The U.S. Eleventh Circuit Court of Appeals held that a prior acts exclusion unambiguously applied to claims arising out of wrongful acts committed prior to the policy period. Zucker for BankUnited Fin. Corp. v. U.S. Specialty Ins. Co., 856 F.3d 1343 (11th Cir. 2017).

The insured, a bank, was subject to a class action lawsuit based on its alleged violation of federal securities laws due to admittedly “risky lending practices.” During the pending of that lawsuit, the insured applied for a new directors and officers policy. The insurer, apprised of the insured’s financial condition, offered to provide coverage to the insured under one of two policies: (1) a policy including a prior acts exclusion; or (2) a policy without the prior acts exclusion for twice the premium. The insured chose the policy with the prior acts exclusion for the lower premium, and a policy was issued. The insured thereafter filed for bankruptcy protection, and unsecured creditors filed an adversary proceeding against the insured’s former executives based on fraudulent transfer of assets. The executives sought coverage under the directors and officers policy, and the insurer denied coverage based on the prior acts exclusion. The creditors settled their claims with the executives and sued the insurer for breach of contract and bad faith. The court found that the prior acts exclusion barred coverage for the fraudulent transfer claims. The creditors appealed.

The Eleventh Circuit affirmed, holding that the prior acts exclusion unambiguously applied to the fraudulent transfer claims since they arose out of wrongful acts committed prior to the policy period. The creditors argued that the exclusion did not apply because the fraudulent transfers occurred after the policy incepted. However, the Eleventh Circuit found that the fraudulent transfers “arose out of” the insured’s pre-policy misdeeds involving its lending practices. The Eleventh Circuit also rejected the creditors’ argument that coverage was illusory, reasoning that the policy clearly provided coverage for claims arising from wrongful conduct occurring only after the policy’s inception date.