A Minnesota federal court has held that a prior acts exclusion bars coverage for claims involving wrongful acts that occurred both before and after the applicable prior acts date because the wrongful acts arose from the “same nucleus” of facts. Tile Shop Holdings, Inc. v. Allied World Nat’l Assurance Co., 2019 WL 2357044 (D. Minn. June 4, 2019).
The insured company and its directors and officers were sued in securities and derivative actions for allegedly failing to disclose related-party transactions in registration statements and subsequent filings. The insureds sought coverage under their D&O policies. An excess insurer denied coverage based on an exclusion for “Loss in connection with any claim alleging, arising out of, based upon, or attributable to any wrongful act(s) committed, attempted, or allegedly committed or attempted prior to August 20, 2012.” The related-party transactions and initial registration filings were made before that date, but the claims also alleged that certain actionable misstatements were made afterwards.
In the ensuing coverage litigation, the court ruled for the insurer, concluding that the prior acts exclusion applied. The court observed that while the lawsuits included conduct from after the prior acts date, they arose from the “same nucleus” of wrongful conduct as the alleged violations from before the prior acts date, namely the related party transactions and the initial registration filings. The court explained that the terms “based upon, or attributable to” and “any” in the prior acts exclusion emphasized the breadth of the exclusion for any claim involving conduct before the prior acts date.
The court also rejected the insureds’ argument that, as a newly formed corporate entity, the insured company could not have committed a wrongful act before the prior acts date (i.e., before it had legal existence). They further argued that the company’s executives and officers could not be connected to prior wrongful acts because, before the prior acts date, they were instead executives of the insured’s pre-registration alter ego. The court reasoned that the executive who signed the documents represented both the insured company and its pre-registration alter ego, and that the pre-registration alter ego was also a “Subsidiary” of the named insured as defined in the policy. The court also observed that “[n]othing about the definitions of Organization, Subsidiary, or Executive prevents exclusion of wrongful acts by entities and persons who later become the Insureds.”