The United States Court of Appeals for the Second Circuit has held, under New York law, that a related claims provision should be interpreted and applied pursuant to the “plain language” of the contract, rejecting the “factual nexus” test applied by the lower court. Nomura Holding Am., Inc. v. Fed. Ins. Co., No. 14-3789 (2d Cir. Oct. 21, 2015). In so holding, the Second Circuit affirmed the trial court’s grant of summary judgment in favor of the insurer as the trial court’s error in analysis was not dispositive to the decision.

The insureds, a holding company, its subsidiaries, and their directors and officers, acted as sponsors, depositors, and underwriters for various securitizations of residential mortgage-backed securities (RMBS). In January 2008, the insureds were named as defendants in a lawsuit alleging that misrepresentations were made in offering the documents for RMBS securitizations. In 2011 and 2012, five additional lawsuits were filed against the insureds alleging misrepresentations in various RMBS securitizations. The insureds tendered the 2011 and 2012 lawsuits to its insurer for coverage under a D&O policy covering the 2011 to 2012 policy period. The insurer denied coverage for the five lawsuits, concluding, in part, that the five lawsuits related back to the 2008 suit and therefore were deemed first made before the inception of the policy. The policy defined “related claims” as “all Claims for Wrongful Acts based upon, arising from, or in consequence of the same or related facts, circumstances, situations, transactions, or events or the same or related series of facts, circumstances, situations, transactions or events.” The policy further specified that all related claims are deemed a single claim, made at the time the earliest of the claims was first made.

Following the insurer’s denial of coverage for the five lawsuits, the insured initiated coverage litigation. The trial court held that coverage was precluded because the five lawsuits were related claims, all of which related back to the 2008 suit, and therefore were deemed first made before the inception on the policy. The court reached this decision by applying a “factual nexus” test, whereby “[a] sufficient factual nexus exists where the Claims are neither factually nor legally distinct, but instead arise from common facts and where the logically connected facts and circumstances demonstrate a factual nexus’ among the Claims.”

The Second Circuit affirmed the trial court’s decision with respect to the application of the related claims provision contained in the policy, but stated that the trial court erred in employing the “factual nexus” test instead of, as required under New York law, interpreting the policy pursuant to its “plain language.” According to the court, the proper analysis is focused on whether the underlying claims are “based upon, arising from, or in consequence of the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events,” and not whether the claims “are neither factually nor legally distinct, but instead arise from common facts and circumstances demonstrate a factual nexus’ among the Claims.” However, because the Second Circuit agreed that there was no genuine dispute that the claims in the five lawsuits were related to the claim first made in 2008, as defined within the policy, the court upheld the decision of the trial court for the insurer.