Applying Texas law, a federal district court has held that an insurer breached its policy by denying coverage for two lawsuits filed after the policy period on the basis that they were not related to an earlier lawsuit. Nobilis Health Corp. v. Great American Ins. Co., 2018 WL 4810840 (S.D. Tex. Oct. 4, 2018). The court found that even if the Wrongful Acts alleged in the three lawsuits were not identical, they were at least Related Wrongful Acts, and the lawsuits therefore constituted a single claim made during the policy period.
During the policy period, the insured healthcare corporation faced securities class action litigation after an anonymous “Seeking Alpha” article queried whether the stock was overvalued. The lawsuit accused the company and its officers of making false and misleading statements or omissions about its 2014 financial metrics, among other things. The company subsequently restated its financials for 2014 and parts of 2015. After the policy period expired, shareholders filed two additional securities lawsuits based on the company’s incorrect and subsequently restated financials. The insurer denied coverage for the later lawsuits as insufficiently related to the first suit to be deemed made during the policy period. The company sued the insurer.
The court first rejected the insurer’s argument that the “eight corners” rule precluded consideration of the original lawsuit. The court held that the rule applied to an insurer’s duty to defend and not a duty to advance defense expenses. The court also reasoned that the “eight corners” rule should not apply in the related claims context.
The court then held that the three lawsuits involved “Related Wrongful Acts,” defined as Wrongful Acts that “are logically or causally connected by reason of any common fact, circumstance, situation, transaction, casualty, event or decision.” The court found that even if the Wrongful Acts in the lawsuits were not identical, they were at least “related.” Specifically, all of the lawsuits concerned misstatements in the company’s 2014 financials about “key financial information” and had overlapping class periods. Accordingly, the court rejected the insurer’s arguments as focusing on “minute differences” in the three complaints.