New York to D&O Insureds: “You Can’t Relate!” without Sufficient Factual Overlap

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In Glascoff v. OneBeacon Midwest Ins. Co., 2014 WL 1876984 (S.D.N.Y. May 8, 2014), the U.S. District Court for the Southern District of New York held that two claims – which seemingly contained allegations concerning deficient corporate structure, and lack of board oversight – did not share a sufficient factual nexus to be considered Interrelated Wrongful Acts to allow coverage for the second claim that was made post-policy period. The decision, which references several New York decisions on related claims, likely will make it more difficult to argue that claims are related absent specific factual circumstances common to both matters.

The claims were submitted by the former board of directors (the “Board”) of the insured, Park Avenue Bank (“PAB”), which was closed by state banking authorities and placed into receivership with the Federal Deposit Insurance Corporation (“FDIC”). Shortly after PAB’s closure, Charles Antonucci (“Antonucci”), PAB’s president, chief executive and a director, was arrested and charged with defrauding a federal bank bailout program and for self-dealing with PAB funds.

The initial claim, made during the policy period, involved FDIC demands against the Board alleging breach of fiduciary duty, negligence and gross negligence in connection with the failure of PAB (the “FDIC Claim”). The FDIC primarily alleged that the Board failed to supervise and conduct PAB’s business, and ensure compliance with banking regulations, focusing on PAB’s deficient internal and underwriting controls. The FDIC also generally asserted that the Board failed to act on allegations of improper conduct by Antonucci, which caused harm to the bank. PAB’s insurer, OneBeacon Midwest Insurance Co. (“One Beacon”), accepted the FDIC Claim for coverage under the D&O Policy (the “Policy”).

The second claim, made two years after the FDIC Claim and post-policy period, involved a lawsuit brought by investors under state securities laws, and sought control person liability against the Board and Antonucci (the “Securities Claim”). Plaintiffs alleged that Antonucci made false statements, misrepresentations, and omissions in inducing them to invest with PAB customers; however, the investments were used to fund Antonucci’s self-dealing. The Securities Claim also alleged “lax corporate oversight” by the Board, and PAB’s lack of “sound corporate governance.”

Following submission under the Policy, OneBeacon rejected the Board’s attempts to argue that the Securities Claim and FDIC Claim involved “Interrelated Wrongful Acts,” and denied coverage for the Securities Claim as made outside the policy period. In response, the Board initiated a suit against OneBeacon.

The District Court found that the relevant policy provisions were unambiguous, including the term “Interrelated Wrongful Act,” defined 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.”  In reviewing a wide body of New York case law, the District Court determined that the “factual overlap…is tenuous at best,” and rejected the Board’s attempts to view the claims as arising out of the deficient corporate structure at PAB or the Board’s lack of oversight, finding that the Board’s conclusory allegations of similarity between the matters lacked factual support. The District Court noted that claims could theoretically have a sufficient factual nexus even though they involved different aggrieved parties and varied theories of liability, however, it ultimately held that there was not an adequate overlay here between the wrongful acts alleged in the two matters to consider them interrelated, and a single claim made during the policy period.

 

Published In: Civil Procedure Updates, General Business Updates, Finance & Banking Updates, Insurance Updates, Securities Updates

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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