An 11th Circuit decision issued earlier this year serves as a reminder of the importance of carefully evaluating time-based exclusions and retroactive dates when procuring or renewing coverage. Liability policies such as directors’ and officers’, private entity, and professional liability policies provide coverage for claims made and reported during the policy period (or an extended reporting period) regardless of the date of the underlying alleged wrongful act. This coverage is not unlimited, however, and an insurer selling a policy with a Prior Acts Exclusion may well deny coverage for alleged wrongful acts that purportedly “arise out of” even tangentially connected conduct that first happens before the policy’s retroactive date. Insurers will do so even though a reasonable insured would not make any connection between the otherwise covered wrongful acts and prior conduct. In Zucker v. U.S. Specialty Insurance Co., the 11th Circuit endorsed this very approach. The court relied on a broad “Prior Acts Exclusion” combined with a retroactive date to eliminate coverage for actions that occurred after the retroactive date and that led to a claim first brought during the policy period.
Zucker (the bankruptcy plan administrator) alleged that corporate officers fraudulently transferred monies from BankUnited because they transferred the money while the bank was insolvent. The insolvency and the alleged fraudulent transfers occurred during the policy period, and the officers timely submitted their claims for coverage after Zucker sued them for the fraudulent transfers. The insurer denied coverage for the lawsuit on the grounds that the fraudulent transfer claims required the insolvency, and the insolvency resulted from the officers’ mismanagement of the bank before the retroactive date. Using a broad “Related Claims” exclusion, the insurer connected the insolvency with the mismanagement and denied coverage. The 11th Circuit agreed. Broadly construing the phrase “arising out of” in the Prior Acts Exclusion under Florida law, the court described the insolvency as an “essential element” of Zucker’s claim that “has a connection to some wrongful acts” of the officers and directors that “occurred before the policy’s effective date.” The court concluded that the Prior Acts Exclusion barred coverage: “Given that, Zucker’s fraudulent transfer claims do share ‘a connection with’ wrongful acts covered by the Prior Acts Exclusion.” The court noted that the governing Florida law broadly construed “arising out of” to encompass virtually any connection and imposes a standard that “is not difficult to meet.”
Tellingly, the 11th Circuit recounted the bank’s decisions regarding placement of the coverage. When offering the coverage to the bank, the insurer offered a choice between two policies: “one with a Prior Acts Exclusion (barring coverage for losses attributable to conduct of the officers before November 10, 2008) and one without the exclusion.” The premium with the exclusion was $350,000; the premium without the exclusion was $650,000. Although the bank purchased other coverage enhancements and doubled the policy limits, resulting in a final premium at $700,000, the bank’s decision to accept the exclusion proved fatal to coverage.
This case should serve as a stark reminder to policyholders to carefully examine their policies and insurers’ coverage proposals. Policyholders should resist or limit as much as possible any terms designed to restrict the time period relevant to coverage, including Prior Acts Exclusions and retroactive dates. Certain seemingly innocuous terms can result in an unexpected and painful outcome that far overshadows any upfront premium savings.