Date of Wrongful Acts, Not Harm Caused By Acts, Relevant Factor in Determining Application of Retroactive Date Exclusion

Applying California law, a federal district court has held that a policy’s retroactive date exclusion bars coverage even if the harm caused by the wrongful acts materializes after the retroactive date.  Bararsani v. HDI Global Ins. Co., 2021 WL 5859464 (C.D. Cal. Sept. 16, 2021).

A lawsuit was filed against the employee of an insured real estate company for fraud and breach of fiduciary duty surrounding a real estate transaction in which the employee allegedly acted as a broker for the plaintiff.  The complaint alleged that the employee was introduced to the plaintiff and began acting on his behalf in October 2017 and made certain misrepresentations to him from then until January 23, 2018.  According to the complaint, these misrepresentations ultimately caused the plaintiff to lose rents and make unnecessary expenditures to improve his property.

The insurer issued an errors and omissions policy to the insured real estate company, which excluded coverage for “Wrongful Acts committed before the Retroactive Date” of March 14, 2018.  The policy defined “Wrongful Act” as “conduct or alleged conduct by You or any person or organization for whom You are legally liable” and included a “negligent act, error or omission.”

The insurer denied coverage for the underlying litigation, and the insured employee brought suit asserting breach of contract and bad faith, as well as negligent and intentional infliction of emotional distress.  The court granted summary judgment in favor of the insurer, holding that “[e]ven if all inferences were drawn in favor of [the employee], the date of the alleged Wrongful Act could not be brought within the Policy’s coverage period.”  The court rejected the employee’s argument that the complaint “contain[ed] facts showing it [was] possible [he] committed a Wrongful Act” after the retroactive date simply because the harm alleged in the underlying complaint occurred after the retroactive date.  Rather, the court held that the wrongful acts themselves, not the harm caused by those wrongful acts, were the applicable consideration in determining the application of the retroactive date exclusion.

The court also held that, because the insurer had no duty to defend the underlying claim, the remaining causes of action against the insurer for bad faith and intentional and negligent infliction of emotional distress were “similarly called into question” and ordered the parties to show cause as to why those additional causes of action should not be dismissed.