Some “D&O policies” (Directors and Officers liability policies) exclude claims for losses “arising out of” the prior wrongful acts of officers or directors. The Eleventh Circuit recently interpreted the phrase “arising out of” broadly, finding that it is not a difficult standard to meet. Zucker for BankUnited Financial Corp. v. U.S. Specialty Insurance Co., -- F.3d -- ,  2017 WL 2115414, *7 (2017) (determining that under Florida law “‘arising out of’ . . . has a broad meaning even when used in a policy exclusion”); but see Brown v. American Intern. Group, Inc., 339 F. Supp. 336, 346 (D. Mass. 2004) (collecting cases in support of its holding that “arising out of” should be “more strictly interpreted when used to define exclusions from coverage.”). In Zucker, the Chapter 11 bankruptcy trustee filed an action against the debtor bank’s D&O insurer for its failure to pay claims related to fraudulent transfers that occurred during the policy period.

By way of background, in 2008, after some investigation and the collapse of the financial market, BankUnited Financial Corporation (“BankUnited”) and its subsidiary BankUnited, FSB (the “Subsidiary”) admitted to engaging in “unsafe and unsound practices,” including risky subprime lending. Unsurprisingly, these practices rendered both banks insolvent. Notwithstanding these admissions, in November 10, 2008, BankUnited obtained a D&O Policy with a Prior Acts Exclusion, opting to forego the higher premium policy without the exclusion.

In early 2009, while still insolvent, BankUnited’s officers approved $46 million in transfers to the Subsidiary bank (“Transfers”). In May of 2009, the Subsidiary was seized by the FDIC and BankUnited filed for Chapter 11 bankruptcy protection. The bankruptcy trustee sued the officers for, among other things, breach of fiduciary duties for authorizing the Transfers. The trustee alleged that the Transfers were in violation of Florida’s Uniform Fraudulent Transfers Act (“UFTA”) in part because they were made while BankUnited was insolvent. The claims were tendered to and denied by the D&O insurer. The officers and trustee entered into a settlement agreement, assigning the officers’ insurance claims to the trustee.

In Zucker, the trustee alleged that the insurer was liable under the D&O policy because the Transfers, or wrongful acts, were made after the policy date. The court disagreed. Interpreting “arising out of” broadly, the court determined that the officers committed multiple wrongful acts prior to the policy date that rendered BankUnited insolvent. Although the Transfers occurred during the policy period, the court held that Transfers were only fraudulent under the UFTA because BankUnited was insolvent at the time, and the insolvency was a result of the prior wrongful acts of the officers.

The court was particularly bothered by BankUnited’s “economical” decision to forego a policy without the Prior Acts Exclusion while aware of its insolvency. Although not all courts will interpret “arising out of” as broadly as the Eleventh Circuit, as a precaution, when a company is insolvent or is on the verge of insolvency, the company should, in the very least, pay the higher premium to obtain stronger protection for the acts of its officers and directors.