Regulatory Warning Notices Asserting Damages Based on Same Acquisition Involve “Related Wrongful Acts”

In a win for Wiley Rein’s client, a New York appellate court has held that a program of asset management liability insurance afforded no coverage for a UK regulatory “Warning Notice” because the notice and a previous notice issued by the same regulator to the same targets arising from the same transaction involved “Related Wrongful Acts” and therefore constituted a single claim first made prior to inception of the relevant policies.  Berkshire Hathaway Specialty Ins. Co. v. H.I.G. Capital, LLC, 2019 WL 2179145 (N.Y. App. Div. May 21, 2019).  In addition, the court held that the policies’ prior notice exclusion applied to bar coverage.

The insured, a private equity company, acquired a bedding manufacturer in the United Kingdom in 2011.  In structuring the transaction, the insured allegedly acquired the company, but not its pension liabilities.  The UK’s Pensions Regulator served a “Warning Notice” to the insured in 2014 related to the insured’s conduct in purchasing the manufacturer.  The 2014 Warning Notice sought recovery based on the regulator’s position that the purchase of the company was undervalued.  The insured tendered the 2014 Warning Notice to its professional liability insurers under its professional liability insurance program for the 2014-2015 policy period.  The Pensions Regulator served a second notice in 2016, also related to the insured’s purchase of the manufacturer, but asserting an alternate damages theory.  The insured tendered the 2016 Warning Notice for coverage under policies issued for the 2016-2017 policy period.  The insurers denied coverage for the second notice on the grounds that the notices involved Related Wrongful Acts and therefore, under the policies’ related claims provision, the notices constituted a single claim first made during the 2014-2015 policy period.  The policies defined “Related Wrongful Acts” as “Wrongful Acts” “that are logically or causally connected by any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions or causes.”  In addition, the insurers denied coverage under a prior notice exclusion because the insured had tendered the 2014 Warning Notice under the 2014-2015 policies.

The appellate court affirmed the lower court’s grant of summary judgment to the insurers, concluding that “[t]he unambiguous language of the Related Claims provision and the Prior Notice Exclusion establishes, as a matter of law, that there is no possible factual or legal basis on which [the 2016 insurers] may eventually be held liable under the 2016 Policy.”  The court held that it is “undisputed that both warning notices allege wrongful conduct stemming from the insureds’ 2011 purchase of a UK entity” and therefore “under the Related Claims provision of the 2016 Policy, the notices are deemed to be a ‘single Claim’ made on ‘the earliest date on which any such Claim was first made,’ which preceded the inception of the 2016 Policy.”  Furthermore, the court concluded that the policies’ prior notice exclusion applied because the insured “gave notice of the 2014 UK warning notice to its insurers when it received the warning notice (and before the inception of the 2016 Policy) and that those claims were paid out.”  Separately, the court also held that Florida law rather than New York law applied to the insured’s remaining claim against one of the 2014-2015 insurers.