D&O Insurance: Separate Claims Deemed a Single Claim--What Are the Implications?

D&O Insurance: Separate Claims Deemed a Single Claim--What Are the Implications?

 As I have previously noted (refer for example here), one of the most vexing issues in the D&O claims arena is the questions of whether or not two claims are or are not interrelated. If the two are interrelated, they are deemed a single claim for purposes of determining the claims made date. The outcome of this analysis often can mean the difference between the availability of coverage and non-coverage for one or both of the claims.

In a recent D&O insurance coverage dispute in the Western District of Washington, Judge Richard A. Jones wrestled with the relatedness question in the context of a qui tam claim that followed after an earlier anti-retaliation claim. Having determined that the subsequent qui tam claim "related back" to the prior anti-retaliation claim, and that the subsequent claim was deemed made at the time of the earlier claim, Judge Jones then had to determine whether the two claims were also a single claim for purposes of the application of a policy exclusion.

As discussed in his March 11, 2013 opinion (here), Judge Jones determined that the "single claim" deeming term operates only with respect to the policy's claims made provisions, but did not operate with respect to the application of the policy's exclusions. Judge Jones's opinion is the subject of a May 15, 2013 memorandum from Matt Jacobs and Jan Larson of the Jenner & Block law firm (here).

Background

In April 2009, Richard Klein, the former CFO of Omeros Corporation, notified the company that he believed he had been terminated from the company in retaliation for internally reporting what he contended was the provision of falsified time records to the National Institute of Health (NIH) in connection with an NIH grant. In September 2009, Klein filed a lawsuit against Omeros alleging that he had been fired in violation of the anti-retaliation provisions of the False Claims Act.

Omeros submitted the anti-retaliation claim to its management liability insurer, which provided both EPL and D&O insurance to Omeros. Pursuant to a reservation of rights, the insurer defended Omeros against the Klein suit under the EPL coverage section. The insurer ultimately exhausted the $1 million limit of liability applicable to the EPL coverage in defense of the Klein claim.

In November 2010, Klein sought leave to amend his complaint to include a qui tam action on behalf of the United States, asserting that Omeros had violated the False Claims Act. Omeros submitted this amended claim to its management liability insurer. The insurer agreed to defend the amended claim, again under a reservation of rights, under the D&O liability portion of its coverage. The insurer then filed an action seeking a judicial declaration that it there is no coverage under its policy for the qui tam action. Omeros filed a counterclaim contending that the insurer had breached its duties under the policy, acted in bad faith, and violated the Washington Insurance Fair Conduct Act.

The insurer moved for partial summary judgment, arguing that because Klein did not file his qui tam claim until November 2010, and because the applicable policy expired in October 2009, the qui tam action was not a claim made during the policy period, and therefore was not covered under the policy. Omeros argued, in reliance on the policy's Related Acts provisions and definitions, that the subsequent qui tam action related back to the prior anti-retaliation claim, that the subsequent claim is deemed made at the time of the earlier claim, and as a result of the operation of these provisions is deemed a claim made during the policy period.

The relevant provisions of the Policy provide that

All Claims based upon or arising out of the same Wrongful Act or any Related Wrongful Acts or one or more series of any similar, repeated or continuous Wrongful Acts or Related Wrongful Acts, shall be considered a single Claim. Each Claim shall be deemed to be first made at the earliest of the following times:

1. when the earliest Claim arising out of such Wrongful Act or Related Wrongful Act is first made; or

2. when notice pursuant to section VII.B above [relating to notice of facts "which may be reasonably expected to give rise to a Claim"] of a fact, circumstance, or situation giving rise to such a Claim is given.

The D&O Coverage section of the Policy defines "Related Wrongful Acts" as "Wrongful Acts" that re "logically or causally connected by reason of common fact, circumstance, situation, transaction, casualty, event or decision."

The March 11 Opinion

In his March 11, 2013 Opinion, Judge Jones held that "the qui tam claim and the anti-retaliation claim Mr. Klein raise in his initial complaint are based on related wrongful acts." Judge Jones noted that Klein had alleged in his initial complaint and in his qui tam claim that Omeros had made false reports to the NIH, and accordingly the two claims were logically connected. The insurer had argued that there were differences between the qui tam claim and the anti-retaliation claim; for example, the former seeks recoveries for wrongs done to the United States, while the later seeks a recovery solely from wrongs done to Klein. Judge Jones said that "the policy's test for a related wrongful act is not whether there are differences, but whether or not there is any 'common fact, circumstance, situation event or decision' that logically connects the acts."

Judge Jones added that Omeros's alleged false reporting "is a common event that logically connects the anti-retaliation and qui tam claims." The facts underlying both claims "are common facts." Because the facts are related within the meaning of the policy, the policy requires the insurer "to treat separate claims based on those wrongful acts as if they had been made on the date of the earlier claim."

The insurer, Judge Jones noted, also had a "backup argument." The insurer argued that if the policy required the two claims to be treated as a "single claim," and because that "single claim" would have to include Klein's original anti-retaliation claim, the following exclusion in the D&O portion of the policy was therefore triggered with respect to the qui tam claim: "The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured ...based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any past, present or future actual or potential employment relationship."

Judge Jones concluded that although the policy deems interrelated claims a single claim for purposed of determining when a claim was made, "they are not a single claim for purposed of applying policy exclusions that are unrelated to the claim-made nature of the policy." He added that "it is reasonable to construe exclusions that have nothing to do with the claims-made nature of the policy to apply individually to separate claims, even if the separate claims are considered a single claim for purposed of determining when they were made."

Discussion

As I have frequently noted on this site, interrelatedness issues are among the most vexing that can arise under the D&O insurance policy. However, the insurer's argument here that the anti-retaliation and qui tam claim were unrelated and therefore separate claims was always going to be an uphill battle. It is not just the Klein asserted the qui tam claim in an amended complaint in the same lawsuit in which he had asserted the anti-retaliation claim. It is also the fact that both claims depended on a core nucleus of underlying factually allegations based on his contention that the company had falsely reporting specific information to the NIH in connection with an NIH grant.

What is more interesting about this decision is Judge Jones's exploration of the question of what it means that separate claims are "deemed a single claim." The insurer argued that if the separate claims are a single claim for purposes of the determining the claims made date, then they must be a single claim for purposes of determining the application of policy exclusions. The problem with this argument is that the "deemer" clause deems separate claims to be a single claim for purposes of making the claims made date determination, not for all purposes under the policy.

The easiest way to see the problem with the insurer's argument is to consider a situation in which Klein had filed both the anti-retaliation claim and the qui tam claim in his initial complaint during the policy period. In that circumstance, Omeros would reasonably expect that the insurer would provide coverage for both of the simultaneously made claims, with coverage for the anti-retaliation claim under the EPL coverage section and coverage for the qui tam claim under the D&O coverage section. The mere fact that the were separately made but deemed a single claim for purposes of the determining the claims made date should not change the availability of coverage under the policy.

It is always an interesting question whether or not two matters will be found to be sufficiently related to be deemed a single claim. In this case, the Court was asked to determine the extent of the implications if two separate claims were deemed a single claim for purposes of determining the claims made date. As Judge Jones determined, even if the separate claims are deemed a single claim for purposes of the claims made date determinations, the single-claim clause does not govern when applying policy exclusions unrelated to the claims-made nature of the policy.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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