The United States District Court for the Southern District of New York recently broadly applied a so-called "prior and pending litigation" exclusion to limit coverage for the settlement of a lawsuit, finding that many of the lawsuit's allegations overlapped with allegations made in a lawsuit filed prior to the inception of the policy. Pereira et al. v. National Union Fire Insurance Co., et. al., No. 04-CV-1134 (Sept. 5, 2007). Such exclusions are intended to avoid providing coverage for an existing or previously-litigated dispute involving the insured. Interestingly, the court did not deny coverage for the entire settlement, but rather held that each itemized judgment amount in the settlement constituted a "separate 'loss' in connection with [a] claim" and denied coverage only as to the specific elements of the settlement that overlapped with the allegations in the prior litigation.

In the case, certain D&O insurers asserted that the facts in the lawsuit noticed under the policy were so similar to those alleged in a litigation commenced prior to the policy inception that the prior and pending litigation exclusion clearly and unambiguously excluded coverage for the settlement of the lawsuit. The insured argued to the contrary.

The court compared the the facts underlying the various components of the settlement to the facts alleged in the lawsuit filed prior to the inception of the policy. The court found that some of the largest losses in the settlement clearly overlapped with the allegations in the prior litigation and denied coverage for those losses. However, the court also ruled that there were issues of fact as to whether some elements of the settlement were excluded by the prior and pending litigation exclusion.

Although in this instance the court was able to attribute a monetary value to each of the non-covered components to the settlement, this application of the prior and pending litigation exclusion may create some confusion under different circumstances. For instance, it is unclear how the court would allocate defense expenses if it found that only certain components of a lawsuit were barred by the prior and pending litigation exclusion. Furthermore, some settlements may be difficult to allocate if the bases for the damage award are not itemized in the final judgment, as was the case here.

A full copy of the court's decision can be found here.