In W.C. and A.N. Miller Development Company v. Continental Casualty Company, No. GHJ-14-00425, 2014 WL 5812316 (D. Md. Nov. 7, 2014), the US District Court for the District of Maryland held that an insurer owed no duty to defend under a claims-made policy where the claim qualified as an “Interrelated Wrongful Act” and the initial claim pre-dated the policy period. The court granted judgment on the pleadings for the insurer and denied the policyholder’s motion for summary judgment.
Haymount Limited Partnership (HLP), a covered subsidiary of the policyholder, W.C. and A.N. Miller Development Company, had executed a contract with International Benefits Group (IBG) in which IBG had agreed to assist HLP in obtaining financing for a development project. Id. at *1. In return, HLP was to pay IBG a $3 million finder’s fee if it successfully obtained a loan from a lender IBG introduced to it. Id. HLP subsequently obtained funding but refused to pay IBG the finder’s fee. Id. IBG went bankrupt, and in 2006, the bankruptcy trustee initiated an adversary proceeding in bankruptcy court against HLP (and related parties), which ultimately resulted in an award of over $4 million. Id.
By 2010, HLP had not paid the award, and the bankruptcy trustee filed a lawsuit in New Jersey federal court, alleging that HLP and other defendants had taken fraudulent actions to transfer assets to make them unable to satisfy the judgment from the 2006 proceeding. Id. at *2. The policyholder tendered its defense to its insurer, Continental Casualty Company (Continental). Id.
Continental’s policy provided claims-made coverage and defined “Interrelated Wrongful Acts” as a single Claim. Id. Specifically, it stated that “more than one Claim involving . . . Interrelated Wrongful Acts shall be considered one Claim which shall be deemed made on . . . the date on which the earliest such Claim was first made.” Id. (citing policy language). The policy further defined “Interrelated Wrongful Acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.” Id.(citing policy language).
Continental denied coverage on the ground that the “Claim” that was the subject of the 2010 lawsuit was first made with respect to the 2006 proceeding, and therefore the trigger for coverage predated the policy period under the terms of the policy’s “Interrelated Wrongful Acts” provision. Id.
In arguing that the policy afforded coverage for the 2010 lawsuit, the policyholder first argued that the claims could not be interrelated because the 2006 proceeding could not have been covered by the policy. Id. at *4. Because a breach of contract action, like the 2006 proceeding, was not covered by the policy, the policyholder asserted that there was no prior wrongful act to carryover. Id. The court quickly rejected this preliminary argument, explaining that a “Claim” need not be covered by the policy to form the basis for an “Interrelated Wrongful Act” and that, under the terms of the policy, the 2006 proceeding would fall into the definition of a “Claim.” Id.
Having established that each legal proceeding constituted a “Claim” under the policy, the court turned to the question of whether the claims were interrelated. Id. at *5. The court found, notwithstanding the existence of several differences between the claims, that the claims were sufficiently related: they involved the same claimant, the same finder’s fee commission, the same contract, and the same real estate transaction. Id. at *6-7. The court then found the requisite logical or causal connection between the two proceedings based on the fact that, had the judgment from the 2006 proceeding been paid, the 2010 lawsuit would not have been filed. Id. at *7. As a result, the court treated the two suits as a single claim under the policy and found no duty to defend where the first suit pre-dated the policy period. Id. at * 8.
This case is a reminder that, under a claims-made policy, an interrelated wrongful acts provision may prevent the triggering of any defense obligations where the initial claim pre-dates the policy period.