Previously, we have reported on a court’s decision that an Insured satisfied their D&O policy's "best efforts" requirement, and the Carrier failed to establish any uncovered portion of the loss under New York’s relative exposure framework. 

A manufacturing company (the “Insured”) pursued D&O coverage for defense and settlement costs arising from a lawsuit. While the first three carriers settled the underlying matter at arbitration, the final excess carrier (the “Carrier”) argued the loss never reached its attachment point. Despite the arbitrator allocating 100% as covered loss, the Carrier sought to vacate the arbitration award claiming the arbitration panel: 1) improperly refused to consider settlement-related evidence regarding allocation of loss; 2) misconstrued the policy's "best efforts" requirement; and (3) wrongly applied the “larger settlement” rule for allocating loss. The carrier lost its challenge, and the court was then asked to confirm the arbitration award.

The court determined that 100% of the loss was covered under the Policy because all the claims were brought jointly and severally under a conspiracy theory and the Carrier failed to show how the presence of uninsured parties increased the settlement or that a portion of the settlement should be excluded from coverage. The court also found that the Insured satisfied the policy's "best efforts" to determine a fair and proper allocation when a claim involves covered and uncovered matters or parties. The Insured demonstrated extensive negotiation and communication with the Carrier, including key developments which satisfied the standard.

The court ultimately confirmed the final arbitration award.

A court held that a lawsuit filed in a subsequent policy period was meaningfully linked to a notice of circumstance in the prior policy period, thus, triggering coverage under the prior policy.  

During the prior policy period, an "activist investor" began a series of actions challenging the Insured's corporate governance including a demand letter seeking to investigate the suitability of the board, potential mismanagement, and threatening a shareholder derivative lawsuit. The Insured noticed the demand letter during the earlier policy period and the carrier accepted the demand letter as a notice of circumstance. 

During the subsequent policy period, the Activist filed a lawsuit for breach of fiduciary duty and a derivative claim for wrongful dilution against members of the board. The carrier argued that the earlier notice was insufficient because it did not spell out the later claims in detail. The policy stated that if the insured reports “any circumstances … which may reasonably be expected to give rise to a Claim,” then any later claim “alleging, arising out of, based upon or attributable to such circumstances” is treated as made at the time of the original notice.

The court applied Delaware’s meaningful linkage standard and found that the lawsuit was meaningfully connected to the demand letter provided in the earlier notice. The court stressed that the inquiry focused on whether the same conduct was involved, not whether the notice anticipated every allegation. The court stated that “[t]he primary factor in determining whether a notice and a claim are meaningfully linked is whether they ‘involve the same conduct.’” The lawsuit and demand letter involved the same underlying alleged conduct of the board. The notice provision and the contents of the Insured’s notice were interpreted broadly in favor of the Insured.

In a win for west coast businesses, the Ninth Circuit held that D&O carriers cannot issue blanket denials for lawsuits that contain both covered and uncovered allegations. In coming to its decision, the court identified errors in the lower courts analysis and rejected the treatment of all allegations as one singular claim under a policy. Instead, the court held that a single lawsuit alleging both covered and uncovered theories of liability must be analyzed allegation by allegation.  

In the underlying suit, a former consultant of a casino company (the “Casino”) alleged breach of contract, fraud, and quantum meruit. Following years of litigation, the Casino was found liable under the theory of quantum meruit (an equitable remedy that allows recovery for reasonable payment despite having no formal or clear contract).

The Casino was unable to recover its defense and settlement costs from its D&O carrier because the carrier had denied coverage for the whole lawsuit. The carrier relied on the contract exclusion as a basis for denying the entire lawsuit, despite the breach of contract allegation being only one of the allegations in the lawsuit. The court disagreed with the carrier and held that by their nature, quantum meruit claims cannot arise from an express and existing contract and, furthermore, the fraud allegations were not centered around a contract. Thus, the lower court’s decision to lump all the allegations and use the contract exclusion as a blanket denial was misapplied.

The court’s decision highlights how crucial it is for carriers and coverage professionals to treat multiple allegations within a lawsuit as separate and distinct theories of liability. Additionally, policy exclusions cannot be enforced generally and must be applied within the parameters of each individual allegation.