The Fourth Circuit ruled that the lower court erred in certifying a mandatory class and failed to perform the necessary analysis required to determine whether commonality existed among the class members relating to their alleged financial losses.

In the underlying action, two former employees alleged that their employer (the “Company”) breached its fiduciary duties under the Employee Retirement Income Security Act ("ERISA") by selecting imprudent investments for a defined contribution retirement plan (“the Plan”). The Plan offered an investment option that allowed participants to match up their retirement dates and risk preferences with a single diversified fund which adjusted investments based upon when the investor would most likely withdraw their funds. The Plan was also a defined contribution plan in which the assets of the plan are allocated to participants' individual accounts as opposed to a defined benefit plan where the assets of the plan are held collectively and then are used to pay the defined benefits to plan participants. The employees sought class certification, which was granted by the lower court and the Company appealed.

The first issue the court discussed was whether the lower court erred in certifying a mandatory class under Rule 23(b)(1). The Company argued that the district court erred because case law required that individualized monetary claims belong in Rule 23(b)(3), which provides class members with notice or opt-out rights unlike Rule 23(b)(1). Since the underlying action involves breach of fiduciary duties in a defined contribution place with individualized monetary claims, the court held that such claims cannot be joined in a class action under Rule 23(b)(1).

Next the court addressed the lower court’s conclusion that ERISA Section 502(a)(2) claims are “inherently” common. The court noted that the commonality requirement for class certification required a showing that the action is capable of common answers that lead to a class-wide resolution. In this case, some of the alleged imprudent investment tiers of the Plan outperformed some of the competitor comparisons presented by employees. Because this case involved different plan options with different investment strategies along with different investment participation timeframes of the plan participants, the court determined that the lower court failed to address commonality with any particularity.

A court found that the D&O policy’s definition of Securities Claim applied to claims stemming from the Insured’s own stock and not claims from buying another company, and so an acquisition-related lawsuit fell outside coverage.

A pharmaceutical company (the “Insured”) was sued by competitors for alleged antitrust violations stemming from its acquisition of another company (the “target company”) and rights it received in that transaction to distribute a certain drug. The Insured sought coverage under its D&O liability policy arguing the lawsuit triggered coverage as a Securities Claim. The policy defined a Securities Claim as:​​

any Claim, other than an administrative, regulatory or investigative proceeding against or investigation of the Company or any employment-related Claim, which in whole or in part is:

1. brought by one or more securities holders of the Company in their capacity as such, either directly or derivatively on behalf of the Company, or

2. based upon, arising out of or attributable to the purchase or sale of, or offer to purchase or sell, any securities issued by the Company, whether such purchase, sale or offer involves a transaction with the Company or occurs in the open market (including without limitation any such Claim brought by the Securities and Exchange Commission or any other claimant).

The Insured argued that although the competitors bringing the suit were not shareholders, the claim was based on its acquisition of the target company, which became a subsidiary, and was therefore "based upon, arising out of or attributable to the purchase or sale of, or offer to purchase or sell, any securities issued by the Company.” The carrier denied coverage asserting it did not constitute a Securities Claim.

The court agreed with the carrier’s position. Based on the policy language, a Securities Claim applied to claims “arising out of a purchase or sale (or offer to buy or sell) securities issued either (a) by [the Insured] itself, or (b) by a company that is/was a subsidiary of [the Insured] when it issued securities out of which the claims arose.” At the time of the acquisition, the target company was not yet a subsidiary and, therefore, its securities could not satisfy the policy’s definition of Securities Claim to trigger coverage. The court refused to accept the Insured’s counterargument that the target company was a subsidiary at the time the claim was made because the relevant question was whether the target company was a subsidiary when it issued securities.

In a claim arising out of BIPA litigation, the court permitted the litigation to proceed because the insurer failed to raise the exclusion timely.

In the underlying class action, a Company was sued for purchasing and selling a database and software that contained BIPA protected information. According to the allegations, the Company acted as a middleman and sold the facial scans of millions of Illinois residents to the Chicago Police Department in violation of BIPA. The Company tendered the matter to its insurer, which denied coverage based solely on the exclusion targeting distribution in violation of statutes (“Statutory Violations Exclusion”).

While the coverage litigation proceeded, the Company ultimately settled the case and assigned the rights to collect insurance proceeds to the Illinois Residents who brought the BIPA case. On behalf of the Company, the Illinois Residents sought insurance proceeds. However, the insurer raised a different bar to coverage, the Access or Disclosure Exclusion, which precluded coverage for:

“[d]amages arising out of . . . [a]ny access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.” 

The Illinois Residents argued that the Company profited from the BIPA information, rather than “accessed” or “disclosed” it. The court disagreed, stating that although it was possible to profit from BIPA protected information without accessing or disclosing it, the Company accessed the information by purchasing it and then sold it to another organization. Thus, selling the information entailed accessing and disclosing.

The Illinois Residents then raised the Mend-the-Hold doctrine which safeguards good faith in precluding insurers from denying claims on one basis and then changing the basis for denials during the course of litigation. In other words, it prevents parties from raising bad defenses to the performance of contractual obligations and, after losing on that basis, finding another reason to not perform. To prevail on this doctrine, the Illinois Residents needed to show that the insurer changed the basis for their denial and that they were prejudiced by those actions. The Illinois Residents successfully demonstrated that the insurer did not initially deny coverage under the Access or Disclosure Exclusion and the insurer raised it only after failing on Statutory Violations Exclusion. Furthermore, the Illinois Residents demonstrated that the change in strategy prejudiced them because they and the Company have already incurred significant litigation costs to overcome the Statutory Violations Exclusion.

The court held that a reasonable jury may find that the Illinois Residents were prejudiced by coverage defenses being raised in a piecemeal fashion and allowed the case to survive a motion to dismiss.

A federal court rejected an insurer’s attempt to deny coverage based on the “public offering” exclusion and held that the carrier was obligated to advance defense costs.

The dispute arose from a de-SPAC merger between a smart tech company (“the Insured”) and a public shell company, after which multiple actions were filed alleging that the Insured’s directors and officers made misleading statements in connection with the transaction. One officer was also sued by the SEC for alleged misstatements regarding the Insured’s warranty liabilities. The Insured sought coverage under its D&O policy, but the carrier denied coverage based on the policy’s public offering exclusion (the “Exclusion”) which barred claims arising out of a public offering of the Insured’s equity securities.

The carrier argued that the Exclusion applied because, in “economic reality,” the publicly traded shares of the post-merger parent company were functionally equivalent to the Insured’s shares. The Insured countered stating that the Exclusion applied only to a public offering of its own equity securities. The court agreed with the Insured and grounded its analysis in the policy’s plain language. Because key terms such as “public offering” and “equity securities” were undefined, the court applied their ordinary meanings and emphasized that the Exclusion must be construed narrowly against the carrier.

The court concluded that no public offering “of” the Insured’s securities occurred. Instead, the shell company registered and issued the publicly traded shares, while the Insured’s shares were cancelled at closing and converted into rights associated with the parent entity. The court rejected the carrier’s attempt to collapse the distinction between parent and subsidiary, noting that such an approach conflicted with well-established corporate law principles and the policy’s plain language. Thus, the Exclusion did not bar coverage.

The court also addressed whether the carrier’s obligation to cover defense costs was triggered only after the Insured actually indemnified the officer. The carrier argued that the policy’s “has indemnified” language required prior payment. The court rejected this argument and found that “indemnify” includes both actual reimbursement and the obligation to reimburse. Thus, the policy’s “pay on behalf of” language, was triggered when the Insured became legally obligated to indemnify, not when it makes payment. As a result, the carrier was required to advance defense costs on the Insured’s behalf.