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What's in a Relationship? Part 1



Director & Officer Liability insurance ("D&O") and professional liability insurance are written on a claims-made basis, and through either definitions or exclusions, treat claims that are related as one claim. Why does it matter if various claims made against an insured are related? There are several answers. Whether different claims are related could mean the difference between having insurance coverage or not; whether the insured has to pay one retention or several retentions; or whether one policy limit applies or several limits are available. This post will discuss the last of these.

The purpose of "related claim" language in an insurance policy is to require that separate claims, or lawsuits, are treated as one claim made at the time the earliest claim was made. In an unpublished opinion earlier this year, the Ninth Circuit affirmed a district court's ruling where 28 lawsuits filed over a three-year period against the insureds were all one claim, and only one policy limit applied. In Previti v. National Union Fire Insurance Co. of Pittsburgh, PA, the insureds were various individuals who owned or controlled numerous affiliated entities. National Union had issued three D&O insurance policies to the insureds—Policy No. 1 (2007-2009), Policy No. 2 (2009-2010), and Policy No. 3 (2010-2011). National Union's insurance policy defined Related Wrongful Acts as "Wrongful Acts which are the same, related or continuous, or Wrongful Acts which arise from a common nucleus of facts. Claims can allege Related Wrongful Acts regardless of whether such Claims involved the same or different claimants, Insureds, or legal causes of action."

In April 2008, several companies controlled by the insureds filed Chapter 11 bankruptcy. In November 2008, a motion was filed seeking to convert the Chapter 11 bankruptcy to Chapter 7, alleging preferential and fraudulent transfers between the debtor companies and nondebtor affiliates. The Previti insureds submitted a notice of circumstances to National Union that included the motion to convert, and National Union accepted the notice and assigned a claim number. This claim was assigned to Policy No. 1. Over the next two years (Policy No. 2 and Policy No. 3), 28 separate lawsuits followed, also alleging fraudulent and improper transfers to affiliates. The subsequent coverage dispute concerned whether National Union had an obligation to defend the additional claims under Policy Nos. 2 and 3; it was already defending under Policy No. 1. This issue was important to the insureds because defense costs reduced the available limits of insurance in the National Union policies.

The district court determined that the term "related" had a broad meaning that encompassed a myriad of relationships, including both logical and causal connections. The court went on to conclude that the language "arise from" should also be interpreted broadly, and requires only a minimal causal connection or incidental relationship. As a result, the court held that National Union had an obligation to defend only under Policy No. 1. The Ninth Circuit affirmed, concluding that the insurance policy language was unambiguous, and that the district court had been correct in concluding that all the lawsuits were related.

In this case, the insureds were left defending 29 lawsuits out of one insurance policy with diminishing limits of $10,000,000, or approximately $350,000 per claim. At least the insureds had coverage under one policy because they had provided timely notice of the first related claim to National Union. The failure to give timely notice of the first claim of several related claims could result in no insurance coverage. This will be the subject of a subsequent post.