The United States Court of Appeals for the Eleventh Circuit recently held that a D&O policy’s so-called "Prior Litigation" Exclusion barred coverage for a shareholder derivative action because it was “in any way related” to litigation pending prior to the Prior Litigation Date specified in the policy.  HR Acquisition Corporation I v. Twin City Fire Insurance Company, No. 08-10135 (December 3, 2008).

The insured sought coverage under its D&O policy for defense costs incurred in defending a shareholder derivative action.  The insurer denied coverage on the ground that the claim was excluded from coverage by the policy’s Prior Ltigation Exclusion, which excluded from coverage any Loss in connection with any Claim made against the insured “based upon, arising from, or in any way related to any demand, suit, or other proceeding against any Insured which was pending on or existed prior to the applicable Prior Litigation Date . . . or the same or substantially the same facts, circumstances or allegations which are the subject of or the basis for such demand, suit, or other proceeding.”  In particular, the insurer took the position that the shareholder derivative action was “in any way related to” a qui tam action filed prior to the policy’s specified Prior Litigation Date.

After the insured filed suit, the district court denied the insurer’s motion for summary judgment based on the Prior Litigation Exclusion.  The Eleventh Circuit reversed, holding that the shareholder derivative action was indeed “related to” the qui tam action.

In reaching this conclusion, the court characterized the preamble language to Twin City's Prior Litigation Exclusion as “very broad,” and reasoned that the shareholder derivative and qui tam actions’ common allegations of a “scheme to purchase real estate from HealthSouth and then [to lease] it back to HealthSouth at artificially high price” met the low standards of the “in any way related” language of the Prior Litigation Exclusion.  Further, the court found that the fact that the two actions did not arise from the same specific transaction and involved different plaintiffs and theories of recovery was immaterial to the issue whether they were “in any way related.”

The court further held that the qui tam action, which was filed prior to the Prior Litigation Date but not served until after that date, was “pending” or “existing” within the meaning of the Prior Litigation Exclusion.  The court reasoned that an action is “pending” or “existing,” though not served upon the insured, where the complaint was filed in a court of competent jurisdiction before the Prior Litigation Date and named the insured as a defendant.  Therefore, the fact that the plaintiff failed to serve a copy of the summons and complaint on the insured until after the Prior Litigation Date did not affect whether the qui tam action was “pending” or “existing.”

For a full copy of the opinion, please click here.