Three's a Trend: Second, Fourth and Ninth Circuits Uphold Broad "Related Claims" Language
THE “RELATED CLAIMS” PROVISION IN CLAIMS-MADE POLICIES
The hallmark of a claims-made insurance policy is that the policy only provides coverage for claims that are “first made” during the policy period. As noted by the Texas Supreme Court, “for the insurer, the inherent benefit of a claims-made policy is the insurer's ability to close its books on a policy at its expiration and thus to attain a level of predictability unattainable under standard occurrence policies.”
To ensure this “level of predictability,” claims-made insurance policies contain provisions stating that all “Related Claims” will be treated as a single claim deemed first made at the time the earliest of such claims was made. The “Related Claims” provision is an issue that comes up time and again – claims can span years, especially in the context of regulatory investigations, which often culminate in enforcement proceedings and litigation. This inevitably leads to disputes regarding whether later claims can be related back to the earlier claim, an issue that becomes even thornier when different insurers participate on different policy years.
Over time, case law on “Related Claims” has been mixed and somewhat inconsistent, with each case tending to hinge on its own unique set of facts, making it difficult to identify a clear standard for determining whether claims are related. However, three recent decisions out of the Second, Fourth and Ninth Circuits show that courts are increasingly deferring to the plain language of the policy and applying these provisions broadly.
SECOND, FOURTH AND NINTH CIRCUITS BROADLY APPLY “RELATED CLAIMS” PROVISIONS
Second Circuit: Nomura v. Federal
On October 21, 2015, in Nomura Holdings America, Inc. v. Federal Insurance Company (no. 14-3789), the United States Court of Appeals for the Second Circuit addressed the “Related Claims” provision in a Directors and Officers liability insurance policy issued by Federal Insurance Company (Federal). The Federal policy defined “Related Claims” as all claims for wrongful acts “based upon, arising from, or in consequence of the same or related facts, circumstances, transactions or events or the same or related series of facts, circumstances, situations, transactions or events.”
In 2008, Plumbers Union filed a complaint against Nomura Holdings America, Inc. (Nomura) for Violation of Section 11, 12(a)(2) and 15 of the Securities Act (the Plumbers Union Action). Five lawsuits were subsequently filed against Nomura in 2011 and 2012. In each of the six lawsuits, the plaintiffs alleged that they invested in reliance on certain misstatements in the offering documents and registration statements filed in connection with various Residential Mortgage-Backed Securities (RMBS) offerings between 2005 and 2007.
The Second Circuit rejected Nomura’s argument that the lawsuits should be distinguished based upon the existence of different plaintiffs, different defendants, different offerings, and different mortgage pools. The Second Circuit noted that based on the policy language, the relevant inquiry is not whether the lawsuits “arise from common facts” but rather whether the underlying claims are “based upon, arising from, or in consequence of the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events.” The Second Circuit held that a “side-by-side review of the underlying claims” demonstrates that the lawsuits are “Related Claims.”
Fourth Circuit: Miller v. CNA
On December 30, 2015, in W.C. and A.N. Miller Development Company v. Continental Casualty Company (no. 14-2327), the United States Court of Appeals for the Fourth Circuit addressed the same issue in connection with a Directors and Officers liability insurance policy issued by Continental Casualty Company (CNA). The CNA policy defined “Interrelated Wrongful Acts” as “any wrongful acts which are logically or causally connected by reason or any common fact, circumstance, situation, transaction or event.”
In 2006, a bankruptcy trustee filed an adversary proceeding against Edward Miller (Miller). The 2006 Adversary Proceeding alleged that Miller engaged in a conspiracy to deny International Benefits Group (IBG) a $3 million finder’s fee under a contract pursuant to which IBG agreed to provide Haymount Limited Partnership (HLP) with financing for a real estate development project. In 2010, the same bankruptcy trustee filed a lawsuit against Miller to recover and collect the judgment entered against Miller in the 2006 Adversary Proceeding.
Analyzing the complaints side-by-side, the Fourth Circuit held that the 2006 and 2010 lawsuits share as a common nexus “an alleged scheme involving the same claimant, the same fee commission, the same contract, and the same real estate transaction.” The court noted that absent Haymount’s breach of its contract and other alleged torts, IBG would not have sued for damages in 2006, nor would it have sued for enforcement of the 2006 judgment in 2010. The Fourth Circuit rejected Miller’s argument that the allegations in the two lawsuits allege merely a “common motive.”
Ninth Circuit: Previti v. National Union
Most recently, on January 22, 2016, in Previti v. National Union Fire Insurance Company of Pittsburgh, PA (no. 13-56368), the United States Court of Appeals for the Ninth Circuit addressed the “Related Wrongful Acts” provision in a Directors and Officers liability insurance policy issued by National Union Fire Insurance Company of Pittsburgh (National Union). The National Union policy defined “Related Wrongful Acts” as wrongful acts which are the “same, related or continuous,” or wrongful acts which “arise from a common nucleus of facts.”
In November 2008, the insureds (the Previti Parties) sent National Union a copy of a motion for entry or order converting Chapter 11 bankruptcy cases to Chapter 7 (the Conversion Motion), which alleged preferential and fraudulent transfers of money from the debtor companies to non-debtor affiliates. After the Chapter 7 trustee filed a lawsuit on May 12, 2009, the Previti Parties submitted a claim under the 2007-2009 policy, and National Union agreed to advance defense costs. Twenty-seven lawsuits were subsequently filed against the Previti Parties alleging: (1) that the Previti Parties misrepresented the financial condition of companies (the Empire Companies) they controlled in order to lure individuals into investing in a limited liability company; and (2) that the Empire Companies made improper transfers to other companies in which the Previti Parties owned a majority of voting securities. The Previti Parties argued that these subsequent lawsuits triggered coverage under later policy years.
The Central District of California granted partial summary judgment for National Union, rejecting the Previti Parties’ argument that the actions are unrelated because they “allege various claims against numerous different parties.” The Previti Parties appealed to the Ninth Circuit, arguing that the District Court construed the term “Related Wrongful Acts” over broadly. The Ninth Circuit disagreed, noting that the Previti Parties’ argument “is foreclosed by the unambiguous language of the contract.” The Ninth Circuit held that the term “Related Wrongful Acts” “encompasses a broad range of acts clearly extending to all the Underlying Actions.”
Rather than substituting its own standard, these decisions suggest that courts are increasingly deferring to the plain language of the broad “Related Claims” provisions. The cases reinforce the fact that claims do not have to be identical in order to be deemed “related” under the broad “Related Claims” language, and do not have to share identical parties or causes of action – in most cases, they need only to arise out of related facts, circumstances, transactions or events. Although these cases will still necessarily hinge on the specific facts and policy language at issue, at the very least insurers and policyholders alike can find some consistency in this “plain language” approach.
For more information, please contact Greg Steinberg (212.714.3066; firstname.lastname@example.org) or any member of our Insurance Coverage Group.
 Fin. Indust. Corp. v. XL Specialty Ins. Co., No. 07-1059, WL 795529, at *2 (Tex. Mar. 27, 2009)