In a December 30, 2015 unpublished per curiam opinion, the Fourth Circuit affirmed the district court’s holding that a 2010 lawsuit filed to enforce a judgment was interrelated with the 2006 lawsuit in which the judgment had been entered, and therefore because the later was deemed first made at the time of the earlier lawsuit, the later suit was not covered under the management liability insurance policy in force when the later lawsuit was filed. The Fourth Circuit’s analysis is interesting in light of other recent appellate case law decisions interpreting D&O insurance policy’s interrelatedness provisions. A copy of the Fourth Circuit’s opinion can be found here.
In the early 2000s, W.C. and A.N. Miller Development Corporation (Miller) and related entities and individuals sought to develop real estate located in Virginia. In order to develop the land, the developer enlisted the services of third-party intermediaries, including IBG, to locate financing sources. The developer agreed to pay IBG a $3 million finder’s fee if the financing was secured. The developer eventually obtained the financing and paid a fee to another intermediary. IBG contended it was due a $3 million fee.
In 2006, IBG filed a lawsuit against Miller and other entities and individuals, seeking to recover the unpaid fee. IBG’s lawsuit ultimately resulted in a verdict against the defendants for the amount of the unpaid fee plus interest.
In 2010, IBG filed a lawsuit against Miller and others, seeking to enforce the judgment and alleging that the defendants had fraudulently transferred assets in order to frustrate efforts to enforce the judgment. The defendants ultimately prevailed in the 2010 lawsuit.
Miller tendered the 2010 lawsuit to its management liability insurance carrier. The policy period on the management liability insurance carrier’s policy was November 1, 2010 to November 1, 2011. The carrier declined coverage for the 2010 lawsuit, based on its contention that the 2010 lawsuit was interrelated with the 2006 lawsuit and therefore that it was deemed first made at the time of the first lawsuit. The carrier contended that because the lawsuit was not first made during the policy period of its policy, it was outside the coverage of its claims made insurance policy.
In 2014, Miller launched an action in the District of Maryland against the insurer seeking to recover the attorneys’ fees it had incurred in defending the 2010 lawsuit. The insurer moved for judgment on the pleadings, while Miller filed a cross-motion for summary judgment. The district court granted the carrier’s motion and denied Miller’s motion, agreeing with the carrier that the subsequent lawsuit was interrelated with the earlier lawsuit and therefore was deemed first made at the time the earlier lawsuit was filed. Miller appealed the district court’s ruling to the Fourth Circuit.
The policy specified that “More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be considered one Claim which shall be deemed made on … the date on which the earliest such Claim was first made.”
The policy defined the term “Interrelated Wrongful Acts” to mean “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.”
The December 30 Opinion
In an unpublished per curiam opinion dated December 30, 2015, a three-judge panel of the Fourth Circuit unanimously affirmed the district court’s opinion.
In affirming the district court, the appellate court noted that the policy’s definition of “interrelated wrongful acts” is both “expansive” and unambiguous. In finding that the 2006 lawsuit and the 2010 lawsuit involve interrelated wrongful acts, the appellate court noted that the two lawsuits “arise out of the same land development project, involve the same contract to secure financing, implicate a dispute over the same fee, and were brought by the same claimant.”
This “factual web,” the appellate court said, “creates a common nexus sufficient to make the claims brought against Miller in 2006 and 2010 interrelated under the policy’s broad definition of ‘Interrelated Wrongful Acts.’” Because they involve interrelated wrongful acts, the two lawsuits are “part of the same claim under the policy,” and the 2010 lawsuit is deemed to have been “first made” at the time of the earlier lawsuit. Because the date the earlier lawsuit was filed is outside of the policy period, the insurer properly denied coverage.
In numerous prior posts (for example, here), I have noted the difficulty that some courts have had in struggling with interrelatedness issues. The cases tend to be all over the map and hard to reconcile. While, given the facts, this outcome of this case arguably is not unexpected, there is nevertheless still an interesting aspect to the court’s analysis.
In attempting to determine whether or not the two lawsuits at issue involved “any common fact, circumstance, situation, transaction or event,” as the policy’s definition of “interrelated wrongful act” requires, the court held this phrase to be unambiguous. Nevertheless, in attempting to determine whether or not the fact presented met the requirements of this definition, the court referred to another standard not found in the policy’s actual language. That is, the court found that the wrongful acts alleged in the two lawsuits involved a “common nexus,” and therefore that they were interrelated.
The problem with this is that the policy’s definition of the term “Interrelated Wrongful Acts” does not contain the words “common nexus.” These are words that the appellate court itself supplied, without explanation, perhaps in unconscious mimicry of many other interrelatedness disputes in which the court involved have also used the “common nexus” standard to provide meaning for the term “interrelated.” I note this with full awareness that some policy definition’s of the term “interrelated wrongful acts” expressly include the words “common nexus” or “factual nexus.”
The courts’ use here of the term “common nexus,” even though it is not found in the policy itself, is an illustration of a point I have made in the past about interrelatedness questions; that is, that relatedness itself is a concept that retreats away from you the more you try to fix its meaning with precision. The analytical difficulty for any court trying to answer relatedness questions is that there are ways that just about any two facts or circumstances can be said to be related and ways that the same facts or circumstances can be said to be unrelated. The courts fall back on substituting other words (“common nexus”) to provide meaning for the definitional words (“common fact, circumstance, situation, transaction or even”), which illustrates how the analytic process can become a reductive exercise that has no bottom.
Just to underscore my point, with respect to the phrase “common nexus,” what does “common” mean? What does “nexus” mean? And of course, whatever words you might propose to define “common” and “nexus” are themselves susceptible to the same reductive analysis, and so on, ad infinitum and ad nauseum. And at a minimum it ought to matter whether or not the words “common nexus” do or do not actually appear in the policy.
I am not the only one to raise this objection to the substitution of the phrase “common nexus” to try to determine the meaning of the words that were actually used in the policy – words that, I want to reiterate, that the Fourth Circuit said were unambiguous.
As I noted in a blog post at the time (here), in an October 2015 decision, the Second Circuit, in affirming a district court’s finding of interrelatedness in a case involving Nomura Securities, 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.”
I am inclined to agree with the Second Circuit on this issue. Interrelatedness cases are vexing enough as it is. While they often involve analytic difficulties, it does not help to achieve analytic consistency for the courts to substitute verbal formulations that are not found in the policies to try to find a flashlight in the darkness. I want to stress that I have no concerns about the outcome of this particular case; rather, I am concerned that it is better for the courts to stick to the actual policy language used, to insure that outcomes on these kinds of cases are consistent with policy requirements.
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