A “claims made” directors and officers liability policy did not provide coverage for a claim that was made during the policy period where a claim involving “interrelated wrongful acts” was first made before the policy period. ( Feldman v. Illinois Union Ins. Co. (2011) WL 3890981)
Facts
Sometime before March 2002, ZF Micro Devices, Inc. (“ZF Devices”) entered into a contract with National Semiconductor Corporation (“NSC”) pursuant to which ZF Devices agreed to purchase computer chips from NSC. In March 2002, ZF Devices transferred certain assets to a successor company, ZF Micro Solutions, Inc. (“ZF Solutions”).
In April 2002, ZF Solutions as successor to ZF Devices sued NSC alleging that NSC had failed to produce computer chips in accordance with the parties’ contract. In May 2002, NSC filed a cross-complaint against both ZF Devices and ZF Solutions for allegedly failing to pay for the chips. NSC’s cross-complaint contained a cause of action for “breach of contract” against ZF Devices and a cause of action for “successor liability” against ZF Solutions. NSC alleged that ZF Devices had assigned assets to ZF Solutions “for the fraudulent purpose of escaping liability of ZF Devices’ debts, particularly the debt to [NSC] under the [contract].”
Thereafter, effective July 1, 2002, ZF Solutions and its directors and officers obtained a Director and Officers Liability Policy from Illinois Union Insurance Company (“Illinois Union”). The Illinois Union policy was written on a “claims made” basis.
While the Illinois Union policy was in force, NSF filed an amended cross-complaint which (a) added ZF Solutions’ president David Feldman (“Feldman”) as a cross-defendant, and (b) added causes of action labeled “breach of fiduciary duty” and “fraudulent transfer of assets.” Feldman tendered the defense of NSC’s amended cross-complaint to Illinois Union. However, Illinois Union denied Feldman’s tender, asserting that NSC’s amended cross-complaint against Feldman “related” to NSC’s original cross-complaint that was filed in May 2002, before the inception of the Illinois Union policy.
Feldman then sued Illinois Union for breach of contract and bad faith, asserting that Illinois Union had wrongfully failed to defend and indemnify him against NSC’s amended cross-complaint. The trial court ruled in favor of Illinois Union. Feldman appealed.
Holding
The Court of Appeal affirmed. The appellate court reasoned that the Illinois Union policy provided that Illinois Union would indemnify a director or officer for wrongful acts, provided a claim was first made during the policy period. However, the policy further provided that ” more than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be deemed to have been made at … the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made ….” The policy defined “Interrelated Wrongful Acts” as ” more than one Wrongful Act which have as a common nexus any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, events or transactions.”
The appellate compared NSC’s original cross-complaint (filed before the Illinois Union policy was issued) with NSC’s amended cross-complaint (filed while the Illinois Union policy was in force). The appellate court concluded that while NSC’s amended cross-complaint contained “new details” regarding Feldman’s involvement in ZF Devices’ alleged fraudulent conveyance of assets to ZF Solutions, the details all pertained to facts and circumstances NSC had alleged in its original cross-complaint. Citing the policy’s definition of “Interrelated Wrongful Acts,” the appellate court concluded that the amended cross-complaint (filed during the policy period) shared a “common nexus” with the original cross-complaint (filed before the policy period). Thus, the original cross-complaint and the amended cross-complaint were deemed to be a single claim that was originally made before the policy period. As such, Illinois Union had no duty to defend or indemnify Feldman against NSC’s amended cross-complaint.
Comment
The difficulty in this case arose because a claim was made before the policy period but was then amended during the policy period. The appellate court thus had to determine whether the amended claim involved wrongful acts that were “new and different” from those in the original claim, or whether instead the amended claim involved wrongful acts that were “interrelated” to those in the original claim. The court held that the amended claim was based on “interrelated wrongful acts,” and that it therefore constituted a single claim that was made before the policy period.