Coverage Barred For Hedge Fund’s Suit Against Insured Because Related to Prior Securities Class Action

An Arizona intermediate appellate court, applying Arizona law, has affirmed a trial court’s rulings in favor of an insurer, holding that a lawsuit against the insured’s directors and officers was based in large part on the same or similar “wrongful acts” that were at issue in a previously filed securities fraud class action suit brought against the insured’s CEO and CFO. SP Syntax LLC v. Fed. Ins. Co., 2016 WL 831532 (Ariz. Ct. App. Mar. 3, 2016). In so doing, the court not only affirmed the trial court’s award of reasonable attorney’s fees and costs to the insurer, but also awarded the insurer reasonable attorneys’ fees and costs for the appeal.

The insured, a company that manufactured televisions, held two consecutive towers of D&O coverage: Tower One, which was made up of primary policies from four different insurers for the November 30, 2007 to November 30, 2008 policy period, and Tower Two, which was made up of a primary policy, two excess policies, and two Side A coverage policies issued by various insurers (with one insurer issuing both an excess policy and a Side A coverage policy) for the November 30, 2008 to November 30, 2009 policy period.

In November 2007, a securities class action suit was brought against the television manufacturer and its CEO and CFO, alleging that the company had misrepresented its finances and operations in public filings. The insured tendered the Securities action to Tower One.

In November 2008, a hedge fund sued several of the insured’s directors and officers, alleging that the defendants induced it to enter into and maintain a $250 million credit facility agreement by making “false and misleading statements and omissions of material fact . . . regarding [the insured’s] financial condition, results of operations, and management,” and that as a result, it lost millions of dollars. The insured tendered the hedge fund action to the insurers of both towers; however, the Tower Two insurers denied coverage on the ground that the hedge fund action arose out of the same wrongful acts as those at issue in the securities action, and thus was barred from coverage by exclusions precluding claims related to claims tendered under a prior policy, among other provisions. After the hedge fund and the insured reached a stipulated settlement with a covenant not to execute, the insured assigned the hedge fund its rights under the Tower Two policies, after which the hedge fund brought a declaratory judgment action against the Tower Two carriers for breach of contract, including the instant suit against a Tower Two insurer that issued both an excess policy and a Side A policy.

The trial court granted the insurer’s motion to dismiss with respect to the excess policy, recognizing that the primary policy, to which the excess policy generally followed form, barred coverage for any claim arising out of any Interrelated Wrongful Act and also included a prior/pending litigation endorsement that specifically referenced the earlier securities class action in its definition of “Interrelated Wrongful Act.” The trial court held that the hedge fund action “arose from the same core financial misstatements” as the securities action, and thus coverage was precluded under the excess policy of Tower Two. Similarly, with respect to the Side A policy, the trial court granted the insurer’s motion for summary judgment, holding that the “the plain language of the [Side A Policy] relates the [hedge fund action] back to the [securities class action].” The trial court also awarded the insurer reasonable attorney’s fees and costs under Arizona statutes.

On appeal, the Arizona intermediate appellate court affirmed the trial court’s holdings, concluding that “the allegations in the [hedge fund] complaint arose out of or are similar to the allegations in the [securities action].” The court rejected the hedge fund’s argument that its case had certain allegations that were not at issue in the securities class action. The court observed that the exclusions at issue in the primary and excess policy are “not limited to claims identical” to the securities action and explained that the hedge fund action constituted one claim that put forth no new alleged representations by the insured that were dissimilar from those in the securities class action.

Concerning the Side A policy, the Arizona Court of Appeals affirmed, rejecting the hedge fund’s argument that the insurer’s Side A policy defeated the hedge fund’s (standing in the shoes of the insured’s) reasonable expectations that the insured expected its Side A policy to cover the allegations in the hedge fund suit because no evidence was shown of any such expectation.

Finally, the intermediate appellate court held that the trial court did not abuse its discretion in awarding attorneys’ fees based on three factors from Associated Indemnity Corp. v. Warner, 143 Ariz. 567 (1985), pointing out that the hedge fund did not rely on controlling authority in bringing its suit or otherwise raise a novel issue. The court also awarded the insurer its fees and costs on appeal.