The recent California federal court decision Scottsdale Ins. Co. v. Beachcomber Mgmt. Crystal Cove, LLC, et al. illustrates the perils that corporate policyholders may face in obtaining the full benefit of the bargain when they procure new D&O insurance after making a claim under a prior policy. 2025 WL 257599, at *13 (C.D. Cal. Jan. 21, 2025). In Scottsdale, the court agreed that an insurer who sold a D&O policy could deny coverage for a lawsuit filed against two corporate executives during its policy period because that lawsuit involved some of the same allegations of wrongdoing as did a claim the policyholder previously submitted to a former D&O insurer. The new policy contained a very broadly worded “prior notice exclusion” that barred coverage for all claims “in any way involving” any wrongful conduct, facts, circumstances, or situations as to which notice had been given to a prior D&O insurer. As discussed below, the company had notified its prior insurer when it received a draft version of the lawsuit a year earlier, and that insurer accepted coverage. When the claimants formally filed their litigation, however, they alleged new wrongdoing and sought new relief, so the company prudently made a claim under its new policy as well. The court acknowledged that the new claims made the formal complaint different than the draft complaint, but invoked the prior notice exclusion to bar coverage because some aspects were the same, and that was all that the plain language of the prior notice exclusion in that case required. This ruling is a cautionary tale for policyholders that underscores the importance of paying close attention to the detailed terms and conditions of existing and prospective insurance policies, particularly with respect to whether and how reporting a claim under one policy may limit or preclude coverage under a replacement or later-in-time policy.

In Beachcomber, the central issue was whether an insurer that sold a D&O policy to replace another D&O policy would cover a litigation that included some of the same claims and allegations as did prior claims, but that also included new and different claims and allegations. During the prior policy period, corporate creditors prepared a draft complaint as part of bankruptcy proceedings accusing two business executives of breaching their fiduciary duties by allegedly causing the company to make distributions that were not in the company’s best interest. The company’s then D&O insurer agreed to cover that claim. Afterward, and as part of the company’s reorganization efforts, the company procured a new D&O insurance policy from a different insurer. After that new policy was in effect, the bankruptcy trustee filed its broader complaint echoing the breach-of-fiduciary-duty allegations from the draft complaint, and also alleging other misconduct, including usurping business opportunities and devoting and transferring corporate financial resources for the benefit of other businesses.

The new D&O insurer ultimately sought a declaratory judgment that it did not owe coverage for the litigation, culminating in Beachcomber. Notably, the new insurer initially had agreed to provide coverage for the claims alleged in the trustee’s formal complaint, but changed its mind and invoked the prior notice exclusion to bar coverage when it learned that the prior insurer had already accepted coverage based on the draft complaint. Thereafter, the new insurer filed summary judgment focused on the point that the company’s notice of the earlier draft complaint to its former insurer satisfied and barred coverage under the prior notice exclusion. As already mentioned, the particular version of the prior notice exclusion at issue included the expansive phrase “in any way involving,” and the court found those words meant that any overlap between the wrongful acts, facts, circumstances, or situations in the draft and as-filed complaints could satisfy the exclusion. In the court’s view, it did not matter that the filed complaint had allegations not present in the earlier draft complaint; so long as both complaints “in any way involve[d]” the same facts and law, they came within the scope of the exclusion.

Notably, in reaching its decision that the prior notice exclusion barred coverage, the court expressly declined to consider cases addressing whether successive claims are “related” for coverage purposes under policy terms and conditions other than the prior notice exclusion. The court’s narrow focus was significant to the result in Beachcomber, because the Ninth Circuit Court of Appeals has shown much greater willingness to differentiate among successive claims with overlapping facts and allegations in other coverage contexts, such as the application of the Interrelated Wrongful Acts provision at issue in Fin. Mgmt. Advisors, LLC v. Am. Int’l Specialty Lines Ins. Co., 506 F.3d 922, 926 (9th Cir. 2007). In FMA, the Ninth Circuit declined to find “related,” for coverage purposes, two lawsuits filed by different investors who had received financial advice from an investment advisory firm, even though the two lawsuits included some common allegations of wrongdoing. In the appellate court’s view, it was more important that some of the wrongful acts alleged in the two lawsuits were different than it was that both claims included some common allegations. The court in Beachcomber ultimately reached the opposite conclusion, and held that the overlap between the draft complaint and the filed complaint was more important than the fact that the filed complaint included expanded facts and claims.

Beachcomber is a reminder of the importance for policyholders to carefully examine and understand the intricacies of their insurance policies, including how policies effective during different time periods can interact. Beachcomber also highlights the potential benefit to policyholders of evaluating their rights at the outset of insurance claims, including those related to reporting claims under their policies. Indeed, having a detailed understanding of the insurance policies implicated by the claim at issue is essential to ensuring that policyholders are adequately protecting their interests. Policyholders may avoid costly errors, or inadvertent oversight, and be prepared to navigate the nuanced nature of insurance claims by contacting insurance counsel who can help them better understand their coverage.