Ninth Circuit Finds “Related Wrongful Acts” Term is Unambiguous and Encompasses a Broad Range of Acts

The United States Court of Appeals for the Ninth Circuit, applying California law, has held that a trial court properly interpreted a D&O policy’s “Related Wrongful Acts” provision in concluding that an insured was not entitled to coverage under two policies for twenty-seven lawsuits that followed the first claim noticed to the insurer. Previti v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA (no. 13-56368) (9th Cir. Jan. 22, 2016).

In November 2008, the insured tendered to its insurer a motion for entry of order that converted Chapter 11 bankruptcy cases to Chapter 7, alleging preferential and fraudulent transfers of money from the debtor companies to non-debtor affiliates. The insurer accepted this motion as a notice of circumstances under the 2007-2009 policy—the first of three consecutive policies it had issued to the insured.

Six months later, the Chapter 7 trustee sued the insured, and the insurer advanced $10 million in defense costs to the insured under the 2007-2009 policy. Twenty-seven lawsuits later filed against the insured included allegations of misrepresentations of the financial condition of the company and improper transfers. The insured sought an additional $20 million in defense costs for these suits, arguing that they triggered coverage under the two subsequent policies. The insurer disagreed on the basis that only the 2007-2009 was triggered because all 28 suits were “related” to the first motion. In response, the insured sued its insurer for breach of contract, bad faith, and a declaratory judgment that the insurer had a duty to defend all of the underlying claims under three separate policies.

The trial court granted the insurer’s motion for partial summary judgment, concluding that all of the 28 underlying claims arose under one policy and were subject to the $10 million limit of liability. On the insured’s appeal to the Ninth Circuit, the insured argued, among other things, that the trial court applied the incorrect burden of proof, the incorrect interpretation of “related wrongful acts,” and incorrectly concluded that the notice of circumstances constituted sufficient notice as to all the underlying suits.

The Ninth Circuit concluded that none of the insured’s arguments withstood scrutiny. After concluding that the trial court applied the appropriate burden of proof for the insurer, the court then turned to the interpretation of the term “Related Wrongful Acts.” According to the court, the unambiguous language of the insurance contract foreclosed an alternate interpretation. The court explained that, when construed with the other contract provisions, the term “Related Wrongful Acts” “encompasses a broad range of acts clearly extending to all [twenty-eight actions].” Finally, the court explained that the notice of circumstances served as a notice for all 28 actions “as it alleged a broad fraudulent scheme involving both debtor insiders and non-debtor affiliates, as well as questionable pre- and post-petition transfers.”