Application Did Not Require Insureds To Disclose Pre-Policy Claim When No Wrongful Acts Asserted

The Ninth Circuit Court of Appeals, applying California law, has ruled that a policy application did not require insureds to disclose a claim that did not assert any “wrongful acts.”  Kelly v. Starr Indem. & Liab. Co., 2019 WL 1895825 (9th Cir. Apr. 29, 2019).

The insureds operated a real estate investment trust and development firm.  Before the relevant policy period, an investor made a written demand under certain promissory notes and threatened litigation if the notes were not paid.  The demand did not allege or assert any misconduct by the insureds aside from the failure to pay.  Later, the insureds applied for and obtained D&O coverage without disclosing the demand in response to a question asking whether the insureds were aware of a claim that would be covered under the contemplated policy.  After the policy was issued, the investor sued the insureds and alleged that they engaged in various types of wrongdoing.  The D&O insurer declined coverage, and coverage litigation ensued.  The district court granted summary judgment in favor of the insurer after concluding that the earlier demand constituted a claim for a wrongful act that the insureds had failed to disclose in their application.

On appeal, the Ninth Circuit reversed.  The court first cited the policy’s “wrongful act” definition, which included “any actual or alleged act, error, omission, neglect, breach of duty, breach of trust, misstatement, or misleading statement by [the insureds].”  According to the court, “[u]nder this clear language, the district court erred in concluding that the [initial] [d]emand constituted a claim for a wrongful act.  Instead, [the claimant] demanded money owed pursuant to contracts with [the insureds’] companies, which at most establishes a question of fact whether the claim would be covered by the Policy.”  The court then reasoned that, because the policy covered only claims for wrongful acts, and because the application sought information only on claims that would be covered by the policy, the insured was not required to disclose a claim where no wrongful act was alleged.  As applied here, the court ruled there was a question of fact regarding whether there were wrongful acts alleged in connection with the claim that were known to the insureds at the time of the application.  On that basis, the court reversed summary judgment in favor of the insurer and remanded for further proceedings.