Warranty Letter Bars Coverage for Claim Against Chief Legal Officer Arising From CEO’s Alleged Fraud

The United States District Court for the District of Nevada, applying Nevada law, has held that a warranty letter executed by the insured’s CEO prior to the issuance of an excess D&O policy barred coverage for a claim made against the insured’s chief counsel. See Ironshore Indem. Inc. v. Kay, 2022 WL 4329790 (D. Nev. Sept. 16, 2022).

The insured, a now-bankrupt cybersecurity company, and its CEO were the subject of an investigation by the SEC alleging that the CEO defrauded investors by using forged documents to entice them to purchase securities. The insured later filed for bankruptcy, and its Chief Legal Officer (CLO) received a demand letter alleging that he had breached his fiduciary duties because he knew of “material irregularities and alarming discrepancies” in the company’s finances but failed to report those to the board.

The CLO sought coverage for the demand letter under an excess D&O policy but the insurer denied coverage under a warranty executed by the CEO on behalf of himself and “all insureds” representing that “no insured has knowledge or information of any act, error[,] or omission [that] might give rise to a claim(s) . . . under [the Excess Limits]” and that, “if such claim(s) . . . knowledge[,] or information exists, then such claim(s) . . . and any claim(s) . . . arising therefrom or arising from such knowledge or information is excluded from coverage under the Excess Limits.” The insurer asserted that the SEC alleged fraud by the CEO beginning before the execution of the warranty, thus the warranty barred coverage for the claim against the CLO.

In subsequent coverage litigation, the court agreed that the warranty barred coverage. First, the court held that the claim against the CLO fell within the terms of the warranty because it “arose from” the CEO’s fraudulent conduct. Second, the court held that the D&O insurer need not show that the CEO had “actual knowledge or information” about his fraudulent conduct, citing to authority holding that “it does not matter what the insureds believed, only what the SEC’s [claim] alleged [that] they knew.” Although the CEO had pleaded guilty, the court did not consider that fact “because the SEC allegations against him [were] sufficient” and distinguished the warranty exclusion from the final adjudication requirements in the policy’s conduct exclusions. Third, the court held that the policy’s non-imputation provisions did not apply to the warranty exclusion. Because the warranty was signed on behalf of “all insureds,” represented that “no insured” had knowledge, and barred coverage for “any claim” arising therefrom, the CEO’s knowledge triggered the exclusion without resort to any imputation.

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