It Is All Relative When Determining Which Insurer Covers a Subsequent Lawsuit
Successive lawsuits with similar facts often give rise to fights between insurers over which insurance policy must defend the lawsuit. Why? Because many insurance policies have provisions that define losses to include those that relate to an earlier claim. This may mean that if a claim was brought two years ago and noticed to that policy, a subsequent claim brought two years later would relate back to the original claim and would be the responsibility of the original carrier to defend. Recently, the Third Circuit Court of Appeals addressed this issue.
In Northrup Grumman Corp. v. Axis Reinsurance Co., No. 19-1949 (3rd Cir. Apr. 22, 2020), the insured purchased towers of insurance policies to cover potential liabilities arising out of its fiduciary obligations in sponsoring retirement plans for its employees. There was a primary insurer each year and several excess insurers each year. The excess policies followed form to the primary policies. The towers had a large self-insured retention, after which the primary policy would kick in and then the excess policies as each attachment point was reached.
The policies also had a prior notice exclusion and a relation-back clause. The prior notice exclusion disclaimed coverage for claims arising out of the same or related wrongful act in any claim reported to a prior policy. The relation-back clause provided that coverage was provided for any subsequent claim alleging a wrongful act that is the same as or related to any wrongful act alleged in the original claim.
In this case, there were two class actions filed alleging breaches of fiduciary duty under ERISA. The one filed in 2006 alleged claims of “fee capture,” excessive fees, and pay-for-play. The class and discovery periods were limited to 2009, so a second class action was filed to pick up claims and issues after 2009. The second action had some different defendants because of personnel changes, was more narrowly drawn because of years of discovery and fewer retirement plans, and focused on the following claims: “fee-capture” (on a different basis), active management, and record-keeping fees.
When the second class action was filed, the insured presented it to the current tower of insurance. The primary carrier denied coverage, arguing that the factual relationship between the wrongful acts in the two actions triggered the prior notice exclusion and the earlier policy’s relation-back clause. When the insured filed the claim with the relevant excess insurer on the earlier insurance tower, that insurer disclaimed coverage reading the clauses differently. So the insured sued both carriers seeking a declaration that one of them was responsible to cover the second class action.
The district court found that the earlier tower of insurance had to cover the later class action, finding the cases related. The insurer responsible in the earlier tower appealed. The circuit court affirmed, holding that while “[s]ome allegations in the two class actions are like siblings; others are more like cousins. But all of them belong to the same family.” In affirming, the court only addressed the duty to defend.
The court reviewed the record for a causal or logical relationship between the alleged wrongful acts in both class actions. Based on its review, the court concluded that each of the wrongful acts alleged in the second class action related to wrongful acts alleged in the first class action. The full analysis is laid out in the opinion. The court also found that there was significant overlap between the defendants and that the wrongful acts alleged in the second action began during the earlier action’s class period and were the logical descendants into the second class period. Thus, the court found that the duty to defend the second action was shifted from the later insurance tower to the earlier insurance tower because of the relation-back provision.