Déjà Sue: Prior Notice Exclusion Dooms Recovery for New Lawsuits Alleging Previously Noticed Conduct
The United States District Court for the District of Delaware, applying Delaware law, has held that a prior notice exclusion bars coverage for securities and derivative lawsuits alleging the same underlying conduct as a letter to the insured’s audit committee previously reported as a notice of circumstance. AmTrust Fin. Servs. v. Liberty Ins. Underwriters Inc., 2025 WL 2720960 (D. Del. Sept. 24, 2025).
A property and casualty insurance holding company had two towers of D&O policies from different insurers for the 2014-2015 and 2016-2017 policy periods. The 2014-2015 primary policy provided that, “[i]f during the Policy Period . . . an Organization or an Insured Person becomes aware of and notifies the Insurer in writing of circumstances that may give rise to a Claim being made against an Insured . . . then any Claim that is subsequently made against an Insured that arises from such circumstances . . . shall be deemed to have been first made at the time of the notification of circumstances for the purpose of establishing whether such subsequent Claim was first made during the Policy Period[.]” The 2016-2017 primary policy had a prior notice exclusion, which barred coverage for “Claims . . . arising out of any circumstances of which notice has been given under any directors and officers liability insurance policy in force prior to the inception date of this policy.”
In 2015, the insured reported a “notice of circumstance” to its insurers under the 2014-2015 tower regarding a letter addressed to its audit committee. The letter, written by the president of an investment firm, alleged that the insured’s financial statements contained discrepancies, including with respect to several specific material weaknesses in internal controls over financial reporting, suggesting that the financial statements were likely materially misstated. In 2017, the insured issued restatements of its 2014, 2015, and 2016 financial statements and related disclosures to correct errors. Stockholders subsequently filed securities and derivative lawsuits against the insured alleging that the insured and its officers made specific materially false and/or misleading statements regarding the effectiveness of the insured’s internal controls over financial reporting and its financial results as reported in its financial statements. After the insured provided notice of the lawsuits to its insurers under the 2016-2017 tower, the primary carrier acknowledged coverage under the 2016 primary policy, but an excess insurer denied coverage.
In the ensuing coverage litigation, the court held that the prior notice exclusion in the 2016-2017 primary policy precluded coverage for the lawsuits because the lawsuits “arise out of” circumstances disclosed in the 2015 notice. Applying Delaware’s “meaningful linkage” standard, the court found that the 2015 notice and the lawsuits were “meaningfully linked” because they all involved the same alleged conduct of specific accounting improprieties and material misrepresentations in financial statements regarding those same improprieties. The court noted that, rather than merely alleging weaknesses in the insured’s internal controls generally, the theories of liability in the letter and the lawsuits identified the same specific material weaknesses in the insured’s internal controls for the same specific violations of accounting rules. The court further highlighted that the letter and the lawsuits relied on the same evidence, and that the lawsuits even cited to and referenced the letter itself.
In so holding, the court rejected the insured’s argument that the conduct alleged in the lawsuits was different because the lawsuits alleged additional improprieties that were not included in the letter. The court concluded that these additional allegations of wrongful conduct did not break the meaningful link, as it was obligated under Delaware law to focus on the similarities between the matters and not their differences. The court also rejected the insured’s contention that other factors, such as the identity of the parties and the relevant timeline, were not identical. The court explained that it did “not matter” whether these additional factors weighed against a finding of meaningful linkage where the underlying conduct was the same.
