialty denied coverage for the Creditors Committee lawsuit under the current policy (covering the 2017-24 period), arguing that this action and the earlier derivative suit “arise from Interrelated Wrongful Acts” and therefore constitute a single “Claim” deemed to be made during the 2015-16 policy period. The 2017-24 policy defined “Claim” as “any civil or criminal judicial proceeding,” and further provided that a Claim arising from an “Interrelated Wrongful Act” (i.e., a Wrongful Act “involving any of the same or related . . . facts, situations, transactions or events” at issue in an earlier claim) “shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest time at which the earliest such Claim is made.”  As amended by an endorsement, the policy contained a parallel exclusion that carved out from coverage “that portion of ” any Claim “involving any fact, circumstances, or situation, transaction event or Wrongful Act,” occurring before the policy period that was the subject of a Claim under any earlier policy. Relying on the exclusion’s reference to a “portion of” a Claim, the Court found that XL Specialty erred in treating the entire Creditor’s Committee action as a single "Claim," deemed to have been made concurrently with the earlier derivative action (i.e., during the 2015-16 policy period). 

Justice Masley explained:

The court rejects XL’s position that all claims in the Underlying Action are covered only under the 2016-16 XL Policy, and therefore, no part of the Underlying Action is eligible for coverage in the 2017-24 policy period because the entire Underlying Action arises out of Interrelated Wrongful Acts with the prior Derivative Action, and all of the transactions alleged in the Underlying Lawsuit are parts of “a single on-going scheme.”  Rather, based on the clear unambiguous language and plain meaning of the policies, the claims in the Underlying Action are covered by the 2017-24 XL policy, but the Seritage claims are excluded from such coverage.  Instead, the Seritage claims are covered by the 2015-16 policy.

The “Exclusion” provisions of the XL policies were each amended by endorsement to add the words “that portion of” before “Claim” and exclude from coverage loss in connection with “that portion of” any “Claim” “which, before the Inception Date of this Policy, was the subject of any notice accepted under any . . . directors’ and officers’ liability insurance policy . . .”  the addition of the words “that portion of” makes clear that even if the term “Claim” could otherwise be construed to refer to an entire action, the parties here intended that any exclusion from coverage under the XL Policies be assessed narrowly on a cause-of-action by cause-of-action basis, not as one whole action. . . .

[T]he court finds that the Underlying Action consists of multiple claims:  claims arising from the Seritage Transaction and all other claims.  XL’s attempt to interpret “claim” as the entire lawsuit is rejected as an “unduly rigid construction” of the term “claim” which ignores “the realities of litigation.”  Here the “Exclusions” provisions of the XL policies in Endorsement 14 make crystal clear that where a civil proceeding involves multiple causes of action, each cause of action must be analyzed individually to determine whether it can be excluded from coverage. . . . [T]he Seritage claims were made under the 2015-16 policy.  The claims against plaintiffs in the Underlying Action regarding the Seritage Transaction “aris[e] out of” or “involv[e]” the same transaction that was at issue in the Derivative Action[.] . . . 

Accordingly, the claims against plaintiffs in the Underlying Action based on the Seritage Transaction and the claims in the Derivative Action constitute a single Claim made in May 2015, within the 2015-16 Policy Period. However, the remaining claims were made under the 2017-24 policy.  Simply joining claims in one lawsuit does not establish a “factual nexus between the claims.” . . .

Finally, the court rejects XL’s arguments that all of the claims by the Creditors’ Committee are one scheme arising out of the Seritage Transaction.  Such bald allegations of conspiracy are insufficient to enmesh otherwise distinct claims.

D&O insurance policies are “claims made,” meaning they generally cover claims made during the policy period.  However, claims that are factually-related to earlier claims may be treated as having been made during a prior policy period.  Sometimes such treatment benefits the policyholder (for example, if the current policy has unfavorable terms); other times it does not (for example, if a prior policy has been exhausted).  Policies define “related claims” in different ways, and as always, the devil is in the details. In Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2018 NY Slip Op 32233(U), previously covered on this blog, I successfully defeated an insurer’s attempt to exclude coverage by arguing that a claim for defense of a criminal prosecution was related to an investigation that began during an earlier policy period.

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