Wrongful Acts Alleged in Class Action Based on Corporate Policy Are Not “Related Acts”

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The United States District Court for the Southern District of New York has held that an insurer has a duty to defend its insured’s subsidiary in a class action lawsuit that alleges wrongful conduct that occurred prior to the parent’s acquisition of the subsidiary, rejecting the insurer’s argument that the policies’ “Related Acts” definition precluded coverage. Great Am. Ins. Co. v. AIG Specialty Ins. Co., 2021 WL 1268450 (S.D.N.Y. Apr. 6, 2021).

The insured parent company acquired the defendant real estate brokerage firm on January 1, 2017. In July 2018, a class action was filed against the real estate brokerage firm for representing both buyers and sellers in a single real estate transaction. The class action seeks damages for violations spanning from 2011 to June 10, 2019.

The insurer issued two Specialty Risk Protector Insurance Policies to the parent company that covered wrongful acts, including those committed by a subsidiary actually or allegedly occurring after the parent company acquired the subsidiary, which are defined as “Third Party Events.” The policies stated that “[a]ll Related Acts shall be considered to have occurred at the time the first such Related Act occurred.” Related Acts include all “Third Party Events which are the same, related, or continuous and all . . . Third Party Events which arise from a common nucleus of facts.”

The insurer argued that all of the property sales alleged in the class action constitute “Related Acts” that are deemed to have occurred in 2011, thereby precluding any duty to defend the class action because the parent company did not acquire the subsidiary until 2017. The court rejected the insurer’s argument, holding that the sales that occurred after the acquisitions were not the “same” or “continuous” sales as the pre-acquisition sales. Specifically, the court rejected the insurer’s theory that it could establish that the sales constituted “Related Acts” on the basis that the subsidiary was alleged to have a corporate policy to conceal that it was representing parties on both sides of the transaction. The court opined that the more reasonable construction of the Related Acts term is that only each of the events or activities connected to a single property sale constitutes a Related Act. But, in the court’s view, no sale qualified as a “Related Act” to a separate sale, so the Related Acts definition did not apply.

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