In Rivelli v Twin City Fire Insurance Co, the plaintiffs, who were directors or officers at Fischer Imaging Co. (Fischer), sought to compel their excess D&O insurer, Twin City Fire Insurance Co. (Twin City), to advance costs to defend against an SEC civil enforcement action alleging securities fraud. The plaintiffs had already exhausted all other primary and excess D&O coverage in two previous shareholder lawsuits. In order to obtain the excess coverage at issue, Fischer supplied Twin City with a warranty letter, signed by the CEO, containing a “prior knowledge” exclusion, which stated that no person or entity to be covered “has any knowledge or information of any act, error, omission, fact or circumstance which may give rise to a claim which may fall within the scope of the proposed insurance.” Notably, this letter did not include a severability provision, so that one insured’s alleged knowledge or information would bar coverage for all insureds.
The SEC’s allegations had described fraudulent actions that took place prior to the CEO signing the warranty letter. Consequently, Twin City refused to advance defense costs. The district court held that the “prior knowledge” exclusion in the letter barred coverage. On appeal, the Tenth Circuit rejected each of the plaintiffs’ six assertions of error, holding, among other things, that the “prior knowledge” exclusion only required that the plaintiffs possessed knowledge or information that could give rise to a claim, not that the plaintiffs had realized that their alleged knowledge or information could give rise to a claim.