The United States Court of Appeals for the Fifth Circuit, applying Texas law, has affirmed a district court’s decision holding that an original complaint seeking only injunctive relief but alleging negligent conduct constituted a “claim” under an earlier claims-made-and-reported policy and therefore the subsequent amended complaints related back to the original complaint. NetSpend Corp. v. AXIS Ins. Co., 2015 WL 4288977 (5th Cir. July 16, 2015). Because the insured did not provide notice of the original complaint during the policy period of the earlier policy, there was no coverage for the lawsuit. The district court opinion was the subject of a prior Executive Summary article.
The insured sold prepaid, reloadable debit cards to consumers and contracted with third party banks to serve as “issuing banks,” which held the deposited funds and provided the insured access to payment services. After discovering a $10.5 million “shortfall” in the depository accounts it provided for the insured’s customers, an issuing bank filed suit in July 2012 seeking injunctive relief, but not damages. That same month the issuing bank filed a first amended complaint that added a cause of action for breach of contract. In September 2012, the issuing back filed a second amended complaint, which included causes of action for breach of fiduciary duty, fraud and negligence. Thereafter, the insured provided notice of the second amended complaint to its insurer under an August 20, 2012 to August 20, 2013 claims-made-and-reported policy. The insurer denied coverage for the shortfall litigation based on late notice.
The district court found that the original complaint constituted a claim for a wrongful act notwithstanding that it sought only injunctive relief because it included allegations of negligent conduct sufficient to fall within the definition of wrongful act. According to the district court, the relevant analysis must focus on the allegations “that show the origin of the damages rather than on the legal theories alleged.” Because the shortfall litigation constituted a claim first made during the earlier policy period for which notice was not provided during the policy period, the district court held there was no coverage for the litigation. The appellate court affirmed the lower court’s decision for the reasons set forth by the district court.