New York Court Holds Underlying Claims Not Interrelated

by Traub Lieberman Straus & Shrewsberry LLP
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In its recent decision in Glascoff v. OneBeacon Midwest Ins. Co., 2014 U.S. Dist. LEXIS 64858 (S.D.N.Y. May 8, 2014), the United States District Court for the Southern District of New York had occasion to consider the concept of interrelated wrongful acts in the context of a professional liability policy.

OneBeacon insured Park Avenue Bank (“PAB”) under a professional liability policy for the period September 9, 2008 through November 9, 2010. The policy provided insured persons coverage against claims made during the policy period, for wrongful acts. Notably, the policy defined “Wrongful Act” as “any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty by . . . any Insured Person in the discharge of their duties while acting in the capacity as such” and “Interrelated Wrongful Acts” as “Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction or series of related facts, circumstances, situations, events or transactions.” The policy also contained a deemer provision stating that all claims arising out of the same Wrongful Act or Interrelated Wrongful Act would be considered a single claim first made on the date of the earliest claim.

In March 2010, the New York State Department of Banking closed PAB and the company was placed into receivership. On September 1, 2010, the FDIC issued letters to PAB’s directors, asserting claims for breach of duties, negligence and gross negligence based on their respective failures to have ensured PAB’s compliance with applicable laws and regulations. These failures, alleged the FDIC, resulted in losses of approximately $50.7 million. PAB’s directors tendered the FDIC’s claim to OneBeacon and OneBeacon agreed to provide a defense.

In February 2012, an individual filed suit against PAB’s directors based on “lax oversight” and failure to control the company’s former CEO in connection with alleged misstatements regarding an investment opportunity. Notwithstanding the fact that the OneBeacon policy expired in November 2010, PAB’s directors tendered the investor suit for coverage on the theory that it constituted an Interrelated Wrongful Act, and thus should be deemed first made in March 2010, which is when the FDIC claim was first made. OneBeacon denied coverage for the investor suit, prompting coverage litigation.

In considering OneBeacon’s motion to dismiss, the court agreed that the Policy’s definition of Interrelated Wrongful Acts was unambiguous. The question for the court, therefore, was whether the FDIC claim and the investor claim had a “sufficient factual nexus” such that the wrongful acts alleged in the two claims could be considered interrelated. Such an analysis, explained the court, does not require an identity of parties, legal theories, wrongful acts or relief sought. It does, however, require “specific overlapping facts.”

While PAB argued that the claims were interrelated based on common allegations of failure of oversight and deficient corporate structure, the court rejected this argument, as creating too broad a standard for interrelatedness:

Here, Plaintiffs admit the FDIC and Kingsley Claims do not share parties, legal theories, or requests for relief, yet they want this Court to find the two Interrelated Wrongful Acts because both Claims ostensibly relate to Plaintiffs’ oversight of [the former CEO of PAB]. Without more, there simply is not a sufficient factual nexus between the FDIC Claim and the Kingsley Claim. To interpret the two as interrelated “would be to grant the insured more coverage than he bargained for and paid for,” … as it would be hard to envision, given the broad and generalized allegations in the FDIC Claim, how any subsequent claim against Plaintiffs would not be deemed an Interrelated Wrongful Act.

Rather, explained the court, a greater degree of factual commonality was required to demonstrate interrelatedness such that the investor claim made in 2012 should be deemed interrelated to the FDIC claim first made while the policy was in force.

- See more at: http://www.traublieberman.com/insurance-law/2014/0516/4571/#sthash.j7DhUgfo.dpuf

In its recent decision in Glascoff v. OneBeacon Midwest Ins. Co., 2014 U.S. Dist. LEXIS 64858 (S.D.N.Y. May 8, 2014), the United States District Court for the Southern District of New York had occasion to consider the concept of interrelated wrongful acts in the context of a professional liability policy.

OneBeacon insured Park Avenue Bank (“PAB”) under a professional liability policy for the period September 9, 2008 through November 9, 2010. The policy provided insured persons coverage against claims made during the policy period, for wrongful acts. Notably, the policy defined “Wrongful Act” as “any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty by . . . any Insured Person in the discharge of their duties while acting in the capacity as such” and “Interrelated Wrongful Acts” as “Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction or series of related facts, circumstances, situations, events or transactions.” The policy also contained a deemer provision stating that all claims arising out of the same Wrongful Act or Interrelated Wrongful Act would be considered a single claim first made on the date of the earliest claim.

In March 2010, the New York State Department of Banking closed PAB and the company was placed into receivership. On September 1, 2010, the FDIC issued letters to PAB’s directors, asserting claims for breach of duties, negligence and gross negligence based on their respective failures to have ensured PAB’s compliance with applicable laws and regulations. These failures, alleged the FDIC, resulted in losses of approximately $50.7 million. PAB’s directors tendered the FDIC’s claim to OneBeacon and OneBeacon agreed to provide a defense.

In February 2012, an individual filed suit against PAB’s directors based on “lax oversight” and failure to control the company’s former CEO in connection with alleged misstatements regarding an investment opportunity. Notwithstanding the fact that the OneBeacon policy expired in November 2010, PAB’s directors tendered the investor suit for coverage on the theory that it constituted an Interrelated Wrongful Act, and thus should be deemed first made in March 2010, which is when the FDIC claim was first made. OneBeacon denied coverage for the investor suit, prompting coverage litigation.

In considering OneBeacon’s motion to dismiss, the court agreed that the Policy’s definition of Interrelated Wrongful Acts was unambiguous. The question for the court, therefore, was whether the FDIC claim and the investor claim had a “sufficient factual nexus” such that the wrongful acts alleged in the two claims could be considered interrelated. Such an analysis, explained the court, does not require an identity of parties, legal theories, wrongful acts or relief sought. It does, however, require “specific overlapping facts.”

While PAB argued that the claims were interrelated based on common allegations of failure of oversight and deficient corporate structure, the court rejected this argument, as creating too broad a standard for interrelatedness:

Here, Plaintiffs admit the FDIC and Kingsley Claims do not share parties, legal theories, or requests for relief, yet they want this Court to find the two Interrelated Wrongful Acts because both Claims ostensibly relate to Plaintiffs’ oversight of [the former CEO of PAB]. Without more, there simply is not a sufficient factual nexus between the FDIC Claim and the Kingsley Claim. To interpret the two as interrelated “would be to grant the insured more coverage than he bargained for and paid for,” … as it would be hard to envision, given the broad and generalized allegations in the FDIC Claim, how any subsequent claim against Plaintiffs would not be deemed an Interrelated Wrongful Act.

Rather, explained the court, a greater degree of factual commonality was required to demonstrate interrelatedness such that the investor claim made in 2012 should be deemed interrelated to the FDIC claim first made while the policy was in force.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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