Directors and Officers (“D&O”) insurance policies have been written on a claims-made basis for decades.  Because of the nature of claim-made policies, D&O policies often have provisions addressing prior claims and the relationship between similar allegations in pending claims.  D&O policies also often have exclusions for prior and/or pending litigation.  These provisions address the circumstances where multiple claims may be brought over time arising from the same set of facts.   In a recent case, the Fifth Circuit addressed these provisions along with the provision requiring the policyholder to provide prompt notice of a claim.

In ADI Worldlink, L.L.C. v. RSUI Indemnity Co., No. 17-41050 (5th Cir. Aug. 2, 2019), the policyholder had annual D&O coverage for several years.  Multiple claims were brought against the policyholder concerning its failure to pay overtime wages to nonexempt employees.  The policyholder failed to give notice to the insurance company of the first claim, which it received in August 2014.  Similar claims were filed by other employees in April 2015 and in September 2015 the policyholder notified the insurer of all the claims.

The insurer denied the claims after deeming all them a single claims controlled by the 2014 policy based on the 2015 policy’s relation-back or “interrelatedness” provision and the provision that requires notice of a claim as soon as practicable.  The provision that the court called the “interrelatedness” provision provides that claims based on the same or related facts are deemed to be a single claim and deemed first made when the earliest claim is first made.

The policyholder brought a declaratory judgment action and, after cross-summary judgment motions, the district court granted summary judgment to the insurer based on the untimeliness of the notice of claim and the relation-back of the 2015 claims to the 2014 claim.  On appeal, the circuit court affirmed, with one dissent.

In affirming, the court applied Texas law and noted that there was one Texas intermediate appellate court opinion on an “interrelatedness” provision. Gastar Exploration Ltd. v. U.S. Specialty Ins. Co., 412 S.W.3d 577 (Tex. App. 2013).  The court went on to distinguish Gastar after the comprehensive analysis of its holding.  Essentially, in Gastar, there was an endorsement adding an exclusion for prior and/or pending litigation, which the court held created an ambiguity when read together with the “interrelatedness” provision.  Because of that inconsistency, the Gastar court ruled in favor of coverage.

Here, said the court, there was no claim of inconsistency or ambiguity with a similar prior and/or pending litigation exclusion.  The basis for the district court’s decision, according to the circuit court, was the policyholder’s failure to comply in 2014 with the notice provision together with the 2015 policy’s “interrelatedness” provision.  Timely notice was not an issue in Gastar, according to the circuit court, and the court did not attempt to divine what the Texas court would have done had notice been an issue.  Accordingly, the circuit court affirmed the summary judgment in favor of the insurer, holding that the absence of notice, joined with the fact that the 2015 policy deemed all the later claims to fall under the 2014 policy, prevented coverage of the claims.