In two recent cases, insureds received claim-related documents prior to the inception of the policy periods under which they sought coverage. Despite the similar fact patterns in both cases, the phrase “arising out of” and the definition of “Claim” in the policies at issue yielded divergent outcomes. 

AmTrust Fin. Servs., Inc. v. Liberty Ins. Underwriters Inc., C. A. 21-374-JLH (D. Del. Mar. 31, 2022)

A financial firm was subjected to extensive litigation and an investigation by the U.S. Securities and Exchange Commission (“SEC”), which resulted in the exhaustion of the limits of its primary and first excess directors and officers liability (“D&O”) insurance policies. The firm then received a declination from its next excess insurer on grounds that a demand letter submitted for coverage a year prior to the policy’s inception triggered the exclusion for prior acts. Under the exclusion, coverage was precluded for claims “arising out of” any circumstances for which notice had been given under any D&O policy in force prior to a specific date. 

The court rejected the excess insurer’s contention that the prior demand letter triggered the exclusion. Comparing the content of the letter and the allegations of the ongoing litigation, the court concluded the litigation arose out of a financial restatement that post-dated the demand letter. Based on this timing and the “arising out of” language in the policy, the court concluded that the prior acts exclusion did not apply. Notably, the court found that mere reference to a prior communication in the pleadings does not establish that the alleged wrongful acts are interrelated for coverage purposes. Accordingly, the court ruled that coverage had been triggered.

White v. Great Am. Assur. Co., 641 S.W.3d 668 (Ark. App. Feb. 23, 2022)

In this matter, a realty company sought coverage from its professional liability insurer for a lawsuit involving damage sustained during a showing of a property to prospective buyers. Prior to the inception of the policy, the property owner sent the realty company two separate communications about the damages, demanding the company notify its professional liability insurer, assume responsibility for the damages, and preserve documents. Following receipt of these letter, the realty company purchased professional liability insurance and subsequently sought coverage for the lawsuit that appended the two prior letters. 

The insurer contended that the owner’s letters constituted a “Claim” that was made before the inception of the professional liability policy. The policy defined “Claim” as “a written demand for money or services received by an Insured … when arising out of an act or omission in the performance of Real Estate Professional Services.” Citing the definition, the court agreed with the insurer that the prior letters constituted a “Claim,” even though no specific monetary amount was sought. As such, the court held the insurer had no duty to defend the realty company in the suit. 

Following a medical device company’s IPO and subsequent stock drop, a shareholder lawsuit was filed in California state court under the Securities Act of 1933 (“’33 Act”).

Although the ‘33 Act generally allows a plaintiff to choose whether to file suit in state or federal court, and bars the removal to federal court of a suit filed in state court, a “federal forum provision” (“FFP”) in the company’s certificate of incorporation (incorporated in Delaware) stated that ‘33 Act claims must be brought in federal court unless the company consents to a different forum. The company promptly moved to dismiss the state complaint, arguing that because of the FFP, the case could be brought only in federal court, and the trial court eventually declined jurisdiction on the basis of the FFP. 

In an attempt to override the FFP, the shareholder made three arguments. First, the shareholder contended that the FFP violated the ‘33 Act, which states that both state and federal courts have jurisdiction over ‘33 Act causes of action. Second, the shareholder argued that the Delaware statutory scheme permitting the FFP violates the Commerce Clause and the Supremacy Clause of the U.S. Constitution. Lastly, according to the shareholder, the FFP was invalid and should not be enforced in any event because it was unfair and unreasonable. 

In a thorough and well-reasoned opinion, the California Court of Appeals rejected these arguments and joined other courts in finding that Delaware has a legitimate interest in allowing corporations to include FFP clauses in certificates of incorporation. In reaching this conclusion, the court relied favorably upon Delaware Supreme Court rulings holding that FFPs are permitted and enforceable.