Delaware Rulings Clarify Interpretation of “Related Claims” Provisions in D&D Insurance Policies

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March 10, 2022 — For businesses and their management liability insurers, a pair of recent decisions from a Delaware court provide new insight into a recurring theme. Directors and Officers (D&O) insurance policies generally include provisions establishing that where a claim alleges wrongdoing related to a prior claim, the two cases will be treated as a single claim deemed to have been made for the first time at the when the first of these claims was first made.

The “related claims” provisions can be a minefield for policyholders and insurers, and depending on the context, an insurer may rely on the related claims provision to bar coverage for a claim related to a claim whose insured was notified before the police. period started. An insurer may also attach a claim to a prior policy period where the policy’s liability limits have already been exhausted. On the other hand, an insured can argue that a loss is linked to a previous loss to avoid paying several deductions or deductibles.

It follows that, depending on which side of the argument one takes, the standard that a court will apply when analyzing the relationship can be a crucial factor. This is especially true as the policy language defining related claims and related wrongful acts is generally very broad and nebulous, using terms such as “arising from”, “based on” or “attributable to”.

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In addition to this, different jurisdictions measure relatedness using different standards. For example, courts in Maryland have held that a relationship analysis should focus on the existence of a common “method or modus” or “common pattern”, while courts in New York and Illinois generally apply a “common nexus of facts” or “a sufficient standard of factual nexus” to a related claim analysis. Additionally, Delaware courts have historically applied a “substantially identical” standard, a standard that many consider to be an extremely high hurdle to concluding a bond. However, this tide seems to be turning.

Two recent decisions from the Delaware Superior Court — Sycamore Partners Mgt., LP vs. Endurance Am. Ins. Co.2021 WL 4130631 (Del. Super. Ct. September 10, 2021) and Options Clearing Corp. vs. US Specialties Ins. Co.2021 WL 5577251 (Del. Super. Ct. Nov. 30, 2021) – apparently indicates a change in Delaware’s kinship measurement, which may have significant implications for insurers and their policyholders.

In Sycamore PartnersDelaware Superior Court Judge Abigail LeGrow issued a ruling stating that “neither the Supreme Court of Delaware nor any other jurisdiction has adopted ‘fundamental identity’ as the standard governing all linkage investigations, regardless of regardless of the contractual wording at issue. Indiscriminately applying this type of gloss to otherwise unambiguous language could arguably violate Delaware law requiring this Court to interpret insurance policies based on their plain language…”

In holding that the less stringent “significant connection” test should be applied, Justice LeGrow held that when interpreting insurance policies, like any contract, “Delaware trial courts have been instructed to analyze contracts using a plain language framework based on general principles of interpretation.”

The policies involved in Sycamore Partners define “interrelated acts” as follows: “unlawful acts which are based on, arise from, result directly or indirectly from, are the consequence of or in any way involve facts, circumstances, situations, operations or events. “

Justice LeGrow noted that the Delaware Supreme Court had previously “defined ‘originating from’ to mean ‘significant connection'” and, in doing so, “also approved a number of synonyms, including ‘originating from’, ‘ originating in, ‘originating from’ and ‘arising from'”. Extrapolating from “this textual paradigm”, and since “the parties showed no other textual intention”, Justice LeGrow concluded that “the expressions ‘as a result of’ and ‘in any way involve’ shall also mean, in this context, resulting from a significant connection or sharing such a connection.

Despite applying the “significant connection” test, which Justice LeGrow said “goes broader than the insured’s preferred test,” the court nonetheless found that the two claims in this case were unrelated. since they “involved different allegations and different wrongdoings” against different parties. And the wrongdoing alleged in the later-noted claim did not stem from the alleged theories or facts disputed by the earlier claim.

Based on its decision in Sycamore Partnersin September 2021, Justice LeGrow issued a November 2021 decision in Options Clearing Corp. vs. US Specialties Ins. Co.rejecting the “fundamentally identical” standard on the grounds that such a standard was not “based on policy language”.

In Option clearingU.S. Specialty had denied coverage based on the policy’s “event exclusion,” which excluded coverage for “a claim arising out of, based on, or attributable to: … any interrelated wrongful act,” as well as “the ‘notice exclusion’ of this insurance policy. which prohibited coverage of a claim “arising out of, based upon or attributable to any alleged facts or circumstances” in any claim which had already been reported to prior insurers.

Applying the same interpretive approach as Sycamore PartnersJustice LeGrow concluded that “phrases such as ‘based on’ and ‘attributable to’ also quite logically mean ‘arising from’ or ‘sharing a significant connection.’ concluded that no meaningful connection existed between the two claims since there were “several key differences [that] refute the insurers’ argument that a ‘significant connection’ exists.” For example, each claim had different time periods, alleged breaches of different regulations and involved different misconduct allegations, and the nature of the remedy was different.

Justice LeGrow’s rejection of the “substantially identical” standard in favor of the “significant connection” standard was based on the language of the policy, the language that is typical in many D&O policies and Delaware law governing the interpretation of contracts. It remains to be seen if other Delaware courts follow Justice LeGrow’s lead.

Michael L. Zigelman is a regular columnist on commercial and professional liability insurance for Reuters Legal News and Westlaw Today.

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

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