Run-Off Endorsement Bars Coverage for “False Filings” Made in Connection with Construction Projects for State Agencies

Wiley Rein LLP

Applying New York law, a New York state trial court granted an insurer’s motion for summary judgment where an insured sought coverage under a private company D&O policy for a settlement it had paid for fraudulent filings for state construction projects that were made after the policy’s run-off date. WDF Inc. v. Zurich Am. Ins. Co., 2020 WL 5801072 (N.Y. Sup. Ct., N.Y. Cnty. Sept. 29, 2020).

The insured was a contractor that worked on numerous construction projects for the New York Port Authority and the New York City Department of Environmental Protection. As part of those projects, the insured was required to make efforts to retain and pay minority and women-owned business enterprises (MWBEs), and had to submit periodic reports to the contracting agency specifying the amount of money it had paid to those MWBEs.

In 2013, the New York District Attorney and Port Authority Inspector General began an investigation concerning allegations that the company had made “false filings” about the MWBEs and that the insured had received approximately $7 million in WBE credits on those projects. After settling for $4 million, the insured notified its insurer, which refused to cover the settlement.

In the ensuing coverage litigation, the insurer filed a motion for summary judgment, arguing that the policy’s run-off endorsement did not provide coverage for loss in connection with any claim “based upon, arising out of, or attributable to any Wrongful Acts where all or part of such acts were committed, attempted, or allegedly committed or attempted subsequent to 07/01/2011” because nearly all of the “false filings” were made after that date. The court sided with the insurer, noting that the false filings made by the company (and not the claim itself) were “wrongful acts” and that over 200 false filings were made after the run-off date, such that the policy’s run-off endorsement applied. The court noted that even if only one “false filing” had been made after the run-off date, the endorsement still would bar coverage for the entire claim.

The court also rejected the insured’s argument that coverage should be allocated between the false filings made before the run-off date and those made after it. The court determined that “the clear language of [the endorsement] precludes that outcome as a matter of law, and negates the ability to have both covered and uncovered matters based on the date of the Wrongful Acts. [The endorsement] clearly states that no coverage exists for any ‘Claim’ where all or any part of the Wrongful Acts were committed, attempted or allegedly committed or attempted subsequent to July 1, 2011. [It] thus eliminates any possibility that a Claim with Wrongful Acts both before and after July 1, 2011 can be a ‘mixed action.’ As soon as there are Wrongful Acts that cross that threshold date, the entire Claim becomes uncovered.”

The court also rejected the insured’s contention that the policy’s Inconsistency Endorsement applied. That endorsement required that where multiple endorsements or policy terms were inconsistent, the terms most favorable to the insured would control. The court concluded that the insured’s contention was “based on [a] flawed premise that the [] Claim is a ‘mixed action,’” and the run-off endorsement was “inconsistent” with the policy’s other provisions only “in the manner that every exclusion in an insurance policy is inconsistent with the grant of coverage.”

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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