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Prior Investigation of Third Party Did Not Trigger D&O Policy's Prior and Pending Litigation Exclusion

On September 10, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2018 NY Slip Op 32233(U), denying a D&O insurers’ motion for summary judgment based on a prior and pending litigation exclusion (the “PPL Exclusion”). Freedom Specialty is a D&O coverage litigation arising from a criminal securities fraud prosecution in the EDNY against officers of Platinum Partners, a New York hedge fund.

Last December, Justice Sherwood issued a preliminary injunction directing three excess D&O insurers to advance up to $15 million in defense costs to the insureds.  (N.B.  HNRK Partner Bradley J. Nash  represented one of the insureds in this case. See our previous post about the litigation here and here.

One of the insurers (Berkley Insurance Company) filed a motion for summary judgment, arguing that coverage was barred by a prior and pending litigation exclusion, which provided as follows: The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving: (I) any prior or pending litigation, administrative or arbitration proceeding, or investigation as of November 20, 2015, or (2) any fact, circumstance, situation, transaction or event underlying or alleged in such litigation, administrative or arbitration proceeding or investigation, regardless of the legal theory upon which such Claim is predicated. Berkley argued that PPL Exclusion was triggered by an investigation of a third party (Murry Huberfeld), who was not an insured under the Berkley policy, and who was later prosecuted by a different United States Attorney’s office for different conduct – allegedly paying a bribe to a public official in exchange for an investment in a Platinum fund.  The Court held that the PPL Exclusion was inapplicable, explaining:

[T]o allow an insurer to establish facts regarding an investigation through (as Berkley seeks to do here) subsequent allegations based on that investigation would circumvent the insurer's burden on summary judgment. . . . Berkley must at minimum show, as a matter of law, that (a) there existed an investigation prior to November 20, 2015, (b) that there was a common "fact, circumstance, situation, transaction or event" between that investigation and the Underlying Prosecution, and (c) that this common "fact, circumstance, situation, transaction or event" was one that was "underlying" the prior investigation, under a strict and narrow interpretation of that term.1

Only two of Berkley's exhibits are of any evidentiary value on any of the three forgoing issues: the May 2015 Subpoenas addressed to Huberfeld and Platinum Partners seeking records relating to transactions between Platinum Partners and COBA, and the sworn statement of FBI Special Agent Blaire Toleman, dated June 7, 2016. The latter concerns the bribery scheme involving Seabrook, Huberfeld and others as well as an urgent need at Platinum Partners for new funds to meet pending redemption requests and makes a reference to the subpoenas. As noted above, the May 2015 Subpoenas merely request documentation regarding "[t]ransactions between any entities controlled by [Huberfeld] or entities for whom you have done work with [COBA] or any of its Executive Board members or union funds" and, from Platinum Partners "[i]nvestments handled for, or monies received from or transferred for, [COBA], any Union funds, Norman Seabrook, or Michael Maiello, including any such transactions involving Centurion Credit Management or any related entities". Although the investigation references a need for new funds to meet redemption requests at Platinum Partners, there are no indications that as of November 20, 2015 the investigation of Huberfeld and Seabrook in any way included a fact, circumstance, situation, transaction or event of a Ponzi-like scheme within Platinum Partners. Even if one were to accept that Berkley had met the commonality test under the strict standard that applies here, it has not shown that such common "fact circumstance, situation, transaction or event" was one that was underlying the Government's bribery investigation of Huberfeld and Seabrook. Because the evidence fails to establish a prima facie case that the PPLI Exclusion applies, let alone show that this exclusion applies as a matter of law, the motion for summary judgment must be denied and upon a search of the record, summary judgment shall be granted in favor of defendants dismissing the complaint. 

This decision illustrates that policy exclusions are narrowly construed in favor of coverage, and an insurer seeking summary judgment based on a policy exclusion bears a heavy burden.

1 To the extent Berkley argues that the language "alleged in such investigation" applies, that phrase cannot be fairly interpreted to cover also . . . facts adduced in an earlier investigation, as alleged in a later action. At best, the PPLI Exclusion is ambiguous as to whether allegations made after November 20, 2015 can be imputed to a "prior or pending . . . investigation," and since "any ambiguity is construed in favor of the insured", even if Berkley could accomplish the herculean task of convincing the court that such an ambiguity exists, Berkley's motion would still fail.

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