Warranty Exclusion Bars Coverage for Demand Letter Referencing SEC Lawsuit Alleging Fraud by Insured Prior to Warranty Date

The U.S. Court of Appeals for the Ninth Circuit, applying Nevada law, has held that a policy’s warranty exclusion bars coverage for a demand letter alleging that the insured was on notice of fraud by the named insured’s former CEO, where the letter cited an SEC lawsuit alleging fraud by the CEO occurring prior to the warranty date. Ironshore Indem., Inc. v. Rogas, 2023 WL 6999435 (9th Cir. Oct. 24, 2023).

The insured, an executive of the insured company that filed for bankruptcy, sought coverage for a demand letter alleging that he breached his fiduciary duties to the company because he was on notice of the CEO’s fraud and did not report it to the company’s board. The insured sought coverage under the company’s insurance tower. The operative excess policy contained a warranty exclusion barring coverage for any claim “‘arising from’ knowledge or information of any insured ‘of any act, error or omission which might give rise to a claim(s), suit(s) or action(s)’” under the policy. The district court granted judgment on the pleadings to the insurer, holding that the warranty exclusion barred coverage for the demand letter.

The Ninth Circuit affirmed judgment for the insurer. The court concluded that “[t]he allegations in the demand letter for which [the insured] seeks coverage arise from [his] failure to respond to the fraudulent activity of the company’s former CEO . . . which began at the latest in 2019 according to the [SEC complaint] referenced in the letter. Thus, [the CEO] had knowledge or information that could give rise to a claim, suit, or action in May 2019 when the Warranty Exclusion was executed.” The court noted that “[t]he provisions in the original coverage policy precluding imputation of knowledge or acts of one insured to another for the purpose of applying exclusions were expressly limited to [the exclusions preceding the warranty exclusion] and therefore did not preclude [the insurer] from denying coverage pursuant to the Warranty Exclusion[.]” The court rejected the insured’s argument that the warranty exclusion did not apply because the demand letter included allegations “possibly deriving from knowledge or information that [the CEO] acquired after executing the Warranty Exclusion” as “the broad language excluding any claim ‘arising from’ pre-execution knowledge would nevertheless exclude those claims.”