Directors and officers (D&O) liability insurance provides liability coverage to the directors or officers of a company, or to the company itself. D&O policies generally afford coverage for a claim that is first made during the policy period and reported to the insurer in accordance with policy terms. Such “claims-made” coverage differs from occurrence-based policies, which generally provide coverage for incidents that occur during a policy period. As the Seventh Circuit recently commented, “The purpose of a claims-made policy is to allow the insurance company to easily identify risks, allowing it to know in advance the extent of its claims exposure and compute its premiums with greater certainty.”
D&O insurance policies also generally provide that two or more claims that are related will be deemed to have been first made on the date that the earliest claim was made. This can have a significant impact on the coverage available to the insured and has spurred substantial litigation between insurance companies and insureds. But what exactly does it mean for two or more claims to be related?
Related Claims under D&O Insurance Policies
D&O policies generally provide coverage for a claim that is first made during the policy period that alleges a wrongful act against an insured. D&O policies also require the claim be reported to the insurance carrier in accordance with the terms of the policy. D&O policies generally define the term “wrongful act” to mean “any actual or alleged act, error, misstatement, misleading statement, breach of duty, or omission” by an insured corporation or by an insured individual as a director or officer of the insured corporation.
D&O policies often include a provision stating that two or more claims that allege related wrongful acts will be treated as a single claim under the policy, having been deemed first made on the date that the earliest claim was made. This decision—whether two or more claims are related for purposes of a related-claims provision—can have a significant impact on the coverage afforded for an underlying claim. For example, an insurer may argue that the provision bars coverage for a claim that was filed during the relevant policy period but relates back to an earlier filed lawsuit. Conversely, an insured may argue that two or more claims are related to avoid paying multiple retentions or to avoid reporting a claim under the insured’s current policy to prevent an increase in insurance premiums. Therefore, this issue frequently arises in coverage disputes and has resulted in substantial case law.
The First Solar Decision
In First Solar, Inc. v. Nat’l Union First Ins. Co, the Delaware Supreme Court examined whether two class-action lawsuits filed by shareholders of First Solar were related. The first lawsuit, filed in March 2012, alleged that First Solar violated federal securities laws by making false or misleading public disclosures. The lawsuit alleged, among other things, that First Solar misrepresented its ability to reduce manufacturing costs for solar panels and misrepresented the extent of manufacturing and design defects in its solar modules. First Solar reported the lawsuit to its insurer, National Union, which provided coverage for the lawsuit under a D&O insurance policy in effect for the 2011-2012 policy year. The insured ultimately exhausted the limits of the policy because of costs incurred in the first lawsuit.
While the first lawsuit was pending, shareholders who had opted out of that first lawsuit filed a separate lawsuit against First Solar in June 2015, alleging violations of the same federal securities action as the first lawsuit. The lawsuit also asserted claims for violations of Arizona statutes and claims for fraud and negligent misrepresentation. At the time the second lawsuit was filed, First Solar had also had a “claims made” D&O policy also in effect with National Union for the 2014-2015 policy year.
The 2014-2015 policy did not afford coverage for related claims that were first made prior to the policy period. The phrase “related claims” was defined as “any claim alleging, arising out of, based upon or attributable to any facts or wrongful acts that are the same as or related to those that were…alleged in a claim made against an insured.” The insured reported the second lawsuit to National Union, which filed a complaint seeking a declaratory judgment that the related-claims provision excluded coverage for the second lawsuit.
The trial court, relying on prior Delaware case law, held that a complaint is related to a previous complaint if the claims are fundamentally identical, which, according to the court, required the same subject and common facts, circumstances, transactions, events, and decisions. The trial court held that the two lawsuits had “substantial similarities” and were “fundamentally identical,” such that the related-claims provision excluded coverage for the later filed lawsuit.
Although the Delaware Supreme Court ultimately affirmed the trial court’s decision, it disagreed with the trial court’s analysis, noting that the use of the “fundamentally identical” standard disregarded the plain language of the insurance policy. First, the court noted that neither Delaware nor any other court had adopted “fundamental identity” as the standard governing relatedness inquiries, regardless of the contractual language. Following the principle that Delaware courts interpret contract terms according to their plain, ordinary meaning, the court held that “whether a claim relates back to an earlier claim is decided by the language of the policy, not a generic ‘fundamentally identical’ standard.” Applying the plain language of the insurance policy, the court found that the two lawsuits were related because the “[a]ctions involve[d] the same subject, as well as common facts, circumstances, transactions, events, [and] decisions,” and thus held that the related-claims provision precluded coverage for the second lawsuit.
Treatment of Related-Claims Issues
Given that the First Solar case was decided in March 2022, there has been limited case law applying the court’s holding. However, in Seritage Growth Props., L.P. v. Endurance Am. Ins. Co., the Delaware Superior Court applied the Supreme Court’s holding to find that a later-filed action by unsecured creditors of Sears in a bankruptcy proceeding was related to an earlier lawsuit filed by shareholders of the company for purposes of a related-claims provision in a D&O policy. While both actions involved different parties and asserted different causes of action, the two actions were both premised on the same transaction involving the insured’s purchase of numerous properties from Sears.
Relying on First Solar, the Superior Court noted that the policy language controlled whether the two claims were related for purposes of the provision. The court also noted that the related-claims provision required the court “to primarily focus on the similarities between the underlying facts for the related claims—not on the parties involved or the type of claims involved.” The court ruled that the two lawsuits were based on the same wrongful conduct and, thus, were related for purposes of the related-claims provision. Conversely, in Amtrust Fin. Servs. v. Liberty Ins. Underwriters Inc., the Delaware Superior Court applied the holding in First Solar to find that two lawsuits were not related as the record did not “suggest a meaningful linkage” between the two actions.
What to Do if Related-Claims Issues Arise
Recent developments in Delaware case law clarify that whether two or more claims are related under a D&O policy for purposes of a related-claims provision depends on the language of the policy and the allegations of the underlying claim. Therefore, it is essential that insurers and claims handlers be cognizant of related-claims provisions in D&O policies and assess whether there are any prior claims submitted by the insured that may constitute a related claim.