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Related Wrongful Acts Exclusion Precludes Additional $20 Million in Coverage

Twenty-eight separate matters fell under a single insurance policy because they all arose out of “Related Wrongful Acts” as defined by the policy. As a result, the insureds were not eligible for an additional $20 million in coverage. Previti v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 13-56368 (9th Cir. Jan. 22, 2016).

National Union Fire Insurance Company of Pittsburg, PA (National Union) issued three Director and Officer Liability insurance policies to James Previti and certain other insureds (the Previti Parties), with the first policy period from December 31, 2007, to April 28, 2009, (the 2007-2009 Policy) and subsequent policies from April 28, 2009, to April 28, 2010, (the 2009-2010 Policy) and from April 28, 2010, to April 28, 2011, (the 2010-2011 Policy). Each policy had a $10 million limit of liability.

In November 2008, the Previti Parties submitted a Notice of Circumstance to National Union, including a Motion for Entry of Order Converting Chapter 11 Cases to Chapter 7 (Conversion Motion) for certain insured entities. The Conversion Motion set forth allegations of improper transfers and the “principals’ prepetition use of the Debtors’ financial accounts as their own personal piggy banks.”

National Union accepted the Conversion Motion under the 2007-2009 Policy and the first of 28 lawsuits was filed on May 12, 2009, during the 2nd policy period. The Previti Parties attempted to divide the suits into three different groups with the first group relating to the Conversion Motion, the second group involving two cases with “nearly identical allegations” relating to agreements certain Previti Parties allegedly induced by a fraudulent scheme, and a third group consisting of 25 proceedings against various debtor companies alleging they made improper transfers, among other illegalities. The Previti Parties asserted the first action fell under the 2007-2009 Policy and the subsequent 27 claims fell under the 2009-2010 Policy and 2010-2011 Policy and did not arise out of Related Wrongful Acts.

The District Court disagreed with the Previti Parties’ attempt to divide the 28 actions into three different groups and policy periods and granted partial summary judgment for National Union. The District Court determined that all 28 actions arose out of Related Wrongful Acts and fell under the 2007-2009 Policy. “Related Wrongful Acts” were defined under the policy as “Wrongful Acts which are the same, related or continuous, or Wrongful Acts which arise from a common nucleus of facts. Claims can allege Related Wrongful Acts regardless of whether such Claims involve the same or different claimants, Insureds or legal causes of action.”

The District Court rejected the Previti Parties’ argument that the claims were unrelated because they alleged various claims against different parties and arose from different schemes. The District Court reasoned that the Conversion Motion contained broad allegations and put the Previti Parties on notice that creditors contended the debtor companies avoided their obligations through transfers to insiders and affiliates. The District Court also noted the issue of whether claims arose from different schemes was a separate issue from whether the schemes were related.

On appeal, the Previti Parties argued the District Court a) applied an incorrect burden of proof, b) construed the term “Related Wrongful Acts” overly broadly, and c) erred in finding the 2008 Notice of Circumstance constituted adequate notice of all the underlying claims. The 9th U.S. Circuit Court of Appeals determined the Previti Parties’ three arguments did not withstand scrutiny and affirmed the District Court’s ruling.

The court found “[t]he term ‘Related Wrongful Acts,’ when construed with the other contract provisions, encompasses a broad range of acts clearly extending to all the Underlying Actions.” The court also noted the Previti Parties’ repeated concessions during the bankruptcy litigation that the underlying claims were related. The court further held that the Notice of Circumstance submitted under the 2007-2009 Policy qualified as notice of all the underlying claims, as it alleged a broad fraudulent scheme involving debtor insiders and non-debtor affiliates as well as questionable transfers made pre- and post-petition.

Tressler Comments

These types of cases can be very fact-specific and unpredictable, but certainly the insurer was aided here by the District Court and 9th Circuit following the policy language in conducting the analysis of whether the matters were related. Decisions in this area tend to become unpredictable when courts stray from the policy language and assess on their own whether any differences between the matters can be identified.