The United States District Court for the District of Delaware has held that, where the matters at issue in securities litigation and attendant claims plausibly did not “arise out of” the matters underlying a notice of circumstances tendered under a prior policy, the court could not conclude as a matter of law on a motion to dismiss that a prior notice exclusion barred coverage. AmTrust Fin. Servs., Inc. v. Liberty Ins. Underwriters Inc., 2022 WL 980299 (D. Del. Mar. 31, 2022).
The insured, a property and casualty insurance holding company, sought coverage under its D&O insurance program for securities litigation, derivative litigation, and an SEC investigation (the “2017 matters”) arising out of changes to its accounting policies (involving warranties and bonuses) in 2017, which resulted in it restating its financials. Among other things, plaintiffs in the underlying securities litigation alleged that the insured knew that it was improperly accounting for bonuses because, in December 2014, an investment adviser questioned its accounting practices in a public letter.
An excess insurer denied coverage for the 2017 matters on the basis that a prior notice exclusion – applicable to a Claim “arising out of any circumstances of which notice has been given under any directors and officers liability insurance policy in force prior to” September 30, 2016 – applied to bar coverage. The insurer moved to dismiss the ensuing coverage litigation filed against it on the basis of the prior notice exclusion because the insured had provided notice of the investment advisor’s public letter to its insurers in 2015.
The court denied the insurer’s motion to dismiss, “declin[ing] to conclude as a matter of law at this stage of the proceedings that the exclusion bars coverage.” According to the court, the record “suggests a plausible claim” that the 2017 matters and the investment advisor’s letter that had been the subject of the insured’s 2015 notice of circumstances did not “aris[e] out of” the same circumstances. In particular, the court noted that the 2017 matters (1) were not instituted until after the insured’s restatement of financials, “which occurred years after” the investment advisor’s letter; and (2) “assert different legal claims regarding different alleged misrepresentations” than those set forth in the investment advisor’s letter. The court continued: “And no one has suggested that the [investment advisor’s] letter somehow initiated a chain of events that led to [the] 2017 restatement or to the SEC Investigation.” According to the court, “[t]he mere mention of the [investment advisor’s] letter in the later pleadings does not mean that they all arise from the same circumstances.”