Coverage for Shareholder Actions Not Barred by Prior Acts Exclusion
The New York Supreme Court, Appellate Division, has held that a “prior acts” exclusion in a directors and officers policy did not bar coverage for settlements reached by the insured in two related shareholder lawsuits, notwithstanding allegations related to a joint venture formed before the prior acts date. Xerox v. Travelers Cas. & Sur. Co. of Am., 2024 WL 1161218 (N.Y. App. Div. Mar. 19, 2024).
The insured technology company had two towers of D&O insurance. The first tower consisted of “run off” policies that explicitly barred coverage for wrongful acts committed or allegedly committed on or after January 1, 2017. The policies in the second tower included a prior acts exclusion that precluded coverage for any “Claim … based upon, arising from, or in consequence of any fact, circumstance or Wrongful Act committed, attempted, or allegedly committed or attempted in whole or in part prior to January 1, 2017.”
In 2017, the company commenced discussions with a third party about the possible acquisition of the company. One of the company’s largest shareholders filed two lawsuits against the company and its board of directors based on the proposed acquisition alleging malfeasance related to the proposed acquisition, including undervaluing the company and failing to follow an open bid process, and seeking to enjoin the deadline for director nominations so that a new board could reevaluate the sale. The shareholder’s complaint also alleged that the company had kept secret a 20-year-old joint venture with the proposed buyer that “locked up” the company’s intellectual property rights in Asia and sought to unwind the joint venture to enhance the company’s value before a sale.
The primary and first excess carriers committed their limits under the second tower for settlements and defense costs in the underlying shareholder actions. The second excess insurer declined coverage, asserting that the prior acts exclusion applied. In the ensuing coverage action, the trial court denied the insurer’s motion for summary judgment based on the prior acts exclusion.
On appeal, the court first addressed coverage under the “run off” policies because the insured had asserted “continuity of coverage” arguments. The appellate court held that the “run off” policies did not provide coverage because the acts that gave rise to liability occurred after January 1, 2017. With respect to the second tower, the court applied a “but for” test to determine the applicability of the prior acts exclusion, which turned on whether any of the causes of action asserted could exist “but for” the existence of the excluded activity. On that point, the court determined that the insurer “failed to establish that the causes of action asserted in the underlying lawsuits could not exist but for the alleged wrongful acts preceding January 1, 2017.” It concluded that the lawsuits arose from the 2017-2018 negotiation and approval of an allegedly disadvantageous transaction, rather than the joint venture, and that the claims could be viable irrespective of whether the company had previously entered into the joint venture. Accordingly, the court held that the prior acts exclusion did not apply. The appellate court also affirmed the denial of the insurer’s motion for summary judgment on the grounds that the underlying settlement was unreasonable and on the company’s bad faith claim, holding these issues raised questions of fact.
