A court found a meaningful linkage between a Notice of Circumstance accepted under an expired D&O program and subsequent securities litigation, thus, triggering coverage under the prior D&O policies, only. The Insured, a property and casualty insurance company, was initially accused of accounting irregularities. The Insured’s Audit Committee (the “Committee”) was on notice of the alleged irregularities and concerns based on a letter received from an investment firm. The Committee noted numerous “short seller reports” published regarding the irregularities and the SEC commenced an investigation but nothing further developed in the short term.

Although the Committee ultimately declined to take any further action regarding the letter, the Insured prudently submitted a notice of circumstance to its prior D&O Tower (the “Prior Tower”). The SEC investigation remained ongoing.

Years later, the Insured issued a financial Restatement because of certain accounting errors. Securities litigation and derivative actions followed in short order. The Securities Lawsuit linked its claims to the Restatement and alleged “that [the Insured] ‘has admitted that its financial statements since 2012 were materially misstated in numerous respects and require restatement.’” The Derivative Lawsuit similarly alleged “that [the Insured’s] financial statements were materially false and/or misleading due to the same specific accounting improprieties” and specifically cited the investment firm letter sent to the Committee as evidence that executives knew that the financial statements were inaccurate.

The Insured sent notice of the lawsuits to its current D&O Tower (the “Current Tower”). The primary carrier accepted the lawsuits as covered Claim. One of the excess carriers, rather than simply adopting the primary position, explicitly reserved the right to assert defenses to coverage. Following exhaustion of the primary layer, the excess carrier denied coverage and argued the noticed matters all relate back to the Prior Tower and the Notice of Circumstance.

In deciding the case, the court referenced the Prior Tower’s primary policy language which provided that, “[i]f during the Policy Period . . . an Organization or an Insured Person becomes aware of and notifies the Insurer in writing of circumstances that may give rise to a Claim being made against an Insured . . . then any Claim that is subsequently made against an Insured that arises from such circumstances . . . shall be deemed to have been first made at the time of the notification of circumstances for the purpose of establishing whether such subsequent Claim was first made during the Policy Period . . . ."

Further, the court noted that the Current Tower’s primary policy excluded coverage for "Claims . . . arising out of any circumstances of which notice has been given under any directors and officers liability insurance policy in force prior to the inception date of this policy."

Applying Delaware law, the court noted the phrase “arising out of” is interpreted broadly; however, “any linkage must be ‘meaningful and not tangential.’” To determine a meaningful linkage between an earlier notice and a later claim, the primary factor is whether they "involve the same conduct,” as well as consideration of relevant parties, time periods, theories of liability, and claimed damages. The court determined “that there is a meaningful link between the [] Notice of Circumstance and the [later] Securities and Derivative Lawsuits. Most importantly, they involve the same alleged conduct-specific accounting improprieties and material misrepresentations in financial statements regarding those specific improprieties.” Therefore, the court ruled that the costs incurred with respect to the Securities and Derivative Lawsuits were excluded from coverage under the Current Tower.

A court ruled an excess carrier of a professional services liability program must cover remaining defense costs and the balance of the settlement despite the carrier’s challenges to coverage based professional services and the definition of Wrongful Acts.

The Insured entered a licensing agreement to develop and sell learning software. The allegation accused the Insured of breaching that agreement in the development of several of the Insured’s products for failure to pay royalties. The parties settled.

The primary policy was exhausted by a portion of the Defense Costs along with a small sum of remaining limits going toward the settlement. The Insured sought the remaining amounts, both the defense costs not paid by the primary carrier and the balance of its settlement costs, from its excess carrier. The excess policy stated that the primary policy’s limit "shall not, for the purpose of determining when this policy applies, be reduced or exhausted by any payment . . . [of] damages which are not covered by [the excess policy]." The excess carrier denied coverage and argued the losses were not caused by the rendering of professional services, which were undefined in the followed policy, and because breach of contract was not a "wrongful act" covered by the followed policy. There was no specific breach of contract exclusion in followed policy.

The excess carrier argued the loss arose from the Insured’s failure to get permission to use the claimant’s trademarks in the Insurer’s advertising and marketing of its products and “advertising and marketing” was not a professional service. Under New York law the phrase “professional services” means services requiring "special acumen and training." The court determined the excess carrier mischaracterized the allegations in the underlying action and the claim indeed resulted from “a core 'professional service' undertaken by [the Insured], including developing, publishing, and, of course, selling educational products, namely, the design, publication, and sale of its various educational technology products.”

The court further found that under NY law "a claim may be insurable, even if pleaded as a breach of contract, if the alleged breach is 'occasioned by' conduct that falls within the scope of the relevant policy. Put differently: 'It is not the form of the pleading which determines coverage . . ., it is the nature of the insured's conduct . . .'" The court determined the breach of contract claim was not premised on the Insured's “mere failure to pay an agreed upon amount. Instead, it was premised on a separate act—namely, [the Insured's] purported misappropriation of [the university’s] intellectual property. In other words, [the university] would have been entitled to relief even if the License Agreement did not exist.” The court also noted that, the primary policy expressly defined "wrongful acts" to include "misappropriation of ideas" and "misappropriation of property rights, ideas, or information." The court determined the entire settlement fell within the excess policy’s coverage.

Finally, the court found the excess carrier had a duty to cover outstanding defense costs following the primary policy’s exhaustion regardless of whether those defense costs were incurred before or after exhaustion. The court noted it ultimately would make no difference to the excess carrier had the primary carrier allocated its entire payment to defense costs and “[a]n excess insurer may not challenge the propriety of a primary insurer's payment or allocation decisions absent collusion to defraud the excess insurer.” By its express terms the excess policy "continued in force as underlying insurance" "in the event of exhaustion of the limits of the Scheduled Underlying Insurance or the Scheduled Retained Limit." 

An insurance carrier asserted that it was not obligated to defend or indemnify the lawyer, and a federal court agreed with the carrier.

While a suit was pending, the lawyer’s firm (the “Insured”) purchased a Lawyer’s Professional Liability Policy. The Insurance application provided that:

It is agreed by all concerned that if any of the proposed Insured Persons is responsible for or has knowledge of any Wrongful Act, fact, circumstance, or situation which s(he) has reason to suppose might result in a future Claim, whether or not described above, any Claim subsequently emanating therefrom shall be excluded from coverage under the proposed insurance. . .

Despite the pending claim against the attorney, the Insured stated that it was unaware of claims or suits against it. The carrier issued the policy with language that stated the carrier relied upon the statements made in the application. It also cautioned that in the event statements in the application were false or misleading, the policy would be deemed void ab initio, or, in other words, annulled as if it never existed.

When malpractice claims against the attorney were filed, the Insured notified its Lawyer’s Professional Liability carrier, who denied coverage, citing the prior knowledge exclusion. The Insured argued that, at the time of the probate action, the lawyer could not have known that a malpractice claim would be filed against them or that the lawyer breached their professional duty. The carrier, in turn, pointed to the application’s language which stated that "no Insured ha[ve] any basis (1) to believe that any Insured breached their professional duty; or (2) to foresee that such Wrongful Act or Related Circumstances might reasonably be expected to be the basis of a Claim against any Insured." According to the carrier, any reasonable attorney would have foreseen that the attorney’s actions and the allegations contained in the probate action could result in a malpractice claim against the firm.

The court looked to the allegations in the action which stated that the lawyer intentionally withheld records from his files regarding services rendered. The action even cited the Model Rule of Professional Conduct and alleged that the lawyer unethically ignored certain facts. Thus, according to the court, the subjective beliefs of the lawyer were irrelevant in light of the allegations that would have ignited a reasonable attorney to believe that a malpractice claim could be filed against them on these facts. 

California courts have long upheld an insured person’s right to seek recovery of attorneys’ fees incurred in an attempt to make insurance carriers pay out on policy benefits. Referred to as “Brandt Fees,” an insured can recover these amounts if they prove: 1) the insurance carrier tortiously or unreasonably withheld policy benefits owed to the insured and 2) reasonable attorneys’ fees that were incurred by the insured to compel payment of those benefits rightfully owed under the policy.

The underlying action stemmed from a car accident, where the Insured was sued by a third-party and obtained a multi-million dollar settlement against the Insured. A district court, relying on the two-prong Brandt Fee analysis, concluded that the Insured was not owed any attorney’s fees. The carrier paid its policy limit to partial satisfaction of the judgment. Following its payment and in anticipation of a potential “bad-faith failure-to-settle” claim, the carrier brought an action against both the Insured and third-party, arguing that it had indemnified and paid out its policy limits in the judgment. According to the carrier, it was not responsible for any amount of the judgment that was in excess of its limits nor was it responsible for payment of any Brandt fees.

The court agreed, holding that Brandt fees do not include attorney fees incurred to obtain damages exceeding the policy limits. 

A court ruled that an Insured’s failure to include an ongoing tax audit and waivers of the statute of limitations in its renewal application entitled the professional liability carrier to rescind the policy.

The Insured, a telecommunications business, was initially the target of a qui tam action filed under seal alleging that the Insured violated the Illinois False Claims Act ("IFCA") for failure to collect and remit certain excise taxes and infrastructure maintenance fees owed by its customers. Later, the Office of the Illinois Attorney General ("OAG") issued a subpoena for documents related to those taxes and fees.

The Insured noticed the subpoena and the carrier provided a defense; however, stated the defense would be limited to the compliance with the subpoena. The Insured requested independent counsel for the broader investigation, which was refused, and the Insured hired counsel at its own expense. Upon discovery that the subpoena originated from the sealed IFCA Action, and given its potential exposure, the Insured began settlement negotiations with the OAG. The carrier refused to recognize the IFCA Action as a covered claim and offered a portion of its limits to settle only the OAG action in exchange for a full release. The Insured refused the offer, settled the matter, and sued its carrier for breach of contract and bad faith. The carrier asserted a counterclaim seeking rescission of the insurance contract based on alleged misrepresentations in the policy’s Renewal Application (the “Application”).

The carrier argued that prior to the renewal, the City of Chicago had been auditing the Insured. The Insured signed several waivers of the statute of limitations in connection with the audit over a number of years, and certain employees were aware that the Insured’s claimed tax exemptions might be improper. The Application asked: "[w]ithin the last 12 months, has there been any change in the status of any claims, loss or circumstance reported in any application previously submitted to the Insurer?" In the initial application for insurance in years prior, the form asked if the Insured was "aware of any fact, circumstance or situation involving any Insureds that might reasonably be expected to result in a Claim." The Insured answered “no” on the initial application and at renewal for each subsequent year. The question was left blank on the Application in question. The carrier alleged the omission of the Insured’s failure to collect and remit Illinois state tax, the City of Chicago Audit, and its failure to remit taxes in other states constituted a material misrepresentation entitling the carrier to rescind the policy.

The Insured argued that the question only sought information related to Claims reported in prior applications. However, the court noted that the question applied to “any change in the status of any claims, loss or circumstance reported in any application previously submitted to the Insurer,” which would include the audit and tax issues. The Application at issue in its question referred to the initial application and, thus, required the Insured to update the carrier accordingly.

The Illinois statute concerning rescission “sets forth a two-prong test for determining if the policy may be rescinded. First, the statement must be false, and, second, it either must have been made with an actual intent to deceive or must materially affect the acceptance of the risk or hazard assumed by the insurer.” The policy permitted [rescission] only if the Insured’s executive knew that information on an application was "untrue, inaccurate or incomplete." Although, the CFO, who executed the Application, and the President testified they were unaware of the business practice, both were aware of the City of Chicago audit and waivers of the statute of limitations. The court determined the waivers, at a minimum, constituted a Claim under the policy and, therefore, its omission was a misrepresentation.

Regarding the materiality of the omission, the underwriter testified that they relied on the Application but did not testify “that they would have either rejected the insurance application or issued it for higher premium had they been aware of the omission or misrepresentation.” However, Illinois recognizes an objective test to establish a presumption of materiality. The court found that “if a reasonably careful and intelligent person learned that … [the Insured] was embroiled in an ongoing audit concerning an alleged failure to remit four types of taxes, that person would, ‘at the very least, reconsider [the Insured’s] premiums,” and, therefore, the omission was material and the carrier was entitled to rescind the policy.