Prior Demand for Books and Records Unrelated to Subsequent Arbitration Brought by Same Claimants

Applying Illinois state law, the Appellate Court of Illinois has held that two lawsuits against insureds did not allege Related Wrongful Acts sufficient to render the two lawsuits a single, related claim under the D&O insurance policy at issue. Chicago Rest. Mgmt. Grp., LLC v. Great Am. Ins. Co., No. 1-23-2353, 2025 IL App (1st) 232353 (Ill. App. Ct. Mar. 5, 2025).

In July 2017, the insurer issued a one-year D&O insurance policy covering the two owners of a company, which was renewed in July 2018. In April 2018, during the first policy period, four investors in the company filed a lawsuit against the owners seeking declaratory relief for access to the company’s corporate books and records. The owners did not report that action to the insurer during the first policy period.

In February 2019, during the second policy period, the investors filed a private arbitration demand against the owners, alleging various tort and breach of contract claims, including for various forms of misappropriation of corporate funds. As background, the arbitration demand restated certain of the 2018 lawsuit allegations concerning the owners’ failure to produce corporate records. The owners sought coverage for this second action under the 2018-2019 policy, and the insurer denied coverage, arguing that the claim at issue had been first made under the prior policy. The trial court concluded that the two actions did not arise from Related Wrongful Acts, as they neither shared a “common nexus” nor were “causally connected,” as required by the pertinent policy provision, with the arbitration demand referencing the 2018 lawsuit only to provide background for the arbitration demand.

On appeal, the appellate court affirmed the circuit court decision, noting that the 2018 lawsuit and the arbitration demand did not share any “common nexus,” as the 2018 lawsuit sought an injunction for the owners’ failure to produce corporate records while the arbitration demand sought damages for the owners’ alleged misappropriation of corporate funds. It also agreed that the two actions were not “causally connected,” as the owners’ alleged failure to produce corporate records did not cause their misappropriation of funds. According to the appellate court, the obligations, duties, and breaches in the two matters were separate and distinct. Consequently, the appellate court affirmed the circuit court’s ruling and thereby the insurer’s coverage obligation under the later policy.