Watch out for Escape Hatch Permitting Successive Insurers to Dodge Claims that “Contain” Circumstances Reported to Former Insurers 

The latest California federal court docket choice Scottsdale Ins. Co. v. Beachcomber Mgmt. Crystal Cove, LLC, et al. illustrates the perils that company policyholders could face in acquiring the total advantage of the cut price after they procure new D&O insurance coverage after making a declare below a previous coverage.  2025 WL 257599, at *13 (C.D. Cal. Jan. 21, 2025).  In Scottsdale, the court docket agreed that an insurer who offered a D&O coverage may deny protection for a lawsuit filed in opposition to two company executives throughout its coverage interval as a result of that lawsuit concerned a number of the identical allegations of wrongdoing as did a declare the policyholder beforehand submitted to a former D&O insurer.  The brand new coverage contained a really broadly worded “prior discover exclusion” that barred protection for all claims “in any manner involving” any wrongful conduct, details, circumstances, or conditions as to which discover had been given to a previous D&O insurer.  As mentioned beneath, the corporate had notified its prior insurer when it acquired a draft model of the lawsuit a yr earlier, and that insurer accepted protection.  When the claimants formally filed their litigation, nevertheless, they alleged new wrongdoing and sought new reduction, so the corporate prudently made a declare below its new coverage as properly.  The court docket acknowledged that the brand new claims made the formal criticism totally different than the draft criticism, however invoked the prior discover exclusion to bar protection as a result of some points have been the identical, and that was all that the plain language of the prior discover exclusion in that case required.  This ruling is a cautionary story for policyholders that underscores the significance of paying shut consideration to the detailed phrases and circumstances of current and potential insurance coverage insurance policies, notably with respect as to if and the way reporting a declare below one coverage could restrict or preclude protection below a substitute or later-in-time coverage.

In Beachcomber, the central subject was whether or not an insurer that offered a D&O coverage to interchange one other D&O coverage would cowl a litigation that included a number of the identical claims and allegations as did prior claims, however that additionally included new and totally different claims and allegations.  Through the prior coverage interval, company collectors ready a draft criticism as a part of chapter proceedings accusing two enterprise executives of breaching their fiduciary duties by allegedly inflicting the corporate to make distributions that weren’t within the firm’s greatest curiosity.  The corporate’s then D&O insurer agreed to cowl that declare.  Afterward, and as a part of the corporate’s reorganization efforts, the corporate procured a brand new D&O insurance coverage coverage from a unique insurer.  After that new coverage was in impact, the chapter trustee filed its broader criticism echoing the breach-of-fiduciary-duty allegations from the draft criticism, and likewise alleging different misconduct, together with usurping enterprise alternatives and devoting and transferring company monetary assets for the advantage of different companies.

The brand new D&O insurer finally sought a declaratory judgment that it didn’t owe protection for the litigation, culminating in Beachcomber.  Notably, the brand new insurer initially had agreed to supply protection for the claims alleged within the trustee’s formal criticism, however modified its thoughts and invoked the prior discover exclusion to bar protection when it discovered that the prior insurer had already accepted protection primarily based on the draft criticism.  Thereafter, the brand new insurer filed abstract judgment centered on the purpose that the corporate’s discover of the sooner draft criticism to its former insurer happy and barred protection below the prior discover exclusion.  As already talked about, the actual model of the prior discover exclusion at subject included the expansive phrase “in any manner involving,” and the court docket discovered these phrases meant that any overlap between the wrongful acts, details, circumstances, or conditions within the draft and as-filed complaints may fulfill the exclusion.  Within the court docket’s view, it didn’t matter that the filed criticism had allegations not current within the earlier draft criticism; as long as each complaints “in any manner contain[d]” the identical details and legislation, they got here throughout the scope of the exclusion.

Notably, in reaching its choice that the prior discover exclusion barred protection, the court docket expressly declined to think about instances addressing whether or not successive claims are “associated” for protection functions below coverage phrases and circumstances apart from the prior discover exclusion.  The court docket’s slim focus was important to the end in Beachcomber, as a result of the Ninth Circuit Courtroom of Appeals has proven a lot higher willingness to distinguish amongst successive claims with overlapping details and allegations in different protection contexts, resembling the applying of the Interrelated Wrongful Acts provision at subject in Fin. Mgmt. Advisors, LLC v. Am. Int’l Specialty Traces Ins. Co., 506 F.3d 922, 926 (ninth Cir. 2007).  In FMA, the Ninth Circuit declined to search out “associated,” for protection functions, two lawsuits filed by totally different traders who had acquired monetary recommendation from an funding advisory agency, although the 2 lawsuits included some frequent allegations of wrongdoing.  Within the appellate court docket’s view, it was extra necessary that a number of the wrongful acts alleged within the two lawsuits have been totally different than it was that each claims included some frequent allegations.  The court docket in Beachcomber finally reached the other conclusion, and held that the overlap between the draft criticism and the filed criticism was extra necessary than the truth that the filed criticism included expanded details and claims.

Beachcomber is a reminder of the significance for policyholders to rigorously study and perceive the intricacies of their insurance coverage insurance policies, together with how insurance policies efficient throughout totally different time intervals can work together.  Beachcomber additionally highlights the potential profit to policyholders of evaluating their rights on the outset of insurance coverage claims, together with these associated to reporting claims below their insurance policies.  Certainly, having an in depth understanding of the insurance coverage insurance policies implicated by the declare at subject is important to making sure that policyholders are adequately defending their pursuits.  Policyholders could keep away from pricey errors, or inadvertent oversight, and be ready to navigate the nuanced nature of insurance coverage claims by contacting insurance coverage counsel who may help them higher perceive their protection.