No Coverage for Claim Related to Lawsuit Filed Prior to Policy’s Inception

Applying New Jersey law, a federal district court has held that a prior and pending litigation exclusion barred coverage for a claim related to an action filed prior to the policy’s inception. Old Bridge Mun. Utils. Auth. v. Westchester Fire Ins. Co., 2016 WL 4083220 (D.N.J. July 29, 2016).

An independent municipal division that provides water and sewer treatment to a township was named as a defendant in multiple suits. On February 17, 2009, a development company and its owner sued the municipal division for allegedly failing to meet its contractual obligation to provide services to the development company’s properties. The suit also alleged constitutional violations. In 2010, the same owner sued the municipal division on behalf of different development companies he owned. The 2010 suit alleged that the municipal division and other defendants engaged in racketeering and violated the same sewer and water service agreements at issue in the 2009 action. The 2010 action also alleged constitutional violations.

The municipal division sought coverage for the 2010 action under a claims-made-and-reported policy for the policy period of November 8, 2009 to November 8, 2010. The policy contained an exclusion for any claim alleging, based upon, arising out of or attributable to “(1) any prior or pending litigation or administrative proceeding . . . filed on or before the effective date of the first policy. . . or (2) any other Wrongful Act whenever occurring which, together with a Wrongful Act underlying or alleged in such prior or pending proceeding, would constitute Interrelated Wrongful Acts.” The policy defined “Interrelated Wrongful Acts” as “all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions, or causes.” The insurer denied coverage for the 2010 action on the grounds that it and the 2009 action involved Interrelated Wrongful Acts, and thus coverage was barred by the prior and pending litigation exclusion.

In the subsequent coverage litigation, the court ruled for the insurer. The court held that the two actions involved overlapping parties and the same allegations regarding the municipal division’s failure to comply with its service agreements. This “substantial overlap,” the court held, was sufficient to find that the two actions involved Interrelated Wrongful Acts. Accordingly, because the 2009 action was filed prior to the policy’s inception, the court held that coverage for the 2010 action was precluded under the policy’s prior and pending litigation exclusion.

Wiley Executive Summary

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