A federal court recently found that an insurer (the “Carrier”) was required to advance defense costs related to an Insured’s lawsuit with a third party for asset management services covered under its professional liability policy.

The underlying lawsuit stemmed from the breach of a lease agreement between two housing companies. The Insured, a private equity group (the “PE Group”), had acquired an entity as part of its investment strategy of purchasing a struggling company's outstanding debt, extending additional loans to that company, and later collateralizing the debt and foreclosing on the company. The PE Group sought coverage under its equity management and professional liability policy for defense costs incurred for the lawsuit and related bankruptcy proceedings. The Carrier denied coverage, citing the policy’s contract exclusion.

In the subsequent coverage litigation, the PE Group argued that the contract exclusion did not apply due to a carve back in the exclusion for Loss “resulting from” Asset Management Services. The court determined that, based on the “resulting from” language, the carve back to the contract exclusion applied where the PE Group could show that its asset management services were the substantial and proximate cause of its incurred defense costs. The court found that regardless of the subsequent breach of the lease agreement, the PE Group’s defense costs in the underlying litigation arose from its investment strategy and management of the defaulting entity. Therefore, the Loss was a proximate result of the PE Group’s Asset Management Services, and the Carrier was required to advance defense costs pursuant to the carve back in the contract exclusion.

A U.S. District Court recently held that an excess E&O Insurer (the “Carrier”) did not owe coverage to an Insured who noticed a multi-million dollar claim nearly three years after the applicable policy period. This case stems from a trade secret lawsuit filed against the Insured that resulted in a large judgment.

The primary insurer accepted coverage and eventually exhausted its limits. Following the primary layer’s exhaustion, the Insured sought coverage from the excess Carrier for its remaining defense costs. The excess Carrier denied coverage and argued that because the Insured never included the excess Carrier in the initial notice of claim, the Insured’s notice was untimely. 

The lower court acknowledged that state contract law favored the Insured which allowed for notice, whether it resulted in prejudice to either party. However, the lower court held that the notice was untimely.

This court agreeing with the lower court held that notice was untimely and, as a result, the excess Carrier was undoubtedly prejudiced by the Insured’s years-long delay. The court reasoned that the excess Carrier was stripped of the opportunity to engage in settlement negotiations, attorney-selection discussions, and was never appraised of material developments. 

A federal court dismissed a claim against a cybersecurity company for a breach that involved confidential information of thousands of patients of a medical device company.

An employee of the cybersecurity company left a port open during a data migration process, exposing the patients’ personal data. The cybersecurity company did not have a direct contract with the medical company. Instead, the contractual relationship was between the medical company and a business communications company, which in turn had contracted with the cybersecurity company that caused the exposure. The two impacted businesses assigned their rights against the cybersecurity company to the communication’s company’s insurer. The insurer pursued a recovery against the cybersecurity company (a process known as “subrogation”) on grounds of equitable indemnification and breach of contract.

The court rejected the Insurer’s arguments regarding equitable indemnification because the cybersecurity company was only an independent contractor, not an agent. As an independent contractor, it had no “vicarious” (or indirect) liability to the communications company. Because the contractual relationships were insufficient to hold the cybersecurity company liable, the court dismissed the claim.

The court also dismissed the insurer’s claim for breach of contract because the business communications company failed to include an indemnification provision in its consumer contract. Similarly, the cybersecurity company’s contract did not prescribe its duties in the event of a data breach, so the court concluded there was no breach of good faith and fair dealings. 

An Insured, a private equity management firm, sued its excess carriers, alleging breach of contract for failing to cover its litigation costs in an underlying action. The excess carriers sought to dismiss the lawsuit arguing that the Insured did not allege, and could not allege, exhaustion of the underlying policies. The court agreed, finding the clear language of the excess policies did not trigger coverage until the exhaustion of the underlying coverage, which the Insured failed to show.

Following the settlement of the underlying dispute, certain insured parties sought and received reimbursement for costs incurred, which exhausted only the primary carrier’s policy limits. Other insured parties then filed suit against the primary carrier alleging they wrongfully distributed the entire insurance proceeds. This coverage litigation was settled, however additional coverage litigation was filed against the excess carriers.

The relevant exhaustion language in the policies included: “shall only be liable … after the total amount of all Underlying Limits of Liability has been paid in legal currency by the Issuers of all Underlying Insurance as covered loss thereunder” and “only provides coverage when the underlying limit of liability is exhausted by reason of the [carriers] of the underlying policies paying or being held liable to pay in legal currency the full amount of the underlying limit of liability as loss.” And “underlying limit of liability” was defined as “the combined limits of liability of the underlying policies, less any reduction or exhaustion of limits of liability due to payment of loss under those policies.”

Applying California law, until the legal obligations of the primary insurers have been determined and the excess policies triggered, an insured cannot sue excess carriers for breach of contract. One policy was triggered only if the total amount of underlying limits had been paid. And the other policy only provided coverage when the underlying limit of liability was exhausted by the underlying carriers paying or being held liable to pay. Such language demonstrated that the policies did not attach and no obligations arose.