I have discussed that corporations that have a board of directors typically maintain a liability insurance policy known as a Directors and Officers liability policy (“D&O” policy). The policy is designed to defend and indemnify the board (and company) for claims from third parties arising out of the board’s wrongful acts. Needless to say, this is a pretty important policy for a board to have!!
Oftentimes, when a liability policy is procured, particularly with a new insurer, there is a prior acts exclusion, which excludes claims arising prior to effective date of the policy period (or stated dated in policy). It is oftentimes possible to get a policy without this exclusion or with certain limitations on this exclusion, but naturally, the premium for such a policy will be more because the insurer is underwriting a lot more risk. When procuring a liability policy, it is important to understand the prior acts exclusion and, particularly, its application.
In a recent Eleventh Circuit decision, Zucker v. U.S. Specialty Ins. Co., 2017 WL 2115414 (11th Cir. 2017), the court discusses the prior acts exclusion applicable to a D&O policy. In this case, Bank United’s D&O insurer declined to renew the policy due to fiscal difficulties the bank was having. The bank needed a new insurer. It found a new insurer willing to underwrite the risk but the policy contained a prior acts exclusion that excluded claims attributable to conduct (wrongful acts) prior to November 10, 2008.
Subsequently, the bank financially collapsed resulting in insolvency and claims made during a bankruptcy proceeding.
The issue in the case, however, was whether fraudulent transfers that occurred post-November 10, 2008 fell within the policy period or whether such wrongful acts were barred by the prior acts exclusion since they arose out of acts that pre-dated November 10, 2008.
The D&O policy at-issue contained the following pertinent language:
In consideration of the premium charged, it is agreed that the Insurer will not be liable to make any payment of Loss in connection with a Claim arising out of, based upon or attributable to any Wrongful Act committed or allegedly committed, in whole or in part, prior to [November 10, 2008].
And the policy defines a “wrongful act” as any:
(1)actual or alleged act, error, misstatement, misleading statement, omission or breach of duty:
(a) by an Insured Person in his or her capacity as such, including in an Outside Capacity, or
(b)with respect only to Securities Claims, by the Company; or
(2)matter claimed against an Insured Person solely by reason of his or her service in such capacity or in an Outside Capacity.
The Eleventh Circuit held that the fraudulent transfers (wrongful acts) arose out of conduct that pre-dated November 10, 2008 because what made the transfers fraudulent was the bank’s insolvency, which stemmed from pre-November 2008 wrongful acts. The prior acts exclusion barred claims “arising out of, based on or attributable to any Wrongful Act committed or allegedly committed, in whole or in part, prior to” November 10, 2008. Since the fraudulent transfers broadly arose out of pre-November 10, 2008 misdeeds, even though the transfers occurred after November 10, 2008, the prior acts exclusion barred coverage. See Zucker, supra, at *7 (“In light of the Florida courts’ broad interpretation of the “arising out of” standard, we conclude that the…Bank’s insolvency “arose out of” wrongful acts that occurred before November 10, 2008.”).
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