Court Applies Objective Standard to Hold that Prior Knowledge Exclusion Bars Coverage

An Ohio federal court has granted summary judgment in favor of an insurer, holding that a prior knowledge exclusion barred coverage under either Ohio or California law for a claim involving wrongful conduct identified in cease and desist letters received by the insured prior to the operative policy period.  Maxum Indem. Co. v. Drive West Ins. Servs., 2015 WL 457025 (S.D. Ohio Feb. 3, 2015).

The insured, a wholesale insurance brokerage, received cease and desist letters from two insurance companies after one of the insured’s “rogue” employees sold and collected premiums on behalf of the insured for policies the employee lacked authority to sell. The insured subsequently procured a professional liability policy, and it was sued by companies accusing it of negligence and breach of fiduciary duties in connection with the insured’s collection of premiums from them for the unauthorized policies. When the insured sought coverage for those suits, its insurer denied coverage based on an exclusion for “[a]ny ‘claim’ arising out of or resulting from any ‘wrongful act’ ... [y]ou had knowledge of or information related to, prior to the first inception date of the ... coverage ... and which may result in a ‘claim.’” A declaratory judgment action over coverage soon followed.

On cross motions for summary judgment, the court ruled in favor of the insurer, holding that the prior knowledge exclusion barred coverage in its entirety. In so ruling, the court rejected the insured’s arguments that the exclusion did not apply because it had no prior knowledge of actual legal claims, as opposed to wrongdoing, and that the policy’s “may result” language mandated a subjective determination of its knowledge. Instead, the court ruled that the exclusion was unambiguous on its face, and it held that the claims at issue clearly arose from the “rogue” employee’s “wrongful acts of which [the insured] had related information prior to the insured time-period,” based on its receipt of the cease and desist letters.  As a result, the court determined that there was no coverage under the policy.