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D&O Team Successfully Defends Appeal Before the United States Court of Appeals for the Third Circuit

June 10, 2015

The Directors and Officers Group  won an appeal before the United States Court of Appeals for the Third Circuit in a complex insurance coverage litigation. In PNY Technologies, et al. v. Twin City Fire Insurance Company, the plaintiffs sought insurance coverage from Twin City after four different banks alleged that the plaintiffs defaulted on contracts they had entered into with each bank. The plaintiffs alleged that because their Chief Financial Officer entered into each of the contracts without authorization, the contracts were invalid and they were entitled to insurance coverage under their D&O policy with Twin City.

After conducting extensive discovery, Twin City moved for summary judgment in the United States District Court for the District of New Jersey on six separate grounds: (1) that the claims made by the banks against the plaintiffs did not assert claims for a Wrongful Act, as defined by the policy; (2) that coverage was barred by the policy’s contractual liability exclusion; (3) that the plaintiffs did not provide notice of the Claim to Twin City in a timely fashion; (4) that any Claim against the plaintiffs was made prior to the inception of Twin City’s policy; (5) that coverage was barred by the prior notice exclusion; and (6) that the plaintiffs entered into settlements with the banks without Twin City’s consent. 

The District Court granted Twin City’s motion and dismissed the plaintiffs’ claims in their entirety. The District Court granted Twin City’s motion on two grounds without reaching the remaining arguments. The court held that: (1) there was no coverage because the banks’ demands for payment from the plaintiffs did not qualify as an entity claim for a Wrongful Act; and (2) coverage was barred by the contractual liability exclusion. 

The plaintiffs appealed the District Court’s decision to the Third Circuit Court of Appeals. In its decision, the Third Circuit only addressed the contractual liability exclusion and did not discuss Twin City’s alternative argument that the banks’ demands were not “entity claims for wrongful acts” as defined by the policy. The Third Circuit rejected the plaintiffs’ argument that the contractual liability exclusion did not apply because the plaintiffs’ CFO was not authorized to execute the contracts with the banks, making the contracts invalid. The Court held that the contractual liability exclusion applies to “any actual or alleged . . . liability under any contract.”  The plaintiffs further argued that the exclusion did not apply because their liability was based on their CFO’s malfeasance, not on the contracts. The Third Circuit rejected this argument as well, holding that the plaintiffs’ liability “relates solely to losses under the contracts,” not to any tortious acts.

Twin City was represented by Scott Casher, John McCarrick, and Zareef Ahmed.

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