Prior and Pending Litigation Exclusion Does Not Apply Where Insurer Cannot Establish Facts Alleged in Later Investigation Were “Underlying” Prior Investigation

A New York state court, applying New York law, has held that an insurer was not entitled to summary judgment based on a prior and pending litigation exclusion because the insurer could not establish that the prior investigation shared a common fact, circumstance, situation, transaction or event with the matter at issue or that any such commonality was “underlying” the prior investigation.  Freedom Specialty Ins. Co. v. Platinum Mtmg. (NY), LLC, 2018 WL 4334216 (N.Y. Sup. Ct., N.Y. Cty. Sept. 10, 2018).  The court instead entered judgment for the insureds.

Several companies and individuals who were allegedly involved in a Ponzi scheme sought coverage under a directors and officers insurance policy for SEC proceedings and criminal prosecutions.  In the declaratory judgment action that followed, one D&O insurer sought summary judgment on the basis that a prior and pending litigation exclusion applied because of a prior investigation and prosecution of a founder of one of the companies.

The prior and pending litigation and investigation exclusion provided that the insurer would not be liable for any payment “in connection with a Claim made against any Insured based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving [] any prior or pending . . . investigation as of November 20, 2015, or [] any fact, circumstance, situation, transaction or event underlying or alleged in such . . . investigation.”

The court rejected the parties’ contention that the question of whether the exclusion applied required a side-by-side review comparing facts that occurred before November 20, 2015 with facts alleged in connection with the underlying Ponzi scheme to determine whether a sufficient nexus existed.  Instead, the court held that, (1) pursuant to the policy language, the insurer was required to establish, as a matter of law, that there was a common fact, circumstance, situation, transaction or event between the Ponzi scheme investigation and an investigation that existed prior to November 20, 2015, and (2) that the common fact, circumstance, situation, transaction or event was “underlying” the prior investigation.  In the court’s view, the subpoenas issued to two insured persons submitted by the insurer concerning the scope of the prior investigation contained “no indications that as of November 20, 2015 the investigation . . . in any way included a fact, circumstance, situation, transaction or event of a Ponzi-like scheme within Platinum Partner.”  The court thus concluded that the insurer could not establish a prima facie case under this standard, and therefore denied its motion for summary judgment and entered summary judgment in the insureds’ favor.

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