In what has become one of the most dominant issues in financial lines coverage disputes, this case once again addresses relatedness. Following one of the largest bank failures in Louisiana, the bank expectedly started to drown in legal actions and, after its collapse, secured a victory against its directors and officers Insurance Carrier (the “Carrier”) over the interpretation of “related” language.

After its collapse, the bank sought coverage from the Carrier for claims made against its executives alleging that they breached their fiduciary duty and were grossly negligent in approving various loans. The Carrier denied coverage, arguing that the new claims related back to claims that were tendered to the Carrier for the previous policy period and, therefore, they were barred from coverage by the prior notice exclusion. The Insured launched a coverage litigation.

The “Interrelationship of Claims” section of the policy provided:

All Claims alleging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions, or events or to a series of related facts, circumstances, situations, transactions or events will be considered to be a single Claim and will be considered to have been made at the time the earliest such Claim was made.

According to the Insurer, the “all Claims alleging, arising out of, based upon or attributable to . . .” language in the exclusion had to be interpreted broadly, requiring “mere connection” to the formerly noticed claims. The court disagreed, focusing on the state law which demanded a stronger causal link. According to the court, the Carrier failed to show that the new claims involving allegations of breaches of fiduciary duties and violations of securities laws were related to the prior claims factually only because they concerned the same bank. Similarly, the court clarified that one of the prior notices constituted a notice of potential claims which could not trigger the prior notice exclusion. The court also held that the two shareholder actions were unrelated because there was no showing of relatedness with the specific lending relationships. As a result, the court granted the bank’s partial summary judgment. 

Recently, in a seminal and high-profile decision, a Delaware Vice-Chancellor held that corporate officers can be sued for breach of duty of oversight. Previously, it was understood that only directors could be held responsible for such Caremark claims. 

In a subsequent decision on the merits of a claim brought against a corporate officer, this court clarified the onerous pleading requirements which must be met to proceed with a breach of duty of oversight lawsuit against an officer.

In the underlying case, a manufacturer of transportation devices (the “Company”) sued its former officer, the Vice President of Finance, for breach of fiduciary duty. The Company alleged that the officer knew or should have known of potential issues related to a drastic rise in accounts receivable. According to the Company, the officer knew about the decline in sales of its devices and the rise of accounts receivable and further, the officer ignored the issue and failed to advise the board.

The court noted that the bar to plead such allegations was high and perceiving a lower bar to apply to claims brought against an officer, as opposed to a director, was a “distressing reading of our law” on the part of the Company. The court stated that bad faith continues to be a necessary predicate for such a claim against an officer, thus, the Company needed to allege that the officer (1) “utterly fail[ed] to implement any reporting or information system or controls,” or (2) “having implemented such a system or controls, consciously fail[ed] to monitor or oversee its operations.”

The court dismissed the Company’s Caremark claims against the officer. In doing so, the court hinted that a plausible complaint against the officer would contain factual allegations showing that the officer was culpable for overlooking accounting improprieties, fraudulent business practices, or other material legal violations. 

In the underlying case, a Learning Institution (the “Institution”) alleged that its D&O Carrier breached its obligations under the policy when the Carrier denied coverage for defense costs related to a False Claims Act (“FCA”) investigation. The Institution earns revenue by charging each franchisee royalties while providing management and support services to the franchisees who are eligible for the veteran assistance program (the “VA Program”).

The Government served the Institution with a civil investigative demand (CID) requesting documents and testimony. Through the CID, the FCA investigation was looking to clarify whether the Institution had submitted false claims to the VA Program for veteran students’ tuition. After receiving the initial CID, the Institution sought coverage from its D&O Carrier. The Carrier denied coverage because the CID did not constitute a “Claim.”

Eventually, one of the Institution’s franchisees settled with the Government and pointed to the Institution as a wrongdoer in its settlement agreement. This confirmed that the Institute was the “target” of the CID investigation. A year later, the Government presented a PowerPoint presentation (the “Presentation”) to the Institution, highlighting the “scheme” which alleged that the Institution had advised its franchisees on how to violate the VA Program’s payments. According to the allegations, the Institution knowingly collected royalties that were inflated due to the franchisees’ false claims. The Presentation concluded with the Government alleging that the Institution had received millions in royalties through payments by the VA Program. Consequently, the Government proposed a large settlement and demanded that the Institution enter into a tolling agreement.

The Institution again sought coverage, yet the Carrier maintained its denial—this time taking the position that there was a valid Claim, but coverage was limited by the Government Funding Endorsement (the “Endorsement”). Ultimately, the Institution filed a complaint against the Carrier alleging that the Carrier breached the insurance contract and denied coverage in bad faith.

The parties disagreed on when the CID gave rise to a claim. The Institution argued that the CID became a “Claim” when the settling franchisee confirmed that the Institution was the “target” of the investigation. The Carrier, in turn, argued that the CID became a claim following the Presentation. The court agreed with the Carrier, stating that “a false claims CID is, at its essence a subpoena issued by an administrative agency” and that not every investigation must lead to the filing of the claim. Thus, only defense costs incurred after the Presentation should be applied toward the retention.

The Endorsement stated that “‘[l]oss . . . shall also not include the return of funds which were received from any federal, state or local government agency’ but the ‘policy shall pay Defense Costs ‘for’ Claims . . . arising out of the return or request to return such funds[.]’” The court stated that the Endorsement applied because the claim arose out of the Government’s request for the return of funds attributable to false claims for the VA Program’s funding. Since the defense costs incurred by the Institution after the presentation were lower than the deductible, the court held that the Carrier had no coverage obligations under that policy and thus did not act in bad faith. 

In the underlying case, a grand jury issued a subpoena and subsequent indictment against a law firm (the “Firm”) that charged the Firm with conspiracy, money laundering, and forfeiture in connection with the Firm’s representation regarding the recovery of frozen assets. The Firm sought coverage from its Professional Liability Carrier (the “Carrier”) for the subpoena and indictment; however, the Carrier denied coverage for them because the subpoena did not constitute a “Claim.”

In the ensuing coverage litigation, the underlying courts determined that the indictment did not constitute a “Claim” as defined by the policy. Courts have also explained that a compromise to provide partial coverage for subpoenas preceding the indictment did not obligate the Carriers to provide coverage for the indictment itself, too. The high-positioned federal court agreed with lower courts and noted that a “Claim,” in relevant part, was defined as a “written demand against any Insured for monetary or non-monetary relief.” Thus, under the plain meaning of the word “demand,” a "Claim” must request something from the Firm.

The Firm attempted to argue that other jurisdictions treated subpoenas as demands for relief and, thus, the subpoena should be deemed a “claim” under the policy. However, the court disagreed stating that, unlike a subpoena, the forfeiture sought by the indictment required no action to comply with the allegations, but rather it informed the Firm of an action that might take place in the future. Moreover, the court determined that “while a forfeiture allegation in an indictment [was] a prerequisite to an order of forfeiture, it [did] not necessarily provide notice of the property to be forfeited and therefore [did] not serve the specific notice-providing function of a demand.”