Amended Complaints Relate Back to Original Complaint That Sought Only Injunctive Relief

A Texas federal court, applying Texas law, has held that an original complaint seeking only injunctive relief but alleging negligent conduct constituted a “claim” under an earlier claims-made-and-reported policy and therefore the subsequent amended complaints related back to the original complaint.   NetSpend Corp. v. AXIS Insurance Co., 2014 WL 3568355 (W.D. Tex. July 18, 2014).  Because the insured did not provide notice of the original complaint during the policy period of the earlier policy, there was no coverage for the lawsuit.

The insured sold prepaid, reloadable debit cards to consumers and contracted with third party banks to serve as “issuing banks,” which held the deposited funds and provided the insured access to payment services.  After discovering a $10.5 million “shortfall” in the depository accounts it provided for the insured’s customers, an issuing bank filed suit in July 2012 seeking injunctive relief but not damages.  That same month the issuing bank filed a first amended complaint that added a cause of action for breach of contract.  In September 2012, the issuing back filed a second amended complaint, which included causes of action for breach of fiduciary duty, fraud and negligence.  Thereafter, the insured provided notice of the second amended complaint to its insurer under an August 20, 2012 to August 20, 2013 claims-made-and-reported policy.  The insurer denied coverage for the shortfall litigation based on late notice.

The court agreed with the insurers that the original complaint constituted a claim for a wrongful act notwithstanding that it only sought injunctive relief because it included allegations of negligent conduct sufficient to fall within the definition of wrongful act.  According to the court, the relevant analysis must focus on the allegations “that show the origin of the damages rather than on the legal theories alleged.”  Because the shortfall litigation constituted a claim first made during the earlier policy period for which notice was not provided during the policy period, the court held there was no coverage for the litigation.

Wiley Executive Summary

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