Prior Acts Exclusion Bars Coverage for Claims Arising Out of Actions Predating Policy
The United States Court of Appeals for the Eleventh Circuit, applying Florida law, has held that a prior acts exclusion barred coverage under a directors and officers liability policy for claims brought against insured persons for alleged fraudulent transfers, even though the transfers occurred within the policy period. Zucker v. U.S. Specialty Ins. Co., 2017 WL 2155414 (11th Cir. May 16, 2017).
Two insured persons, executives at a bank, were sued by the bank’s bankruptcy administrator for breaching fiduciary duties to the bank. They allegedly approved two tax return transfers to the bank’s subsidiary in 2009 that were made when the bank was insolvent and thus violated the Florida Uniform Fraudulent Transfers Act. In November 2012, the administrator made a written settlement demand. After the demand was forwarded to the D&O insurer, the insurer denied coverage based on the policy’s prior acts exclusion. The exclusion provided that the insurer would not be liable for any Claim “arising out of, based upon, or attributable to any Wrongful Act committed or allegedly committed, in whole or in part, prior to [November 10, 2008].” The claim was ultimately settled for $15 million to be paid either by the insurer or the insured persons individually. The settlement agreement assigned the insured persons’ rights under the policy to the administrator. The administrator then brought suit against the insurer based on its denial of coverage. The district court ruled in favor of the insurer on cross-motions for summary judgment, holding that the policy’s prior acts exclusion barred coverage for the fraudulent transfer claims and that the insurer did not breach the insurance contract. The administrator appealed.
On appeal, the court held that the prior acts exclusion barred coverage for the fraudulent transfer claims because the fraudulent transfer claims “arose from” wrongful acts that predated the policy’s effective date. In so holding, the court noted that the exclusion’s language, which barred coverage for any claim “arising out of” any wrongful act committed prior to the inception date of the policy, had a broad meaning. Although the transfers were made after the prior acts date, the underlying conduct rendering the bank insolvent—and the transfers fraudulent—occurred before the priors acts date. The court concluded that the fraudulent transfer claims “arose from” wrongful acts that predated the policy’s effective date and thus fell within the scope of the prior acts exclusion.
Further, the court held that the exclusion did not render coverage illusory or ambiguous because the exclusion did not eliminate all coverage under the policy. Rather, the exclusion simply excluded coverage for a subset of claims that arose exclusively from conduct that happened before the effective date of the policy.