The United States District Court for the District of Minnesota Considers the Scope of a Prior Acts Exclusion Under an Excess D&O Policy
In Tile Shop Holdings, Inc. v. Allied World Nat’l Assurance Co., 2019 WL 2357044 (D. Minn. June 4, 2019), the United States District Court for the District of Minnesota held that a prior acts exclusion in an excess D&O policy precluded coverage for claim that occurred during the policy period because the claim arose from “the same nucleus of operative facts” as a claim that occurred prior to the policy incepting.
On June 29 and July 31, 2012, Tile Shop filed registration statements with the SEC in preparation of a public stock offering. However, the statements omitted the existence of several related-party transactions. Tile Shop, for example, did not disclose the relationship between its CEO and his brother-in-law, the owner of a Chinese export-promotion firm, and certain of Tile Shop’s exporting agents and suppliers. These undisclosed relationships were used to understate the cost of goods sold, overstate earnings and profits, and hide the facts that Tile Shop’s products were contaminated with lead and that their stock was overvalued. Tile Shop continued to omit the information until a November 2013 investigative report exposed them.
Purchasers of Tile Shop stock filed two lawsuits in November 2012 and 2013, which were later consolidated. The complaints alleged misrepresentations and omissions, all but one of which were alleged to have occurred after August 20, 2012. A consolidated derivative action followed in 2015 that repeated the allegations of the securities lawsuit, but also highlighted related-party transactions dating back to 2011.
Tile Shop was insured under a D&O policy tower. In relevant part, Allied World issued Tile Shop an excess D&O policy effective from August 20, 2012 to August 20, 2013 that followed form to a primary policy issued to Tile Shop by AIG. The primary policy precluded coverage for any loss in connection with any claim made against an Insured alleging any wrongful act prior to August 20, 2012 and treated all loss arising out of the same or related wrongful act as arising from the first such “same or related Wrongful Act.” The excess policy followed form to the primary policy but it also contained its own broader prior acts exclusion that excluded coverage for any loss in connection with any claim “alleging, arising out of, based upon, or attributable to” any pre-policy period wrongful acts.
Tile Shop settled the securities and derivative lawsuits with the underlying plaintiffs. AIG tendered most of its limits toward the settlement, and Tile Shop then turned to Allied World to fund the rest of the settlement. Relying on its own prior acts exclusion, Allied World denied coverage. Tile Shop filed suit against Allied World and the parties filed competing motions for summary judgment.
In reaching its determination that there was no coverage under the excess D&O policy, the Court first noted that the excess policy contained a broader prior acts exclusion than the primary policy. While the prior acts exclusion in the primary policy precluded coverage for loss “arising out of” pre-policy period wrongful acts, the prior acts exclusion in the excess policy precluded coverage for any loss “arising out of, based upon, or attributable to” pre-policy period wrongful acts. The court reasoned that by adding the terms “based upon, or attributable to” the excess insurer had broadened the scope of its prior acts exclusion.
Construing this broader exclusion, the court held that the pre and post-policy period wrongful acts that were alleged in the lawsuits all arose from the “same nuclei of wrongful conduct.” As a result, the Court concluded that all of the wrongful acts alleged in the lawsuits dated back to 2011, and the lawsuits were therefore excluded from coverage.
Accordingly, the Court granted summary judgment in favor of Allied World.