In two nearly identical cases, the Delaware Superior Court and the New York State Supreme Court rejected claims alleging that mutual funds misled investors by failing to disclose their treatment of realized income and capital gains before those amounts were distributed. The courts held that the funds’ accounting practices complied with applicable standards and were adequately disclosed, rejecting efforts to transform disagreements over lawful accounting and distribution practices into Securities Act disclosure claims.

In Dandini, the Delaware Superior Court dismissed claims alleging that the funds’ registration statements were misleading because they did not explain that realized income and capital gains were temporarily reflected in net asset value before being distributed. The investors argued that the funds practice artificially increased the funds’ net asset values, resulting in higher asset-based fees and additional tax liabilities.

The court rejected that theory and found that the funds had properly disclosed that earnings could be included in net asset value when investors purchased shares. The court also noted that the investors did not identify any SEC rule, or accounting requirement requiring the funds to classify those amounts as liabilities immediately or distribute them more frequently. Thus, the court dismissed the Securities Act claims and related control-person claims because the funds practices were lawful and met the industry standard for disclosures. 

The New York State Supreme Court subsequently followed similar reasoning in Morad. The investors asserted that the fund should have disclosed more information about their treatment of realized income and capital gains before distributions were declared. They also argued that funds practice of declaring dividends daily demonstrated that other funds should have followed the same approach.

The court dismissed the claims and found that the investors could not identify any law, regulation, or accounting guidance that required the fund to account for earnings differently or declare distributions more frequently. The court further determined that the funds had adequately described their accounting and distribution practices, defeating both the investor’s misstatement and omission theories.  

Together, the decisions confirmed that investors cannot use disclosure claims to force mutual funds to adopt a different lawful accounting method or distribution schedule. Where a fund followed applicable accounting standards and accurately disclosed its practices, an investor’s preference for more frequent distributions did not establish a Securities Act claim.

Ordinarily, excess policies require exhaustion of the primary and underlying excess layers before coverage attaches; however, a court held that an insured need not wait for the entire insurance tower to be exhausted before pursuing declaratory relief and bad faith claims against excess insurers. 

Two investment firms and business partners co-founded an investment firm and jointly managed funds before one of them decided to create a third fund, while the latter only maintained a small investment interest in the new fund. The partners later experienced a falling out, which led to a business dispute and expensive litigation. The primary insurer paid its limit to one partner, while the other partner firm received no payment under the primary or excess policies. The unpaid partner and related entities then brought coverage litigation, seeking to recover litigation-related losses and alleging a breach of covenant of good faith and fair dealing.

The question was whether a policyholder can pursue bad faith, declaratory relief and a bad-faith claim against an excess insurer when the underlying layer of the insurance tower has not yet been exhausted. The court sided with the unpaid partner and held that an actual controversy exists if sufficient evidence is presented to suggest that the excess policy is reasonably likely to attach. As far as the bad faith allegation, exhaustion of underlying layers is not the prerequisite so long as facts demonstrate that excess layers would become implicated, but-for the insurer’s bad faith conduct, and that such conduct jeopardized the insured’s ability to recover the policy’s proceeds. 

A federal court held that the “return of funds” exclusion within a D&O policy did not extend to multiplied damages. This decision stems from a multimillion-dollar settlement between a national health organization (the “Company”) and the government after the Company had allegedly falsified patient medical records to inflate its bills and were sued by the DOJ. 

Following the settlement, the Company sought coverage under its D&O policy. The insurer denied coverage arguing that the settlement fell within the “return of funds” exclusion (the “Exclusion.”) The court, however, rejected this argument and held that the policy’s definition of Loss included multiplied damages, which were not meant to fall within the Exclusion’s scope. The court further held that the Exclusion’s language was not clear on its intent to include/exclude multiped damages.

The court recognized that the Exclusion did apply to a portion of the settlement, the actual return of government funds, including restitution or disgorgement amounts, but did not determine the ultimate allocation of the settlement between restitution, multiplied damages, and other categories. 

A court ruled that the False Advertising and Unfair Trade Practices exclusion (the “Exclusion”) barred coverage for the enforcement action against a cash advance company.  

The New York Attorney General (the “NYAG”) served a merchant cash advance company (the “Company”) with a subpoena and an investigation into cash advances in New York. The Company tendered the matter to its carrier. NYAG formally commenced an enforcement action against the Company and alleged violations of credit laws, charging excessive interest without license, and engaging in deception and fraud. The underlying matter was settled with NYAG. 

The Company later sought recovery for the action from its D&O carrier which denied the claim, citing to various defenses to coverage, including the Exclusion. That Exclusion barred coverage for claims "based upon, arising out . . . of or attributable to any actual or alleged (i) intentionally false or intentionally misleading advertising or (ii) . . . unfair competition or unfair business or trade practice."

The Company argued that the Exclusion was inapplicable because the underlying action concerned violation of banking and lending laws, not trade practices. The court disagreed because one of the allegations was engagement in intentionally false and misleading advertising of its services. Because the banking and lending claims shared substantial nexus with the false advertising claims, they were excluded as well.

A Delaware court held that an employee arbitration fell within the applicable D&O policy period because earlier demand letters did not involve a covered Employment Practices Wrongful Act. The court also applied the Larger Settlement Rule to allocate defense costs between the covered arbitration and an uncovered proceeding.

A former employer sent demand letters to the Company and two former employees who had joined the Company. The former employer alleged that the employees had mishandled confidential information and misrepresented their employment plans. Several years later, the former employer pursued separate arbitrations involving the Company and the former employees. Because the later proceedings overlapped with the earlier demand letters, the Carrier argued that they were related and had to be treated as a single claim first made during the earlier policy period.

The Carrier contended that the demand letters alleged “employment-related misrepresentations” because one employee had allegedly misrepresented his employment plans before leaving the former employer. The court disagreed and explained that policy language had to be read in context not in isolation. The phrase “employment-related misrepresentations” appeared alongside provisions addressing wrongful termination, harassment, retaliation, and similar employment disputes. Taken together, those provisions described claims generally brought by employees against employers. 

Because the earlier demand letters did not involve Employment Practices Wrongful Acts the carrier’s interrelated argument failed. Thus, the court held that the Employee Arbitration was covered under the later policy period.

The court separately addressed defense costs incurred in the Employee Arbitration and the Company’s uncovered arbitration. Although the proceedings involved overlapping allegations and some legal work benefited both matters, the parties had not agreed on an allocation. The court held that the Larger Settlement Rule applied and the Carrier had to pay covered defense costs unless it showed that the uncovered proceeding increased costs beyond what would have been incurred for the covered arbitration alone. The court found that the Rule applied but declined to allocate all defense costs to the covered matter because additional facts were needed to determine whether the uncovered arbitration expanded discovery or other defense work.