Court Holds Retroactive Date Exclusion Is Ambiguous Under California Law
A federal district court, applying California law, has determined that an insurer owed a duty to defend because the policy’s retroactive date exclusion was ambiguous in that it could reasonably be interpreted to apply only to claims or to both claims and interrelated wrongful acts occurring before the retroactive date. Emerson Equity, LLC v. Forge Underwriting Ltd., 2023 WL 9502961 (N.D. Cal. Dec. 15, 2023). The court also rejected the insurer’s argument that the investment banking exclusion applied.
The insured, a financial services company, submitted over 50 statements of claim to the insurer, each of which alleged that the insured’s representative failed to conduct reasonable due diligence and thus made unsuitable recommendations to customers to purchase bonds that eventually became nearly worthless. The insurer denied coverage for these matters pursuant to its retroactive date exclusion, which precluded coverage for loss in connection with “any Claim, including any Interrelated Wrongful Act(s), occurring prior to [the retroactive date].” The insurer explained that all of the claims constituted a single claim because they alleged interrelated wrongful acts and that, because these wrongful acts occurred before the retroactive date, the retroactive date exclusion barred coverage. The insurer also denied coverage under an exclusion for investment banking activity. In the ensuing coverage litigation, the insured moved for partial summary judgment seeking a determination on the insurer’s duty to defend.
The court granted the insured’s motion for partial summary judgment and determined that the insurer had a duty to defend because the language of the retroactive date exclusion was ambiguous. In so holding, the court found that there were two reasonable constructions of the retroactive date exclusion: first, it could be read to preclude coverage for claims made after the retroactive date that alleged interrelated wrongful acts that occurred prior to the retroactive date; second, it could be read to apply only to claims that were filed before the retroactive date. Because the exclusion was ambiguous and the insurer failed to provide sufficient evidence that it believed the insureds understood its proffered interpretation of the retroactive date exclusion at the time of contract formation, the court resolved the ambiguity in favor of the insured. As such, the court concluded that the insurer owed a duty to defend because the insured’s interpretation that the exclusion only barred actual claims filed before the retroactive date — not claims alleging wrongful acts occurring before that date — was reasonable.
The court also rejected the insurer’s argument that the investment banking exclusion barred coverage. The court found that the investment banking exclusion only applied if the insured was acting with the purpose of raising capital for the company selling the bonds at issue. Because the insurer was unable to provide evidence that conclusively established this intent, the investment banking exclusion could not apply.
