The United States District Court for the Southern District of Ohio, applying Ohio law, has held that an insurer is not entitled to judgment on the pleadings regarding the application of a prior knowledge provision, notwithstanding the insureds’ entry into a tolling agreement and receipt of a federal agency’s notice of findings of statutory violations prior to policy inception.  Acosta v. Potts, 2017 WL 4418579 (S.D. Ohio Oct. 5, 2017).

A company and individual purchased consecutive claims-made-and-reported professional liability policies for the policy periods of September 2014 to September 2015 and September 2015 to September 2016.  The Secretary of Labor filed an action against the insureds alleging ERISA violations from the overpayment for an investment by an Employee Stock Ownership Plan (“ESOP”).  The individual had been appointed as a “limited purpose trustee of the ESOP” for that purchase.

The insurer denied coverage for the action under a prior knowledge condition and intervened in the action brought against the trustee and the company by the Department of Labor in 2016.  The insurer sought a declaratory judgment that no coverage was afforded under either of the policies for the alleged ERISA violations because of the prior knowledge provision.  The insurer moved for judgment on the pleadings, and the court denied the insurer’s motion.

The prior knowledge conditions required that in order for the policy to apply to a claim, “[p]rior to the inception date of this Policy, no Insured knew, nor could have reasonably foreseen, that the Wrongful Acts might result in a Claim.”  The insurer argued that four documents established the policyholder’s prior knowledge: (1) a December 2014 agreement between the insureds and the Department of Labor tolling the statute of limitations defenses to ERISA claims; (2) a March 2015 letter from the Employee Benefits Security Administration (“EBSA”) to the insureds describing “in some detail” various ERISA violations by the insureds; (3) a December 2015 letter from the Office of the Solicitor noting that the ESBA had referred the case “for consideration of filing an action in federal district court”; and (4) in the December 2015 notice to the insurer, the insureds admitted that no notice of any potential claim had been previously provided to the carrier.

The court found that the prior knowledge language was ambiguous, as “[t]wo minds can reasonably differ on what is reasonably foreseeable.”  The court also noted that the subjective inquiry into what the insureds knew prior to inception was an issue that was generally decided on a motion for summary judgment.  The court concluded that “a decision on the reasonableness of [the insureds’] actions presents factual issues that cannot be determined on a motion for judgment on the pleadings.”  The court also refused to dismiss counterclaims against the insurer for breach of contract, a declaratory judgment that the insurer had a duty to defend and indemnify, and for bad faith.