Action by Tennessee Attorney General Deemed to Pre-Date Claims-Made Policy Period Because Related to Earlier-Filed Customer Complaints

A Tennessee federal court has held that a claims-made D&O policy does not afford coverage for a lawsuit brought by the Tennessee Attorney General because the suit involved wrongful acts that were related to customer complaints filed against the insured prior to the policy period. Hale v. Travelers Cas. & Sur. Co. of Am., 2015 WL 6737904 (M.D. Tenn. Nov. 4, 2015). Alternatively, the court held that coverage was barred because the insured made material misrepresentations in its application for the policy.

The insured, a provider of hormone replacement therapy, did not dispute that prior to the inception date of the policy at issue numerous customer complaints had been filed against it with the Better Business Bureau and the Tennessee Department of Commerce and Insurance, it had received refund demand letters from customers, a customer had filed a complaint in state court, and a local news channel had conducted an investigation into the customer complaints. During the policy period, the Tennessee Attorney General filed a lawsuit against the insured containing “virtually identical” allegations to the customer complaints and accompanied by affidavits of disgruntled customers. The insurer denied coverage on the grounds that the Attorney General lawsuit and the customer complaints involved “related wrongful acts,” which the policy defined as wrongful acts having as “a common nexus, or [] causally connected by reason of, any fact, circumstance, situation, event or decision.” The policy provided that all claims for related wrongful acts were considered a single claim deemed made at the time of the first such claim.

The court held that the plain language of the policy dictated that the Attorney General lawsuit alleged “related wrongful acts” to those alleged in the customer complaints, and accordingly held that the Attorney General lawsuit was a claim first made before the policy period. The court rejected the insured’s argument that the customer complaints were meritless, frivolous, and represented only a small percentage of its customers because the policy did not require more than one alleged wrongful act or that an allegation be meritorious. The court also rejected the insured’s objections that the customer complaints were hearsay because it considered them not for the truth of the matter asserted but as evidence that the complaints were filed and to determine whether the allegations in them had a common nexus or causal connection with the Attorney General lawsuit.

In the alternative, the court found that the insured had made material misrepresentations on its policy application. The application asked whether there had been any demands against the insured in the past five years, whether or not they would be covered under the policy. The court found that the insured was aware at the time it responded “no” on the application that it had received the customer complaints and demands for refunds. Similarly, the insured falsely responded “no” to a question asking whether it had knowledge of any fact, circumstance, or situation that could reasonably give rise to a claim against the insured. Because the application stated that coverage would be unavailable for any matter that constituted a claim under the policy and that was required to be disclosed on the application, the court held that coverage was barred for the Attorney General lawsuit.