A federal court in Virginia recently held that a directors and officers liability insurer owed no coverage for a bank’s underlying lawsuit against an insured officer alleging that the officer engaged in a fraudulent conveyance to avoid paying debts to a bank after defaulting on loans. Lessard v. Continental Casualty Co., 2014 WL 4162006 (E.D. Va. Aug. 19, 2014).

After his corporation defaulted on certain loans and confessed judgment in favor of the lender bank, an officer in the corporation allegedly schemed to transfer certain assets from the corporation to avoid the obligation.  The bank sued the officer, and he reported the claim to the corporation’s directors and officers liability insurer, who defended and contributed towards a settlement reached between the insured and the bank.  After the settlement, the insured reported the claim to his current insurer, seeking to recover defense costs and amounts paid in settlement.  The insurer denied coverage, and the insured sued.  The insurer removed the case and moved for summary judgment.

Granting the insurer’s motion for summary judgment, the court held that there was no coverage for the bank’s lawsuit because the claim against the officer was made prior to the policy period, as evidenced by the notice provided to the prior insurer and the settlement reached prior to the insured providing notice to the current insurer.  The court rejected the insured’s arguments that pre-lawsuit demands were separate claims from the lawsuit, as the policy specifically required that interrelated wrongful acts would be treated as a single claim.  The court further held that the insured’s claims were not a “loss” as defined by the policy and were excluded by the policy’s prior notice exclusion and otherwise were not covered due to the insured’s failure to give timely notice and failure to secure the insurer’s consent prior to engaging in settlement negotiations