An Insured’s Prior Knowledge Precludes Coverage for Other Insureds Seeking Coverage; Prior Litigation Exclusion Applies to Arbitration Demand

Applying California law, the United States Court of Appeals for the Ninth Circuit has held that prior knowledge of wrongful acts that could reasonably be expected to give rise to a claim possessed by an insured who is not seeking coverage may bar coverage for other insureds under the same policy.  Woo v. Scottsdale Ins. Co., 2017 WL 1532056 (9th Cir. Apr. 28, 2017).  The court also held that a prior litigation exclusion was triggered by a demand for arbitration and independently barred coverage.

The insured television manufacturer purchased a business and management indemnity policy from the insurer that provided coverage on a claims-made-and-reported basis.  The policy contained a prior knowledge exclusion that excluded coverage for claims “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving, any Wrongful Act, fact, circumstance or situation which any of the Insureds had knowledge of prior to the Continuity Date and such Insured had reason to believe at the time that such known Wrongful Act could reasonably be expected to give rise to such Claim.”  The definition of “Insured” extended to general partners, directors, officers, managers, and employees of the insured company.  The policy also included a prior litigation exclusion that barred coverage for claims which “in any way” involve “any prior or pending litigation or administrative or regulatory proceeding, [or] demand letter.”

During the policy period, one of the insured’s suppliers brought suit to enforce a bankruptcy judgment against insured employees stemming from an arbitration commenced several years before.  The supplier alleged that the insured fraudulently transferred funds in an attempt to avoid the arbitration award.  The supplier filed an amended complaint also during the policy period, and the insured employees immediately tendered the claim.  The insurer denied on the bases of the prior knowledge and pending or prior litigation exclusions, and the insured brought suit seeking a declaration regarding the insurer’s duty to defend.  The district court granted the insurer’s motion for summary judgment and denied the insureds’ motion, holding that each exclusion independently barred coverage for the supplier’s suit.

The Ninth Circuit, in a brief opinion, affirmed. It held that the prior knowledge exclusion applied because certain insureds knew of the facts and circumstances from which the supplier suit derived, even if those individuals were not the ones seeking coverage for the present underlying action.  The court further held that the prior litigation exclusion precluded coverage because the original demand for arbitration, which the insureds received in February 2009, predated the Continuity Date of April 2010.  The supplier’s suit “arose out of” the arbitration even though the two actions had distinct parties and issues.