Tenth Circuit Holds Underlying Securities Claims Interrelated

In its recent decision in Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate 2003, 2013 U.S. App. LEXIS 9599 (10^th Cir. May 13, 2013), the United States Court of Appeals for the Tenth Circuit, applying New York law, had occasion to consider whether an underlying securities arbitration related back to claims first made prior to the policy’s inception date, and if so, whether the insurer was estopped from denying coverage on this basis.

Lloyds insured Brecek & Young Advisors, Inc. (“BYA”) under a claims-made and reported broker/dealer professional liability policy in effect for the period December 1, 2006 to December 1, 2007.  The policy contained an “Interrelated Wrongful Acts” provision stating that all claims based on the same wrongful act or interrelated wrongful acts would be deemed a single claim.  The policy also contained an exclusion applicable to claims arising out of wrongful acts for which notice had been given under any prior policy or “any other Wrongful Act whenever occurring, which together with a Wrongful Act which has been the subject to such claim or notice, would constitute Interrelated Wrongful Acts.”  The policy defined “Interrelated Wrongful Acts” as wrongful acts that are:

1.   similar, repeated or continuous; or

2.   connected by reason of any common fact, circumstance, situation, transaction, casualty, event, decision or policy or one or more series of facts, circumstances, situations, transactions, casualties, events, decisions or policies.

The Brecek decision addressed the interrelatedness of three underlying proceedings.  The first, referred to as the “Wahl Arbitration” was a claim first made against BYA while the Lloyds policy was in effect.  The claim alleged that BYA sold unsuitable investment products and that BYA and a co-defendant engaged in practices of churning investments during the period 1999 through 2005.   The claim alleged causes of action against BYA for various theories of agency liability and failure to supervise.   The complaint filed in the Wahl Arbitration was subsequently amended to add twenty-five additional claimants who claimed similar injuries as a result of similar misconduct.

Relevant to coverage for the Wahl Arbitration was a claim first made against BYA in September 2005, referred to as the Knotts Arbitration.  The Knotts Arbitration contained similar allegations and causes of action as alleged in the Wahl Arbitration, and identified the same individual defendants as those identified in the Wahl Arbitration.  Also relevant was a claim first made against BYA in June 2006, referred to as the Colaner Arbitration, which also contained allegations of unsuitability and churning over the same time period by the same group of individual defendants. 

Lloyds initially took the position that the Wahl Arbitration was interrelated to the Colaner Arbitration and therefore should be covered under BYA’s prior policy which had been issued by Fireman’s Fund.  Lloyds subsequently advised, however, that it had determined the Wahl and Colaner matters were not interrelated.  Lloyds thereafter agreed to provide BYA with a defense in the Wahl Arbitration, but took the position that each claimant in the proceeding represented an entirely unrelated claim subject to a separate $50,000 self-insured retention.  While BYA eventually settled with each of the claimants in the Wahl Arbitration, Lloyds prorated the defense costs among all claims and paid indemnity on those claims which exceeded the $50,000 retention.  As a result, Lloyds indemnified BYA for only $385,000 of some $932,000 incurred by BYA in legal fees and settlement payments.

The issue of multiple-retentions eventually was briefed to the United States District Court for the District of Kansas, where the declaratory judgment action was filed.  On motion for summary judgment, Lloyds argued that there was not a sufficient factual nexus between the claimants in the Wahl Arbitration such that they could be considered interrelated, notwithstanding the fact that the claimants were part of the same lawsuit.  In a footnote, Lloyds argued that in the alternative, if the claims asserted in the Wahl Arbitration were found to have arisen from interrelated wrongful acts, then they would necessarily relate back to claims made in the Knotts Arbitration or the Colaner Arbitrations, and therefore excluded by the Lloyds policy.  The district court ruled against Lloyds on the number of retentions, but ordered briefing on Lloyds “relation back” theory.  BYA argued that the Wahl Arbitraiton did not relate back to the earlier claims, but that even if they did, Lloyds was precluded from taking this position based on the doctrines of waiver or estoppel.  The district court ruled against BYA on the issues of waiver and estoppel, but ultimately concluded that the three arbitrations were not interrelated for the purpose of the policy’s exclusion.

On appeal, the Tenth Circuit reasoned that the matters would be deemed interrelated if they shared a “sufficient factual nexus,” which is the standard articulated by New York courts in considering similar “interrelated wrongful act” provisions.  Applying this standard, the court found sufficient common facts to establish interrelatedness.  As the court explained:

Several common facts connect the Wahl, Knotts, and Colaner Arbitrations. All named as respondents BYA, B&G Financial Network, Gergel, and Snyder. Further, both the Wahl and Colaner arbitrations included claims against broker/agents Brandt and Farrar. All of the misconduct was alleged to have taken place during roughly the same time period-from the late 1990s to the mid 2000s. All claims allege the respondents sold unsuitable investment products including various types of annuities. Further, all claims involved allegations of churning or flipping of investment accounts in order to enrich the broker/agents at the expense of account holders. Finally, BYA's liability was predicated on theories of vicarious liability and failure to supervise its broker/agents in each of the claims.

The court concluded that the three arbitrations were connected by common facts, circumstances, decisions and policies such that they were “interrelated” for the purpose of the exclusion in the Lloyds policy.

The court, however, also concluded that Lloyds was potentially estopped from relying on the exclusion as a defense to coverage since it undertook BYA’s defense in the Wahl Arbitration with knowledge of the coverage defense, but only asserted the defense for the first time late in the coverage litigation.  The court agreed BYA was potentially prejudiced in the form of detrimental reliance as a result of Lloyd’s control of BYA’s defense without having properly reserved rights on the “relation back” coverage defense.  The Tenth Circuit, therefore, remanded the proceedings for further consideration of whether BYA detrimentally relied on Lloyds’ conduct, and if so, whether it was entitled to further recovery under the policy notwithstanding the otherwise applicable coverage defense.

11th Circuit Addresses Late Notice and Related Claims

In its recent decision in Sharp Realty & Mgmt. v. Capitol Specialty Ins. Corp., 2013 U.S. App. LEXIS 243 (11^thCir. Jan. 4, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, considered whether an insured’s untimely notice of suit under a professional liability policy vitiated its right to coverage, regardless of prejudiced.  Additionally, the court addressed the concepts of related claims.

The insured, Sharp Realty & Management (“SRM”), was insured under a professional liability policy issued by Allied World Assurance Company (“AWAC”) during the period November 2007 through November 2009, and later under a professional liability policy issued by Capitol Specialty Insurance Corp. (“Capitol”) for the period November 2009 through 2010.   In July 2009, SRM was sued by several parties for its alleged mismanagement of a property.   SRM, however, did not give notice of the suit to AWAC until March 2010 – some eight months later.  SRM also gave notice of the underlying suit to Capitol.  AWAC agreed to provide SRM with a defense under a reservation of rights on several grounds, including SRM’s failure to comply with its policy’s notice provision.  Capitol denied coverage to SRM on the basis that the claim was first made prior to the inception date of its policy.  SRM later brought a declaratory judgment action against AWAC and Capitol in an Alabama federal district court.  Both insurers were successful on motion for summary judgment.

On appeal, the Eleventh Circuit considered first whether SRM’s non-compliance with the notice provision in the AWAC policy precluded its right to coverage.  In considering this issue, the court noted that under Alabama law, the only relevant considerations concerning an insured’s compliance with a notice provision are length of delay and reason for delay.  Under Alabama law, prejudice is not a consideration unless the policy fails to contain a provision making timely notice a condition precedent to coverage.  See, Travelers Indem. Co. of Connecticut v. Miller, 86 So. 3d 338, 342 (Ala. 2011); American Fire & Cas. Co. v. Tankersley, 116 So. 2d 579, 581 (Ala. 1959).   The notice provision in the AWAC policy stated:

B. WHAT TO DO IF AN INSURED HAS A CLAIM

If there is a Claim, or a circumstance or incident likely to result in a Claim, the Insured must promptly do the following:

1.   Notify the Company in writing . . .

2.   Send the Company copies of all . . . legal papers received in connection with the Claim or potential Claim; . . .

C. LEGAL ACTION AGAINST THE COMPANY . . .

2.   No action may be brought against the Company unless the Insured has fully complied with all terms and conditions of this Policy.

SRM argued that this notice provision did not constitute a condition precedent to coverage because it did not contain that phrase, and as such, AWAC need be prejudiced in order to disclaim coverage.  The court disagreed, explaining that the notice provisions “make it clear that SRM was required to promptly notify [AWAC] of any claim before it could bring an action against it.”  As such, the court concluded that the only relevant considerations were the length of SRM’s delay and the reason for its delay.

With respect to the first factor, the court held as a matter of law that SRM’s eight-month delay in giving notice to AWAC was late, observing that in Nationwide Mut. Fire. Ins. Co. v. Estate of Files, 10 So. 3d 533, 536 (Ala. 2008), the Alabama Supreme Court had held that a shorter delay of five months was late as a matter of law.  The court also concluded that SRM could offer no reasonable excuse for its eight-month delay.  While SRM pointed out that it immediately gave a copy of the lawsuit to its attorney, and that its attorney failed to send a copy of the suit to AWAC, the court nevertheless held that the failure of SRM’s attorney was still a delay on SRM’s part and thus not a reasonable excuse for its non-compliance with the policy’s notice provision.  Thus, finding that the length of SRM’s delay in giving notice of suit was too long, and that there was no reasonable excuse for this delay, the court affirmed the lower court’s ruling of summary judgment in AWAC’s favor.

Turning to coverage under Capitol’s policy, the court agreed that the claim was first made in July 2009, prior to the inception date of Capitol policy, and thus did not trigger that policy’s coverage that was limited to claims first made and reported during the policy period.  SRM argued that because the underlying suit was amended during the policy period to include new claims regarding information first learned by plaintiffs during discovery, the amended complaint should be considered a cnew laim first made after the policy’s November 2009 inception date.  The Capitol policy, however, contained a multiple claims provision stating that all claims arising out of the same “erroneous act” would be considered first made on the date the first claim was made against the insured.    Additionally, the Capitol policy contained a related acts provision stating that all erroneous acts that are “logically or causally connected by common facts, circumstances, transactions, events and/or decision” would be considered a single erroneous act.  The court agreed that the new erroneous acts alleged in the amended complaint related to those initially pled, explaining:

All of the claims in the underlying action are based on related Erroneous Acts. The same claimant sued the same defendant for the same type of wrongdoing (failure to collect rent and maintenance fees) at the same location over an overlapping period of time. Both audits examined whether SRM was collecting rent and fees from the same tenants in accordance with the same leases. Thus, while there may be separate occurrences, those occurrences are clearly related because they are "logically or causally connected by common facts, circumstances, transactions, events and/or decisions.

As such, the court agreed that all claims arising out of the alleged erroneous act would be deemed first made in July 2009, and thus prior to the inception date of the Capitol policy.

Texas Court Holds Prior Knowledge Exclusion in E&O Policy Inapplicable

In its recent decision in OneBeacon Insurance Company v. T. Wade Welch & Associates, et al., 2012 U.S. Dist. LEXIS 178587 (S.D. Tex. Dec. 18, 2012), the United States District Court for the Southern District of Texas had occasion to consider the application of a prior knowledge exclusion in a professional liability policy.

OneBeacon issued a series of lawyers professional liability policies to the law firm of T. Wade Welch & Associates, the first such policy incepting on December 20, 2006.  Each of the policies contained a prior knowledge exclusion applicable to “any claim arising out of a wrongful act occurring prior to the policy period if, prior to the effective date of the first Lawyers’ Professional Liability Insurance Policy issued by [OneBeacon] to [the Welch Firm] and continuously renewed and maintained in effect to the inception of this policy period … you had a reasonable basis to believe that you had committed a wrongful act, violated a disciplinary rule, or engaged in professional misconduct; [or] you could foresee a claim would be made against you.” 

The T. Wade Welch & Associates firm and various attorneys in the firm (the “Welch Defendants”) were named as respondents in an arbitration brought by a former client, the DISH Network.  The Welch Defendants had been representing DISH in a lawsuit preceding the issuance of the first OneBeacon policy.  DISH’s arbitration petition alleged, among other things, that in 2005, the Welch Defendants failed to respond to discovery, and withheld this error and also withheld other subsequent, but related, events from its client.   This misconduct eventually led to a sanctions motion being made against DISH in February 2007, which the Welch Defendants did not disclose to their client until July 2007, when the sanctions motion against DISH was granted. 

Although the sanctions were awarded while the OneBeacon policies was in effect, OneBeacon argued that the prior knowledge exclusion barred coverage for DISH’s malpractice claim since the Welch Defendants knew prior to December 20, 2006 that it had engaged in professional misconduct.  OneBeacon further contended that the sanctions were part of a series of related wrongful acts predating the inception of the first policy it issued to the Welch firm.  The Welch Defendants argued, on the other hand, that DISH’s damages, and the basis for its malpractice claim, was the July 2007 sanctions order, which occurred while the first OneBeacon policy was in effect.  The Welch Defendants further contended that “any acts or omissions prior to the entry of the February 2007 discovery motion and July 2007 discovery order were readily curable and could not, on their own, support DISH’s [malpractice] claim.”

The court agreed that all of the events described in DISH’s arbitration petition were related, but that they constituted “independent wrongful acts.”  Specifically, the court concluded that the Welch Defendants engaged in separate acts of professional misconduct after the inception of the 2006 OneBeacon policy when they failed to advise DISH about the pending sanctions motion and failed to correct the alleged discovery deficiencies.   In reaching this conclusion, the court rejected OneBeacon’s argument that these acts all related back to misconduct from 2005, which predated the inception of the first OneBeacon policy.   In support of this argument, OneBeacon cited to a long line of cases regarding relationship of claims, such as the seminal decision in Continental Casualty Co. v. Wendt, 205 F.3d 1258 (11^th Cir. 2000).  The court found these decisions distinguishable, explaining:

… these cases do not involved relating independent wrongful acts back to the initial wrongful act so that all wrongful acts fall within a prior knowledge exclusion.  Rather, they all deal with whether alleged wrongful acts are related for limits of liability purposes.  Thus, they are not on point.

The court ruled similarly with respect to OneBeacon’s argument that all pre-policy and post-policy wrongful acts should be “linked together” and thus all considered to have happened prior to the inception of the first policy.  In support of this argument, OneBeacon relied on a “Multiple Insureds, Claims or Claimants” condition stating:

Each wrongful act, in a series of related wrongful acts, will be deemed to have occurred on the date of the first such wrongful act. A series of related wrongful acts includes wrongful acts which are logically or causally connected by common facts, circumstances, situations, events, transactions or decisions and which may involve the same person or organization or class of persons or organizations.

The court concluded that this language was not relevant in considering the application of the prior knowledge exclusion since “the language linking related wrongful acts is in a completely different section of the policies than the exclusions.”  The court agreed that OneBeacon’s argument was reasonable, and “perhaps even more reasonable” than the contrary view espoused by the Welch Defendants, which was that the “Multiple Insureds, Claims or Claimants” provision must be read independently of policy exclusions.  The court nevertheless agreed that the Welch Defendants argument was “not itself unreasonable,” and as such, there were two reasonable interpretations of the policy, which required the court to construe the policy against OneBeacon.  Thus, the court concluded that OneBeacon could not rely on the prior knowledge exclusion to disclaim a duty to defend the wrongful acts that allegedly occurred after the December 20, 2006 inception of the first OneBeacon policy.

Florida Court Holds No Coverage for Related Claims Under E&O Policy

In its recent decision in Zodiac Group v. Axis Surplus Ins. Co., 2012 U.S. Dist. LEXIS 176622 (S.D. Fla. Dec. 13, 2012), the United States District Court for the Southern District of Florida had occasion to consider whether an insured was entitled to coverage under a claims made and reported professional liability policy for a newly filed lawsuit related to a earlier suit filed prior to the policy’s date of inception.

The underlying dispute arose out of a contract between Zodiak and Linda Georgian, whereby Ms. Georgian was hired to endorse Zodiak’s telephone psychic services.   In April 2008, Ms. Georgian brought suit in state court against Zodiak for allegedly continuing to use her name and likeness in their advertising after the endorsement contract terminated.  The suit was dismissed for lack of prosecution in November 2009, but later refiled in federal court in January 2010, albeit with slightly different causes of action.

In September 2008, while the earlier state court suit was pending, Zodiak applied for a professional liability insurance policy from AXIS.  The policy application required Zodiak to identify any pending or prior claims made in the last five years.  In response, Zodiak stated “Former contract celebrity claimed unauthorized use of her name after their [sic] relationship ended. Allegations of invasion of privacy & injunctive relief.”  AXIS subsequently issued a one year claims-made and reported professional liability policy for the period October 2008 through October 2009.  The policy was later renewed for the period October 2009 to October 2010.  Notably, the 09-10 policy provided coverage for wrongful acts committed subsequent to the policy’s March 6, 1998 retroactive date and prior to inception date of the policy, but only if the claim was first made during the policy period, and only if prior to the policy’s date of inception the insured was unaware of circumstances that could give rise to a claim.   Additionally, the policy stated that "[a]ll Claims arising from the same Wrongful Act will be deemed to have been made on the earlier of" either "[t]he date the first of those Claims is made against any Insured," or “[t]he first date the [insurance company] receives the Insured's written notice of the Wrongful Act.” 

Zodiak contended that although the earlier state court was first made prior to the inception date of either policy, the lawsuit later filed in federal court should be considered a claim first made and reported during the 09-10 policy period, and thus covered under that policy.  AXIS countered that the federal court lawsuit involved the same allegations as the previously filed state court lawsuit, and that it light of this relationship should be considered a claim first made prior to the 09-10 policy’s inception date.

Observing that the federal court lawsuit was premised on the same alleged wrongdoing as alleged in the earlier state court lawsuit, the court granted AXIS’ motion to dismiss Zodiak’s complaint.  The court reasoned that the two preconditions for coverage for prior wrongful acts were not satisfied.  First, the federal court lawsuit was not first made during the policy period given its relationship to the state court lawsuit.  Second, Zodiak failed to establish that at the time of the policy’s issuance, it was unaware of circumstances that could give rise to a claim.  On the contrary, its responses in the application indicated otherwise.  As the court explained:

Nor is it true that Zodiac had no knowledge, prior to the policy's inception date, "of a circumstance that could reasonably be expected to lead to the Claim." … That is plainly false because Zodiac in fact disclosed on its application for insurance the underlying dispute with Georgian that later materialized into the federal lawsuit. In response to the question about pending or prior claims, Zodiac wrote that a "[f]ormer contract celebrity claimed unauthorized use of her name after their relationship ended," and that the suit involved "[a]llegations of invasion of privacy & injunctive relief." … Although Zodiac responded "no" to the question about whether it knew of any facts or circumstances that might reasonably result in a future claim being made, that obviously does not lessen its knowledge about the April 2008 state court lawsuit and the circumstances and facts underlying it.

Utah Federal Court Holds Pain Pump Claims Not Related

In its recent decision in Columbia Casualty Company v. SMI Liquidating, Inc., 2012 U.S. Dist. LEXIS 162892 (D. Utah Nov. 14, 2012), the United States District Court for the District of Utah had occasion to consider the concept of “related claims” in the context of claims made products liability policies.

The insurance dispute in SMI Liquidatingarose out of defective shoulder pain pumps manufactured by Sorenson Development, which was insured by Columbia Casualty under successive policies.  The first such policy, issued for the period July 1, 2007 through July 1, 2008, had limits of liability of $10 million per claim and in the aggregate, subject to a $25,000 deductible per claim and a $125,000 deductible aggregate.  Notably, the 07-08 policy contained a “related claims” provision that stated, in pertinent part:

If related claims are subsequently made against the Insured and reported to the Company, all such related claims, whenever made, shall be considered a single claim first made and reported to the Company within the policy period in which the earliest of the related claims was first made and reported to the Company.

The policy defined “related claims” as all claims arising out of the same occurrence or related occurrences.  Further, the policy defined related occurrences as those “that are logically or casually connected by any common fact, circumstance, condition, situation, transaction, event, advice or decision in the design, formulation, manufacturing, distribution, sale, testing, use, operation, maintenance, repair or replacement of your product or your work.”

While the 07-08 policy was in effect, Sorenson was named as a defendant in four lawsuits relating to its pain pumps.  Columbia initially treated these suits as separate claims, each triggering a separate deductible.  Columbia did, however, have internal deliberations between its claim and legal departments as to whether the four suits should be considered related claims triggering only a single deductible. 

Toward the end of the 07-08 policy period, Columbia began the underwriting process for a renewal.  During this process, the Columbia underwriter learned of the pending pain pump claims and became concerned about future claims.  She determined that the renewal would have different deductible terms than the 07-08 policy.  She offered a renewal on the terms that all claims other than shoulder pump claims would be subject to the original $25,000 deductible per claim, with a $125,000 deductible aggregate, but that shoulder pump claims would be subject to a $250,000 deductible per claim, unaggregated.  Sorenson’s risk manager understood  at the time why the renewal would be on different terms and reluctantly agreed to it.  The renewal became effective on July 1, 2008.

Claims continued to be made against Sorenson during the end of the 07-08 policy period and into the 08-09 policy period.  In August 2008, some seven weeks after the 08-09 policy became effective, Columbia’s claim department decided to treat all pending claims as being related and thus covered only under the 07-08 policy.  Notwithstanding its decision, Columbia continued charging Sorenson separate deductibles for each new claim made.  Over the next year, as new claims were made against Sorenson, Columbia issued supplemental correspondence amending the grounds on which Columbia determined that the underlying claims were related.  Thus, whereas Columbia initially took the position that various claims were related because they involved the same pain pump model, this later evolved into the position that any claims involving any pain pump model manufactured by Sorenson were related. 

During a mediation in November 2009, the issue of related claims was brought to a head. Columbia advised that it would be tendering the remaining limits of its 07-08 policy in connection with an upcoming mediation, and that at that point, its coverage obligations would be terminated.  Around the same time, Columbia learned of the fact that it had been charging multiple deductibles instead of a single deductible as it should have in light of its related claims position.  Columbia tried to refund the “erroneously” paid amounts to Sorenson, but Sorenson refused to accept the check.  Columbia subsequently filed a coverage action against Sorenson seeking a declaration that the pain pump claims were related claims covered only under the 07-08 policy, and not covered under the 08-09 policy.

In considering the issue, the court focused primarily on the deductible language contained in the 08-09 policy that specifically distinguished pump claims from non-pump claims.   This deductible scheme, concluded the court, indicated “a clear and unequivocal agreement that shoulder pump claims would be covered, subject to specialized deductibles.”  Columbia’s “related claims” position, observed the court, would negate this express and specific language.  The court further concluded the concept of related claims in the 07-08 policy could be harmonized with coverage for pump claims in the 08-09 policy, agreeing with Sorenson’s contention that “whatever was intended to fall within the scope of the related claims’ clause, the parties specifically agreed that it would not include the expressly dealt with shoulder pump claims.”

While the court reached its conclusion based on the plain terms of the 08-09 policy, it noted that extrinsic evidence would have compelled the same holding.  Specifically, the fact that Sorenson and Columbia negotiated the deductible scheme for the 08-09 policy indicated to the court that the parties considered and agreed on the manner in which the 08-09 policy would provide coverage for pain pump claims.  Absent from these negotiations was any discussion that the specialized deductible would apply only if Columbia decided that pump claims made in 08-09 were not related to those made in the 07-08 policy.  In this regard, the court found it “significant that Columbia’s decision to treat all shoulder pump claims as ‘related claims’ under the Year One policy post-dates the effective date of the Year Two policy by over a month.”  Thus, the court concluded that the parties’ contemporaneous communications, at least at the time the 08-09 policy was issued, reflected a mutual understanding that pump claims would be covered under the 08-09 policy.   Columbia’s subsequent decision that the claims would only be covered under the 07-08 policy “fundamentally altered the allocation of risk bargained for by the parties in the Year Two policy and was contrary to the parties’ express intentions at the time of contracting.”