Single Lawsuit Comprised of Multiple “Claims”

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The U.S. District Court for the Northern District of California, applying California law, has found that a single lawsuit contains multiple “Claims.”  Stem, Inc. v. Scottsdale Ins. Co., 2021 WL 1736823 (N.D. Cal. May 3, 2021).  The court concluded that no coverage was available for one “Claim” because it constituted a claim first made prior to the policy period but coverage was available for a second “Claim” that did not relate back to the first “Claim.”

The insured, a technology company, sought coverage under its directors and officers policy for a shareholder lawsuit (2017 Lawsuit) based on a 2013 stock financing round (2013 Stock Financing) and a 2017 loan to the company by a member of the board of directors (2017 Loan).  The 2017 Lawsuit also contained allegations concerning a 2010 employment dispute involving the termination of the insured’s co-founder (2010 Employment Dispute).  The insurer denied coverage for the 2017 Lawsuit on several grounds, including that the 2017 Lawsuit was a claim first made prior to the policy period, relating back to the 2010 Employment Dispute.

The court concluded that the 2017 Lawsuit consisted of two “Claims.”  The policy defined “Claim” to include “a written demand against any Insured for monetary damages or non-monetary or injunctive relief” and “a civil proceeding against any Insured seeking monetary damages or non-monetary or injunctive relief, commenced by the service of a complaint or similar pleading.”  The court reasoned that the 2017 Lawsuit “asserts causes of action for breach of fiduciary duty, conspiracy, and unjust enrichment based on allegations that the underlying defendants schemed to dilute the underlying plaintiffs’ shares through the [2013 Stock Financing],” and also “asserts a cause of action for breach of fiduciary duty based on allegations that the [2017 Loan] constituted impermissible self-dealing.”  Accordingly, the court concluded that “the causes of action relating to the [2013 Stock Financing] and the [2017 Loan] were separate ‘demand[s] . . . for monetary damages,’ and thus separate Claims” even though the policy also defined “Claim” as a “civil proceeding.”  

The court then concluded that the interrelated wrongful act exclusion barred coverage for the 2013 Stock Financing “Claim” because it was interrelated to the 2010 Employment Dispute, which was a “Claim” made prior to the policy period.  The court also concluded that the prior and pending litigation, breach of application, and insured verses insured exclusions barred coverage for the 2013 Stock Financing “Claim.”  The court found, however, that coverage was available for the 2017 Loan “Claim” because it did not relate back to the 2010 Employment Dispute and no other exclusion applied.

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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