A large retailer (the “Insured”) submitted a Securities Class Action and certain derivative lawsuits for coverage to its D&O program, (the “Carriers”). Months later, the Insured received notice of investigations commenced by the SEC and DOJ as well as a Wells Notice and a series of derivative demands. The Insured provided notice of the investigations to its D&O program under a subsequent Policy Period. 

The Carriers argued that only one Policy Period was implicated because the subsequently tendered letters, investigations, and prosecution documents related back to a Claim first made when the initial Securities Class Action was submitted for coverage.  The Carriers relied on the definition of Interrelated Wrongful Acts, Specific Investigation Exclusion endorsements, and the Prior Notice Exclusion. The Insured disagreed and argued that two Policy Periods were triggered, and the Insured could use proceeds from each D&O program to cover Loss in connection with the various pending matters. 

Specifically, the Insured argued that the allegations in the original class action were separate and distinct from allegations contained in the governmental matters, the Wells Notice and the related derivative demands. 

The court agreed with the Insured and found that coverage was not limited to one Policy Period. First, the court determined that exclusionary endorsements impacted the related Claim analysis because such endorsements conflicted with the main body of the Policy and narrowed the scope of the insurers’ Single Claim argument. Second, the court found that the allegations in the original Securities Class Action involved alleged “false and overly optimistic” statements about future earnings but that the subsequent claim documents focused on sales and accounting practices. 

In deciding in favor of the Insured, the court concluded that the class action plaintiffs and government investigation involved “different parties, focus[ed] on overlapping, but not identical, time periods, raise[d] different theories of liability, rel[ied] on different evidence, and [sought] different relief.”

In a lawsuit filed by a paper manufacturer (the “Manufacturer”) against a financial advisor company (the “Company”), the court clarified that the duty to defend applied over broadly worded exclusionary language as long as at least one allegation fell within the covered scope of the insurance policy. However, when covered allegations were dropped from the amended complaint, the carrier’s duty to defend ceased.

The Company faced two lawsuits both of which stemmed from financial advisory services the Company provided to the Manufacturer in valuing the Manufacturer’s stock price for the operation of the Employee Stock Ownership Plan (“ESOP”). The plan was governed by ERISA and, according to the complaint, the Company overvalued the stock and induced the Manufacturer’s employees to invest their retirements in ESOP. The Company submitted these lawsuits to its professional liability carrier (the “Carrier”). 

The Carrier initially recognized its duty to defend the Company; however, it reserved rights to seek reimbursement if it had no duty to defend or indemnify the Company. Later, the Carrier filed a lawsuit, asking the court to declare that the Carrier had no duty to indemnify the Company in the litigation due to the broadly worded ERISA exclusion. The exclusion denied coverage for any claim “based on or arising out of actual or alleged violation of: (1) The Employee Retirement Income Security Act of 1974; (2) The Securities Act of 1933 . . . .” As the common law claims of fraud and negligent misrepresentations were not caused by ERISA violation claims and could have been alleged separately, the court concluded that the broad exclusionary wording did not bar the Carrier’s duty to defend.

After an amended complaint was filed and all covered common law allegations were dropped from it, the Carrier once again sought a declaration that it had no duty to defend the Company. The court held that the Carrier had the duty to defend the action while the covered claims were pending against the Company. However, the duty to defend ceased once the only remaining allegation was specifically excluded from coverage. The court determined that the Company had to reimburse the Carrier for all defense costs spent from the date the covered allegations were dropped from the action.

A court, applying Ohio law, held that a bad faith allegation made by a third-party against an insurance company (the “Company”) for mishandling the defense of its insured in a Florida wrongful death lawsuit does not constitute a claim under its errors and omissions liability policy. The Company agreed to defend its client in the wrongful death suit and initially refused to settle for the policy limits, despite a warning of excess exposure. The demand was later increased to five times the limit (the “excess demand”) and warned of a potential bad faith claim, yet the Company still refused to settle. The excess demand was accepted by the Company’s E&O carrier as notice of a potential adverse verdict and Wrongful Act that could give rise to a future Claim.

The wrongful death suit proceeded to trial and a jury awarded a verdict well in excess of the policy limits, which the Company paid with interest. The Company then sought coverage for the portion of the judgment that exceeded its client’s policy limit. The carrier denied coverage because the client never brought a bad faith claim against the Company. The parties agreed the excess demand was not a claim when it was received, but the Company argued it ripened into a claim when the excess verdict was rendered.

The court disagreed, finding the Company had not incurred a "Loss" stemming from a "Claim". The excess demand was to settle claims against the client, not the Company, and the Company was not a party to the wrongful death suit. The court found that, although the judgment may have triggered an actionable liability against the Company for bad faith, there was no evidence that the client made any threats of litigation or demands against the Company based on bad faith liability after the judgment was entered. No legal obligations could arise without the Company’s bad faith liability being determined and therefore no “Loss” was incurred.

The U.S. Bankruptcy Court for the District of Delaware set a new precedent by granting authority to creditors’ committees derivative standing to assert claims belonging to the estate in cases involving debtor limited liability companies (LLCs). This is a departure from prior decisions, where courts held that creditors of an insolvent LLC debtor were not permitted to bring a derivative action on behalf of the LLC.

Derivative actions are claims that shareholders can pursue “on behalf of the corporation, that the corporation itself could have enforced in court,” with the purpose of preventing injustice when a corporation’s rights and interests would not be protected due to inaction by the board of directors. Under the Delaware Limited Liability Company Act (DLLCA), “[a] member or an assignee of a limited liability company interest may bring an action in the Court of Chancery in the right of an LLC to recover a judgment…” Until recently, courts have held that a creditor of the insolvent LLC debtor is not permitted to bring a derivative action in the name of the LLC because the creditor is not a member or an assignee of the LLC.

Following a recent decision by the U.S. Court of Appeals for the Third Circuit, the court held that the bankruptcy court’s authorization of a creditor’s committee to bring a claim on behalf of the estate is not subject to the DLLCA. The court reasoned that: (1) the bankruptcy court’s authority to authorize a committee to pursue an estate cause of action is an implicit part of the overall congressional design, (2) the bankruptcy court’s authority to grant derivative standing is implied in the Bankruptcy Code, and (3) Bankruptcy Code retains the courts’ equitable principles that courts relied on prior to the Bankruptcy Code’s enactment. Ultimately, this decision notes that bankruptcy courts’ have the authority to grant a creditors’ committee derivative standing under federal law. The court concluded that the DLLCA does not bar the bankruptcy court from authorizing a creditors’ committee to assert what would otherwise be derivative claims on behalf of the bankruptcy estate and would allow creditor committees to bring derivative actions against LLC members in the Delaware Bankruptcy Court, unhindered by the DLLCA.