lawboks2When I started out as a law firm associate doing D&O insurance coverage work more than three decades ago, there was virtually no interpretive case law available. Legal research in connection with D&O insurance tended to be a meagre, frustrating process. Things have changed so much in the interim that now we can have two appellate decisions from two different federal circuit courts on D&O insurance issues in just a single day. On October 21, 2015, both the Second and Fifth Circuits issued D&O insurance coverage rulings, in both cases finding that the there was no coverage under the D&O insurance policies involved for the matters in dispute.


The Second Circuit’s October 21, 2015 summary order in Nomura Holding America, Inc. v. Federal Insurance Company can be found here. The Fifth Circuit’s October 21, 2015 opinion in Martin Resource Management Corporation v. Axis Insurance Company can be found here. I discuss the two appellate decisions below.


The Second Circuit’s Opinion in the Nomura Holding America Case: This case involves the frequently recurring D&O insurance coverage issue on the question of the “claims made” date or dates applicable to a series of related lawsuits. The case arises out of a series of RMBS-related securities lawsuits filed in the wake of the financial crisis against Nomura Holding America, Inc. and certain of its operating subsidiaries. The company defendants contended that the subsequent lawsuits triggered the policies in force at the time the lawsuits were filed; the carrier contended that all of the lawsuit were interrelated within the meaning of the policy, and therefore under the policy were all deemed first made at the time the first of lawsuits was filed, prior to the policy period of the carrier’s policy.


The policy at issue provided that  “All Related Claims shall be treated as a single Claim first made on the date the earliest of such Related Claims was first made … regardless of whether such date is before or during the Policy Period.” The policy further provided that the term “Related Claims” is defined as “all Claims for Wrongful Acts based upon, arising from, or in consequence of the same or related facts, circumstances, situations, transactions, or events or the same or related series of facts, circumstances, situations, transactions or events.”


As discussed here, in a September 11, 2014 opinion (here), Southern District of New York Judge Katherine Polk Failla, applying New York law, ruled that — because she found that the five subsequent lawsuits filed against the Nomura entities were related to a prior securities lawsuit previously pending against the firms — the five subsequent claims related back to and were deemed made at the time of first  lawsuit. Based on this determination, she ruled that there was no coverage for the subsequent suits under the D&O insurance policies in place at the time the subsequent suits were filed. The Nomura entities appealed this ruling to the Second Circuit.


In its October 21, 2015 summary order, the appellate court affirmed the district court’s ruling, holding that, as the district court’s side-by-side review of the underlying claims showed, that “there is no genuine dispute that the claims in the five underlying lawsuits are ‘Related Claims’” to the first-filed lawsuit. Because the first filed lawsuit was “first made” prior to the policy period of the policies, “the underlying claims fall outside the ambit of coverage provided by the Policies.”


While the appellate court affirmed the district court’s ruling, the court took exception to the district court’s use of a “factual nexus” test. The district court, in determining whether or not the series of claims were the “same” or “substantially similar,” had inquired whether or not the claims were “neither factually nor legally distinct, but instead arise from common facts… where the logically connected facts and circumstances demonstrated a factual nexus.” The appellate court criticized the district court’s use of this “factual nexus” test, stating that where, as here, an insurance contract is “unambiguous” it “should be interpreted according to its plain language.” There is, the appellate court said, “no reason to depart from this well-established principle and invoke a test that employs a different standard.” However, while noting the district court’s error, the appellate court said that it was “not dispositive to the outcome here,” affirming the district court’s conclusion that the various lawsuits represented “Related Claims” under the policy.



I have referred numerous times on this blog (for example here) to the difficulty and vexatiousness of interrelatedness disputes. The difficulty arises from the fact that it is always possible to find similarities between two actions and it is always possible to find differences. The outcomes of interrelatedness cases tend to be all over the map and it is very difficult to draw any generalizations about the cases, except that they tend to be very situationally and factually specific.


The reason the district court referred to the “factual nexus” test is that without some kind of a guide and standard, the determination of the question of whether or not claims are the “same” or “similar” can prove to be elusive – there are always going to be certain ways disparate claims can be said to be similar and ways in which they can be said to be different. Courts always struggle with the questions of what kinds and degree of similarity or differences are important.


Because interrelatedness disputes tend to be very fact-specific, the case decisions in this area are of limited utility in attempting to sort our other relatedness disputes when they arise. That said, however, the one lesson from the Second Circuit’s ruling in this case arguably may be that district courts (or at least those applying New York law) should not use the “factual nexus” test to try to determine whether or not various claims are or are not “related,” at least where the policy language is unambiguous.


Whether or not the district court’s inability to use the factual nexus test will make a difference in outcomes seems questionable; the appellate court’s rejection of the factual nexus text here made no difference. In my view, regardless of the test they use, courts will continue to struggle with the question of what makes two or more claims sufficiently similar to make them “related.”


The Fifth Circuit’s Opinion in the Martin Resource Management Corporation Case: MRMC was sued in a Texas state court stock-dilution lawsuit. The company sought coverage for the lawsuit under its D&O insurance program. Its program consisted of three $10 million layers, a primary layer and two excess layers. After the primary insurer denied coverage for the lawsuit, the company filed a federal court lawsuit seeking coverage for the underlying claim. The primary insurer reached a settlement with MRMC in which the primary insurer received a full release in exchange for its agreement to pay $6 million of its primary $10 million limit.


The first level excess insurer then moved for summary judgment in the insurance coverage lawsuit, arguing that its insurance obligations had not been triggered because the underlying primary policy had not been exhausted by payment of the full limit of liability. In making this argument, the first level excess insurer relied on the language in its policy which stated that “The Insurance afforded under this Policy shall apply only after all applicable Underlying Insurance … has been exhausted by actual payment under such Underlying Insurance.” MRMC argued that the excess policy allowed the policyholder to “fill the gap” by paying the difference between the below-limit settlement and the primary policy’s $10 million limit of liability.


The magistrate judge, applying Texas law, held that the excess carrier’s policy unambiguously required the primary carrier to actually pay its full $10 million limit in order for the excess carrier’s insurance obligation to be triggered. MRMC appealed.


In an October 21, 2015 opinion written by Judge Edward C. Prado for a unanimous three-judge panel, the Fifth Circuit affirmed the district court’s ruling, holding that the excess policy “unambiguously precludes exhaustion by below-limit settlement.” The appellate court said that the policy language is “unambiguous as to who must pay and the amount that must be paid in order to exhaust” the underling policy – that is, the primary insurer must pay its full limit. The excess policy’s coverage trigger’s reference to “all” underlying insurance “makes it clear” that a settlement does not exhaust the underlying limit when it is for less than the limit of liability. Under the “plain terms of the contract,” the excess policy “is not triggered where MRMC pays the difference between [the primary insurer’s] liability limit and a below-limit settlement releasing [the primary insurer] of any further obligations.”



As I have discussed in prior posts (for example, here), a number of courts have now held that even if the policyholder funds the gap created by a below-limits settlement with a primary insurer, the underlying insurance has not been exhausted by the underlying insurer’s payment of loss, and accordingly the excess insurer’s obligations have not been triggered. To be sure, now that this growing line of cases has highlighted the issue, many insurance buyers are seeking, and many excess insurers are now granting, excess coverage trigger language that allows the amounts below the excess insurer’s attachment point to be funded by payment either by the underlying insurers or by the policyholder (or another other source). With this type of alternative payment trigger language in place, excess insurers are much less likely to be able to avoid payment.


There is a separate set of issues that can arise if a payment gap is created because an underlying insurer is insolvent, as discussed here and here. When a carrier in insurance program is insolvent and unable to pay a claim, it not only creates an uninsured liability exposure, but it also creates the kind of “gap” that avoids coverage for any carriers that were above the insolvent insurer in the insurance tower. This is not an issue that can be “fixed” with the type of wording cited above, which provides that the excess D&O insurance will be triggered if the underlying amount is paid by the underlying insurer, the insured, or any other source. When the underlying insurer is insolvent, there is just an underlying uninsured gap. The excess carriers will take the position that they have no obligation to “drop down” to take the place of or attach at the underlying carrier’s attachment point.


For that reason, the financial stability of all of the carriers in the insurance program should be an important consideration. In particular, excess D&O insurance should not be viewed as generic and fungible. The excess carrier’s financial ability to honor its payment obligations is an important and potentially differentiating consideration. By the same token, the excess carrier’s willingness to make payments under its excess insurance policy, as well as its ability to make payments, should also be taken into account.


These payment trigger issues are only one category of the recurring excess insurance coverage issues that frequently arise, as discussed here.


Esty IPO Securities Suit Remanded to State Court: In a prior post, I noted the recent phenomenon of plaintiffs filing IPO-related securities suits in state court, pursuant to the concurrent jurisdiction provisions of Section 22 of the ’34 Act. When these lawsuits are filed, the defendants often seek to remove the lawsuits to federal court, with mixed success (as detailed and explained here).


Among the recent state court IPO-related lawsuits was the one filed in California state court against Etsy, which, as usually happens, the defendants then removed to the Northern District of California. The defendants sought to remand the case to state court. On October 21, 2015, Northern District of California Judge Phyllis Hamilton granted the plaintiffs’ motion to remand the case (here).


The defendants sought to retain the case in federal court in reliance on SLUSA. Judge Hamilton said that the record on whether or not Congress intended SLUSA to override the concurrent jurisdiction provisions of the ’33 Act to be unclear. She noted that the Ninth Circuit has cautioned that in situations where there are doubts as to whether federal jurisdiction exists, those doubts must be “resolved against removability.” She added that “Given the lack of clear authority from the Supreme Court or the Ninth Circuit (or any Circuit) on this issue, and in view of the split among the district courts (as well as the recent trend to denial of removability, especially by the judges in this district), the court finds that remand is appropriate here.”


All of which suggests that we will continue to see plaintiffs’ lawyers filing IPO-related securities suits in state court, particularly in California.


It should be noted that there is a parallel securities suit pending against Etsy in the Eastern District of New York, in addition to this state court suit.