Navigating today’s complex risk environment can be a monumental task. Steve Shappell, Alliant Claims & Legal, spearheads Executive Liability Insights, a monthly review of news, legal developments and information on executive liability, cyber risk, employment practices liability, class action trends and more.
FEATURED ARTICLE
BACK TO BASICS: AMBIGUITIES ARE TO BE CONSTRUED IN FAVOR OF THE INSURED AND AGAINST THE INSURER
Banc of Cal. Nat'l Ass'n v. Fed. Ins. Co., No. 21-56179, 2022 U.S. App. LEXIS 34179 (9th Cir. Dec. 12, 2022)
In a recent case, a Federal appellate court reversed a lower court’s ruling that favored an insurance carrier and remanded the case for further coverage analysis with the guidance that the law requires the interpretation of ambiguities in favor of the insureds.
In This Issue:
BACK TO BASICS: AMBIGUITIES ARE TO BE CONSTRUED IN FAVOR OF THE INSURED AND AGAINST THE INSURER
Banc of Cal. Nat'l Ass'n v. Fed. Ins. Co., No. 21-56179, 2022 U.S. App. LEXIS 34179 (9th Cir. Dec. 12, 2022)
In a recent case, a Federal appellate court reversed a lower court’s ruling that favored an insurance carrier and remanded the case for further coverage analysis with the guidance that the law requires the interpretation of ambiguities in favor of the insureds.
Read More >>
INSURANCE COMPANY DELAY IN ACTING TO RESCIND INSURANCE POLICY WAIVES RESCISSION
Evanston Ins. Co. v. Desert State Life Mgmt., No. 21-2145, 2022 U.S. App. LEXIS 35936 (10th Cir. Dec. 30, 2022).
This rescission coverage litigation arose out of a Professional Liability policy for which the application was submitted to the insurer amidst an embezzlement scheme. On behalf of the insureds, the corporation’s CEO applied for a Professional Liability coverage and assured the insurer that no person or entity was “aware of any fact, circumstance, situation, incident or allegation of negligence or wrongdoing, which might afford grounds for any claim such as would fall under the proposed insurance.”
Read More >>
SIGNIFICANT DECISIONS TO WATCH IN 2023: WILL FORUM SELECTION PROVISIONS SURVIVE?
The inclusion of Forum Selection provisions in corporate bylaws is a relatively new development over the last decade. Corporate America introduced such provisions as an attempt to minimize duplicative or redundant litigation and, to steer state-based shareholder derivative lawsuits into more predictable state courts (particularly in corporate friendly Delaware).
Read More >>
INSURED V. INSURED EXCLUSION PRECLUDES COVERAGE WHEN ASSISTANCE PROVISION CARVE-BACK NOT TRIGGERED
Gregory v. Navigators Ins. Co., No. 22-CV-4834 (VEC), 2022 U.S. Dist. LEXIS 222519 (S.D.N.Y. Dec. 9, 2022).
In the underlying derivative litigation, security holders, including one employee, filed a purported derivative action against the owner of the company and other security holders. The shareholders submitted the matter to their Directors & Officers Liability (”D&O”) carrier; however, coverage was denied because the carrier determined the subject lawsuit was filed, at least in part, by an Insured Person against other Insureds.
Read More >>
INSURANCE BUYERS BEWARE: CRUCIAL EXCLUSIONS WOVEN INTO THE DEFINITION OF LOSS
Onyx Pharmas. Inc. v. Old Republic Ins. Co., No. CIV 538248 (Cal. Super. Ct. Dec. 30, 2022).
A California court recently held that the settlement of shareholder litigation involving the acquisition of a pharmaceutical company (the “Company”) was not covered by the company’s Directors & Officers Liability (“D&O”) policies. The suit alleged that the board failed to maximize the company’s price per share, thereby violating its fiduciary duty to the company’s shareholders.
Read More >>
BOILERPLATE RESERVATION OF RIGHTS LETTER PRECLUDES CARRIER FROM INVOKING COVERAGE DEFENSES
Stoneledge at Lake Keowee Owner’s Assoc. v. Cincinnati Ins. Co., No. 1-92009, 2022 WL 17592121 (4th Cir. 2022).
A South Carolina Court ruled in favor of a Homeowner’s Association after it sued its insurers to collect damages arising from a construction-defect case. In the underlying litigation, the insurers issued two “generic” reservations of rights letters before ultimately denying coverage.
Read More >>
CYBER CORNER
Click to read the following cases:
- REPLACEMENT OF SOFTWARE NOT COVERED LOSS UNDER A PROPERTY POLICY
- THE MUCH-NEEDED BOOST OF CONFIDENCE IN CYBER-COVERAGE AND A SIGN TO CYBER-CARRIERS TO NOT DROWN IN TECHNICALITIES
Read More >>
EPL CORNER
Click to read the following cases:
- FEDERAL COURT RULES IN FAVOR OF INVESTMENT MANAGERS DESPITE FUNDS BEING HELD IN POORLY PERFORMING FUNDS
Read More >>
SEC CORNER
Click to view the following cases:
- SEC UNANIMOUSLY ADOPTS CHANGES TO RULE 10B5-1
- SEC ISSUES NEW GUIDANCE ON DISCLOSURES FOLLOWING THE COLLAPSE OF CRYPTO CURRENCY EXCHANGE
- DECEMBER 2022 NOTEWORTHY ENFORCEMENT ACTIONS FILED
- DECEMBER 2022 NOTEWORTHY SETTLEMENTS AND JUDGEMENTS
Read More >>
SHAREHOLDER CORNER
Click to view:
- DECEMBER 2022 SECURITIES CLASS ACTION FILINGS
Read More >>
BACK TO BASICS: AMBIGUITIES ARE TO BE CONSTRUED IN FAVOR OF THE INSURED AND AGAINST THE INSURER
Banc of Cal. Nat'l Ass'n v. Fed. Ins. Co., No. 21-56179, 2022 U.S. App. LEXIS 34179 (9th Cir. Dec. 12, 2022)
In a recent case, a Federal appellate court reversed a lower court's ruling that favored an insurance carrier and remanded the case for further coverage analysis with the guidance that the law requires the interpretation of ambiguities in favor of the insureds.
A bank purchased a forged insurance policy from an insurance carrier. The policy guaranteed coverage for losses sustained due to forgery, provided that six requirements were met. After purchasing the policy, the bank made a multi-million dollar loan based on a document that was later determined to be a forged agreement. The forged contract gave the bank the ability to control the borrower’s bank account. The borrower’s bank account for which control should have been granted did not exist, as the employee’s signature on the document was forged.
Upon receipt of the matter, the carrier denied coverage, arguing that one of the elements, the control agreement, did not qualify as evidence of debt, and thus did not trigger coverage. Under the policy’s wording, forgery reimbursement required loss to result from the insured’s reliance on an original of one of eight listed examples of collateral. The policy defined a Security Agreement to mean “an agreement which creates an interest in personal property or fixtures, and which secures payment or performance of an obligation.”
Since the policy did not specify what kind of property interest needed to be retained to constitute a Security Agreement, the court considered it to be an ambiguity subject to interpretation. To resolve that ambiguity, the court applied the famous canon of interpretation—that ambiguities should be resolved in favor of the insured and against the insurer. In other words, because the control agreement created a possessory interest, and the policy did not contain a provision that stated that a control agreement constitutes insufficient collateral, the control agreement qualified as evidence of debt.
The Takeaway
This case reinforces the principle that policies should perform in accordance with the clear expectations they create and discourages carriers from trying too hard to use wording gaps for coverage denials.
INSURANCE COMPANY DELAY IN ACTING TO RESCIND INSURANCE POLICY WAIVES RESCISSION
Evanston Ins. Co. v. Desert State Life Mgmt., No. 21-2145, 2022 U.S. App. LEXIS 35936 (10th Cir. Dec. 30, 2022).
This rescission coverage litigation arose out of a Professional Liability policy for which the application was submitted to the insurer amidst an embezzlement scheme. On behalf of the insureds, the corporation’s CEO applied for Professional Liability coverage and assured the insurer that no person or entity was “aware of any fact, circumstance, situation, incident or allegation of negligence or wrongdoing, which might afford grounds for any claim such as would fall under the proposed insurance.” In reliance on the CEO’s application responses, the insurer issued the policy with various exclusions.
Shortly after the issuance of the policy, state regulators conducted an investigation that rendered the insured financially unsound. The insurer was aware of the investigation as well as of the allegations of misconduct by the CEO. Nearly a year after the initial investigation, the CEO pled guilty to two federal felonies in connection to material misrepresentations in the application for insurance. Yet, the insurer did not rescind the policy.
An additional six months passed before the insurer sought to rescind coverage. The court explained that rescission, the act of voiding the policy from its inception, is a remedy that must be promptly exercised “where there has been a misrepresentation of a material fact, the misrepresentation was made to be relied on, and has in fact been relied on.” The court reasoned that but for a prompt exercise of this right, the remedy is waived. The court sided with the insured and concluded that the insurer failed to act immediately to rescind the policy despite being aware of misconduct. Thus, the insurer was not entitled to this remedy.
Next, the court addressed the exclusion that barred coverage for any claim “based upon or arising out of any conversion, misappropriation, commingling of or defalcation of funds or property.” Generally, an exclusion that appears in a policy controls coverage and applies as written. As evidenced by the CEO’s guilty plea, the class-action litigation arose from the CEO’s commingling—the act explicitly accounted for by the exclusion. Therefore, the court concluded that the exclusion applied and barred any coverage.
The Takeaway
Recission of an insurance policy is a challenging issue and is a harsh and aggressive action for an insurer to take. If successful, rescission results in the voiding of the entire insurance policy as to ALL insureds regardless of their knowledge or participation in a misrepresentation or a misconduct leading to such rescission. As shown above, the CEO, who violated the policy, should lose coverage because of their misconduct. However, when an insurer rescinds a policy, as attempted here, even those who have not committed misconduct would lose coverage. To avoid the unfair application of a recission provision, it is important to remember that severability and non-imputation clauses can mitigate this harsh consequence in some management liability policies.
SIGNIFICANT DECISIONS TO WATCH IN 2023: WILL FORUM SELECTION PROVISIONS SURVIVE?
The inclusion of forum selection provisions in corporate bylaws is a relatively new development over the last decade. Corporate America introduced such provisions as an attempt to minimize duplicative or redundant litigation and, to steer state-based shareholder derivative lawsuits into more predictable state courts (particularly in corporate friendly Delaware).
Recently, the Seventh Circuit Court of Appeals struck down a forum selection provision holding that a corporation may not attempt to limit wasteful, frequently meritless shareholder litigation through a forum selection provision. The Circuit Court explained that federal courts maintain exclusive jurisdiction over all Exchange Act claims, and a corporate limitation forcing derivative lawsuits into state court would preclude shareholders from bringing a derivative claim in a forum which is well-equipped to adjudicate such issues.
In contrast, five months after the Seventh Circuit’s decision, the Ninth Circuit Court of Appeals came to the opposite conclusion and upheld the validity of a forum selection claim. The Ninth Circuit reasoned that a corporate forum provision is enforceable as applied, and such enforcement effectively precludes shareholders from bringing a derivative action in federal court. The Ninth Circuit held that there is a strong presumption in favor of enforcing contractual forum selection clauses.
The decision, however, is not yet final as the parties are awaiting review by the full Ninth Circuit Court of Appeals. Three former Chancellors from the Delaware Court of Chancery have submitted briefs in support in favor of upholding the forum selection clauses. A decision is expected later this year.
INSURED V. INSURED EXCLUSION PRECLUDES COVERAGE WHEN ASSISTANCE PROVISION CARVE-BACK NOT TRIGGERED
Gregory v. Navigators Ins. Co., No. 22-CV-4834 (VEC), 2022 U.S. Dist. LEXIS 222519 (S.D.N.Y. Dec. 9, 2022).
In the underlying litigation, security holders, including one employee, filed a purported derivative action against the owner of the company and other security holders. The shareholders submitted the matter to their Directors & Officers Liability (”D&O”) carrier; however, coverage was denied because the carrier determined the subject lawsuit was filed, at least in part, by an Insured Person against other Insureds. Coverage litigation alleging breach of contract ensued.
The carrier argued that the policy’s Insured v. Insured exclusion applied. In response, the Insured argued that the policy contained a carve-back to the exclusion since the plaintiffs were acting totally independently, without the solicitation or any form of assistance and intervention of the Company or any other Insured, and therefore this matter should be covered. The Insureds alternatively argued that even if claims brought by the Insured employee were uncovered, there should still be coverage for claims made by the non-Insureds under the policy’s allocation provision.
The court ruled in favor of the carrier, finding that while numerous security holders brought this lawsuit, at least one of the shareholders was an Insured; therefore, the Insured v. Insured exclusion applied to preclude coverage. The court further addressed the carve-back within the exclusion and held that the Insured was not acting totally independently (without any assistance, solicitation, and other forms of participation) of the Company or any other Insured Person. As such, the exception to the exclusion was not met and the coverage denial was warranted.
The court also addressed allocation between covered and uncovered exposure and held that once the exclusion was found applicable, it served as a complete bar to coverage and the allocation portion of the policy was irrelevant.
The Takeaway
A broad Insured v. Insured exclusion can create significant coverage hurdles. Carve-back provisions can mislead Insureds’ expectations of such broad exclusions. When the exception to the exclusion is not triggered, the claim will be found to be a complete “uncovered” matter without any allocation.
INSURANCE BUYERS BEWARE: CRUCIAL EXCLUSIONS WOVEN INTO THE DEFINITION OF LOSS
Onyx Pharmas. Inc. v. Old Republic Ins. Co., No. CIV 538248 (Cal. Super. Ct. Dec. 30, 2022)
A California court recently held that the settlement of shareholder litigation involving the acquisition of a pharmaceutical company (the “Company”) was not covered by the company’s Directors & Officers Liability (“D&O”) policies. The suit alleged that the board failed to maximize the company’s price per share, thereby violating its fiduciary duty to the company’s shareholders.
Although the suit qualified as a Claim under the primary policy, the last paragraph of the policy’s definition of Loss provided that “[i]n the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all of the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased” (the “Loss Exclusion”). The primary insurer did not contest coverage and paid its full limits in the underlying shareholders lawsuit. However, the Excess insurers contested coverage.
In response, the Company argued that at least a portion of the claims asserted in the shareholder class action were based upon something other than inadequate consideration. The court held that the theory did not provide a separate claim for relief but rather served as evidence of alleged wrongful conduct of the transaction. The Company then argued that its directors and officers all expected that insurance coverage would be available for all lawsuits by shareholders. The court held that although courts may consider reasonable expectations of parties to reinforce their conclusions regarding the meaning of unambiguous language, the standard is not the subjective intent or understanding of the insured but rather the reasonably objective understanding. The court heavily examined the policy’s underwriting history and noted that the Company’s broker was aware of the exclusion—it was not slipped into the policy. The court underscored that the broker failed to inform the Company about this gap in their coverage, despite raising the issue throughout the negotiation phase.
Therefore, the court found that the Loss exclusion unambiguously precluded coverage. It further held that the excess “follow form” carriers were squarely within their rights to contest and deny coverage.
The Takeaway
This case reiterates that some of the most crucial coverage exclusions may be hidden outside of the “Exclusions” section of a policy. Thus, it is imperative for a qualified Claims Advocate or Attorney to review a policy when a claim arises, and that the client is informed of the distinctions between what the policy provides and if more favorable terms and conditions are available.
BOILERPLATE RESERVATION OF RIGHTS LETTER PRECLUDES CARRIER FROM INVOKING COVERAGE DEFENSES
Stoneledge at Lake Keowee Owner’s Assoc. v. Cincinnati Ins. Co., No. 1-92009, 2022 WL 17592121 (4th Cir. 2022).
A South Carolina court ruled in favor of a homeowner’s association after it sued its insurers to collect damages arising from a construction-defect case. In the underlying litigation, the insurers issued two “generic” reservations of rights letters before ultimately denying coverage. The lower court ruled that the generic reservation of rights letters were insufficient to later deny coverage, and ruled in favor of the homeowner’s association. The insurers then appealed.
The appellate court found the decision in Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E.2d 288 (S.C. 2017), controlling. Relying on the “axiomatic” principle that “an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage,” Harleysville held that “generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) is not sufficient.”
The court went on to discredit insurers use of the “we will let you know later” approach in issuing a reservation of rights letter. The insurers in this case issued letters that merely identified the policies and recited 9 – 10 pages of various policy terms, exclusions, and definitions. No specific coverage defenses were raised that directly addressed the facts of the underlying matter. The court stated that at a minimum, the carrier must discuss its position as to the policy provisions and explain potential reasoning for denying coverage. The court went further and found that a carrier simply stating that “coverage may be limited by other exclusions and endorsements”, without discussing why those exclusions may apply, is insufficient to adequately reserve rights.
The Takeaway
While this case involved general liability policies rather than management liability policies, the court’s rationale here can be used to scrutinize reservations of rights letters across the board. All too often we see carrier’s using boilerplate language and reciting pages of policy terms but applying very little analysis of the facts of the underlying matter to the terms of the policy. The decision in Stoneledge should give carriers pause in simply issuing a generic reservation letter, as it may preclude the carrier from denying coverage later in the claim. Similarly, it provides an insured with additional support to challenge a denial after receiving a generic reservation of rights letter.
Cyber Corner
REPLACEMENT OF SOFTWARE NOT COVERED LOSS UNDER A PROPERTY POLICY
EMOI Services, LLC v. Owners Ins. Co., 2022 WL 17905839 (Ohio, Dec. 27, 2022)
The Ohio Supreme Court recently held that an insured whose digital media was corrupted in a cyberattack did not suffer an insurable loss under its property insurance policy. The court concluded that computer software did not possess a “physical existence” necessary to trigger coverage under such a policy.
CYBER CARRIER UNABLE TO DENY COVERAGE FOR RANSOMWARE PAYMENT BASED ON POLICY TECHNICALITY
Yoshida Foods Int'l, Ltd. Liab. Co. v. Fed. Ins. Co., No. 3:21-cv-01455-HZ, 2022 U.S. Dist. LEXIS 219389 (D. Or. Dec. 6, 2022).
A food manufacturing company suffered a ransomware attack during which the hacker gained unauthorized entry into the company’s computer system and encrypted the data using malware. The attack rendered the system unusable.
FEDERAL COURT RULES IN FAVOR OF INVESTMENT MANAGERS DESPITE FUNDS BEING HELD IN POORLY PERFORMING FUNDS
Tullgren v. Booz Allen Hamilton Inc., No. 1:22-cv-00856 (E.D. Va. Aug. 1, 2022)
Hall et al. v. Capital One Financial Corporation et al., No. 1:22-cv-00857 (E.D. Va. Aug. 3, 2022)
In the same week, a Virginia federal judge ruled in favor of two investment managers following two separate complaints regarding employee 401(k) plans. In each complaint, it was alleged that the investment group mismanaged various employee retirement savings by placing them or leaving them in poorly performing investment funds, which resulted in workers losing millions in retirement savings.
SEC Corner
SEC UNANIMOUSLY ADOPTS CHANGES TO RULE 10B5-1
The U.S. Securities and Exchange Commission (“SEC”) adopted significant amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. The rules will become effective 60 days after their publication in the Federal Register. The changes seek to enhance investor protections regarding insider trading.
SEC ISSUES NEW GUIDANCE ON DISCLOSURES FOLLOWING THE COLLAPSE OF CRYPTO CURRENCY EXCHANGE
In the past decade, we have seen a significant rise in the use of Crypto Asset Markets. One such crypto currency exchange collapsed in December of 2022 after facing a liquidity crisis and has since filed for bankruptcy.
DECEMBER 2022 NOTEWORTHY ENFORCEMENT ACTIONS FILED
| Director/Officer | Role | Company |
| Adam Rogas | CEO | NS8, Inc. |
| Anthony Michael Hernandez | CEO | Oi2Go Media Technologies, Inc. |
DECEMBER 2022 NOTEWORTHY SETTLEMENTS AND JUDGMENTS
| Amount | Director/Officer | Role | Company |
| $ 1,800,000,00 | Randall Goulding | Owner | The Nutmeg Group LLC |
| $ 574,312.45 | Matthew Moravec | CEO | Thor Technologies, Inc. |
Source: U.S. Securities and Exchange Commission
Source: Stanford Law School Securities Class Action Clearinghouse
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Contributors
Abbe Darr, Esq.
Claims Attorney
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David Finz, Esq.
Claims Attorney
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Isabel Arustamyan
Claims Advocate
isabel.arustamyan@alliant.com
Jacqueline Vinar, Esq.
Claims Attorney
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Jaimi Berliner, Esq.
Claims Attorney
jaimi.berliner@alliant.com
Katherine Puthota
Senior Claims Advocate
katherine.puthota@alliant.com
Malia Shappell, Esq.
Claims Attorney
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Matia Marks, Esq.
Claims Attorney
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Michael Radak
Claims Attorney
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Robert Aratingi
Senior Claims Advocate
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Robert Hershkowitz, Esq.
Claims Attorney
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Steve Levine, Esq.
Claims Attorney
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