Court Holds Prior Litigation and Event Exclusion Does Not Apply

The United States District Court for the Southern District of Indiana has held that a prior litigation and event exclusion in a directors and officers liability policy did not bar coverage for a shareholder suit against the insured.  Emmis Commc’n Corp. v. Illinois Nat’l Ins. Co., 2018 WL 1410191 (S.D. Ind. Mar. 21, 2018).  The court held that the exclusion applied only to events reported prior to the policy’s inception, and further that the exclusion did not apply because the action against the insured was not caused by or related to two previous lawsuits.

In 2010, the chief executive officer and largest shareholder of the insured, a media conglomerate, attempted to take the company private due to the decreasing market price of the company’s common stock.  The CEO formed a company to acquire the common stock and obtained a commitment from an investment fund to finance the transaction.  Shareholders sued the insured’s officers and directors, alleging that the proposed transaction breached the officers’ fiduciary duties.  After the investment fund withdrew its offer of financing, the transaction failed and the suits were dismissed.

After the transaction failed, the would-be buyer filed suit against the investment fund for breach of contract.  In turn, the fund filed a derivative action against the insured’s board of directors, alleging that the insured wrongfully funded the breach of contract action as a “personal litigation vendetta” by the insured’s CEO.

A few months later, the insured engaged in a series of transactions to repurchase and gain control over preferred stock.  These transactions ultimately resulted in the insured’s control of over two-thirds of preferred stock, which allowed the insured to amend the company’s articles of incorporation.  The insured issued a series of amendments that altered the rights of other preferred stockholders.

Certain preferred stockholders filed suit against the insured, alleging that the insured’s transactions violated federal securities and state laws.  The original and first amended complaints referred to the 2010 go-private attempt and the derivative action by the investment fund.  A second amended complaint alleged generally that the insured’s CEO had subjected the company to numerous “take-private efforts.”

The insured’s D&O insurance carrier denied coverage for the lawsuit based on the “Specific Investigation/Claim/Litigation/Event or Act Exclusion,” which barred coverage for claims constituting “Events” under the policy, claims “arising from” Events, and claims based on acts “related to” acts alleged in any Event.  The policy defined “Events,” in part, as claims or notices of circumstances “as reported” to the insured’s previous carrier.

In resulting coverage litigation, the insurer argued the lawsuit qualified as an excluded “Event” because it had been reported to the insured’s prior carrier.  The court rejected the argument, holding that the policy could not reasonably be read to exclude coverage for claims reported to the other insurer at any time, but rather held that the provision referred to claims reported prior to the policy’s inception.

The court also held that the lawsuit did not “arise from” the prior lawsuits, finding that the phrase “arising out of” under Indiana law means “that one thing must be the ‘efficient and predominating’ cause of something else.”  The court reasoned that the shareholders did not sue the insured “because of” the two prior lawsuits.

Finally, the court held that, if applied literally, the related claims language in the exclusion “would mean any shared factual allegation would be sufficient to trigger the exclusion,” including facts such as that the insured was a publicly-traded company.  Rather, the court held that the exclusion applied to claims that share “operative facts” with prior lawsuits.  The court held that the overlapping facts in the case at hand were “merely window dressing” and “historical context” to the shareholders’ claims.  Moreover, the court reasoned that the legal basis for the shareholder suit would not change even if the 2010 go-private attempt had never occurred.