Specific Circumstances and Prior Notice Exclusions Bar Coverage for Trustee’s Lawsuit Against Former Directors and Officers

Applying California law, the United States District Court for the Northern District of California has held that coverage is precluded under a claims-made D&O policy based on two exclusions: a specific circumstances exclusion and a prior notice exclusion.  Landmark Am. Ins. Co. v. Navigators Ins. Co., 2018 WL 6591620 (N.D. Cal. Dec. 14, 2018).

The first insurer issued a D&O policy to a nonprofit that matched birth mothers with adoptive parents.  During the policy period, the California Department of Social Services issued a report advising of a complaint and investigation involving allegations that the nonprofit was not financially able to provide the services it offered (the CDSS Report).  The first insurer accepted the investigation as a notice of circumstances.  The nonprofit then purchased a D&O policy issued by the second insurer for the subsequent policy period.  Thereafter, the nonprofit filed for bankruptcy, and the trustee sued seven of the nonprofit’s former directors and officers alleging negligence and breaches of fiduciary duties based on the nonprofit’s accepting fees despite its inability to fulfill its obligations.  The first insurer agreed to defend under a reservation of rights because the trustee’s complaint shared facts or circumstances in common with those alleged in the CDSS Report.

In later coverage litigation between the two insurers, the court held that two exclusions in the second insurer’s D&O policy each independently barred coverage for the trustee’s suit.

First, the second policy excluded coverage for claims “based upon, arising out of, relating to, directly or indirectly resulting from or in any way involving” the CDSS Report.  Broadly interpreting the “in any way involving” lead-in language, the court concluded that the trustee’s suit plainly involved the CDSS Report, which investigated allegations that the nonprofit was “not financially able to provide the services which it offers.”  The trustee’s suit, the court observed, “elaborates this same allegation.”  The court noted that the presence of other allegations in the trustee’s suit not specifically addressed in the CDSS Report did not limit the application of the exclusion.

Second, the court held that a prior notice exclusion in the second policy also barred coverage for the trustee’s suit.  The exclusion provided that the second insurer “will not be liable . . . to make any payment of any Loss in connection with any Claim made against any Insured . . . in any way involving any Wrongful Act or Related Wrongful Act or any fact, circumstance or situation which has been the subject of any notice given under any policy of which this Coverage Part is a renewal or replacement.”  The court held that the exclusion applied because (1) the first insurer received notice of the CDSS investigation during its policy period, (2) the second policy was a replacement of the earlier policy, and (3) the trustee’s suit shared “any fact” with the allegations in the CDSS Report noticed under the earlier policy.

Thus, the court held that both exclusions barred coverage for the trustee’s suit.