connecticutA recent summary judgment ruling in a D&O insurance coverage lawsuit in the District of Connecticut addressed several potentially preclusive coverage issues. In her February 28, 2017 opinion (here), Judge Vanessa Bryant, applying Connecticut law, ultimately held that coverage for the underlying claim was precluded due to the insured’s late provision of notice of claim, a conclusion that under the facts presented arguably is unremarkable. What makes Judge Bryant’s opinion interesting is not her ruling on the notice of claim issue, but rather her analysis of other issues, particularly her conclusion that the “related claim” and “prior or pending litigation” exclusions did not preclude coverage. The facts involved present other seemingly critical issues that Judge Bryant’s decision does not address.


A March 17, 2017 post about the Connecticut decision on the Hunton & Williams law firm’s Insurance Recovery Blog can be found here.



Graham Zahoruiko was President of Space Web Corporation, which was later known as Refresh Software Corporation. In 1999, the company entered a debt note in connection with a line of credit. Zahoruiko signed the note as guarantor. In 2002, the note creditor filed a lawsuit against the company and Zahoruiko, alleging default. In July 2003, the creditor, the company, and Zahoruiko entered a settlement agreement. The settlement agreement released the obligations under the 1999 Note, but required the company and Zahoruiko to enter a second note (the 2003 Note), with Zahoruiko again signing as guarantor.


In 2008, the creditor on the 2003 note alleged that the company was missing note payments. In May 2008, the creditor and the company entered a forbearance agreement, pursuant to which the creditor agreed to forbear from executing on collateral, and the company agreed to waive any defenses. Zahoruiko executed the forbearance agreement as the company’s president and as guarantor.


In April 29, 2010, the creditor sent the company a demand letter regarding the debt, threatening litigation. In July 2010, the creditor filed a lawsuit alleging that the company and Zahoruiko had failed to meet their obligations under the 2003 Note. This second lawsuit went forward. In early February 2012, the creditor notified the company that it intended to move for summary judgment in the second lawsuit. Ten days later the company notified its D&O insurer of the lawsuit. In March 2012, the trial court in the second lawsuit entered summary judgment in the creditor’s favor, and scheduling a subsequent hearing to assess damages.


In April 2015, Zahoruiko filed an action the District of Connecticut against the company’s D&O insurer, alleging breach of contract, unjust enrichment, conversion, and for declaratory relief. The D&O insurer filed a motion for summary judgment, arguing that coverage for the underlying claim was precluded on a number of grounds, including the operation of the “pending or prior litigation” and “related claim” exclusions and because of the company’s late provision of notice of claim.


The policy’s pending or prior litigation exclusion bars coverage for losses “based upon, arising from, or in consequence of a written demand, suit, or other proceeding pending, or order, decree or judgment entered for or against any Insured on or prior to the applicable Pending or Prior Litigation Date … or the same or any substantially similar fact, circumstance or situation underlying or alleged therein.” (The opinion does not appear to identify the applicable Pending or Prior Litigation Date under the D&O insurance policy; however, since the original inception date of the relevant policy seems to have been December 14, 2002, I am assuming that is the relevant P&P lit date.)


The D&O insurer also argued that 2010 lawsuit was related to the prior 2002 lawsuit within the meaning of the policy’s “related claims” provision, because, the insurer argued, it is “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.” The insurer argued that the prior lawsuit and the subsequent lawsuit should be treated as a single claim first made at the time the 2002 lawsuit was filed. There was no D&O insurance policy in force at the time the first lawsuit was filed.


Finally, the policy’s notice of claim provision provides that “Any Insured shall, as a condition precedent to exercising their rights under any Liability Coverage Section give to [the insurer] written notice as soon as practicable of any Claim.”


The February 28, 2017 Opinion

In her February 28, 2017 opinion, Judge Bryant granted the D&O insurer’s motion for summary judgment, holding that coverage was precluded due to the company’s late provision to the insurer of notice of claim.


In granting the insurer’s motion on the grounds of late notice, Judge Bryant noted that the company did not provide the insurer with notice of the 2010 lawsuit until sixteen months after it was served with the complaint 20 months after receiving the pre-suit demand  letter, and three years and nine months after signing a forbearance agreement. Zahoruiko, Judge Bryant said, “offers no legitimate explanation for his failure to promptly notify [the insurer] of the claim.”


Judge Bryant also found, as required under Connecticut law in order for the late provision of notice to preclude coverage under a liability insurance policy, that the insurer was prejudiced by the late notice. In reaching this conclusion, Judge Bryant noted that Zahoruiko had “executed a forbearance agreement, in which he waived defenses to suits for non-payment of the loan, and incurred litigation costs defending the 2010 lawsuit.” The late notice also prevented the insurer from “negotiating better repayment terms or from settling the lawsuit before the defense costs were incurred.”


Although Judge Bryant concluded that coverage for the underlying claim was precluded as a result of the late notice of claim, she rejected the insurer’s argument that coverage was precluded by operation of the P&P lit exclusion or because the 2010 lawsuit was related to the earlier lawsuit. In reaching this conclusion, she said that when the creditor agreed to settle the 2002 lawsuit, and when Zahoruiko executed a new note and guarantee, “disputes relating to the 1999 Note were definitively resolved and any obligations under that note were extinguished.” Because, she said, “each case involves the breach of a different note, they cannot be said to arise from the ‘same or any substantially similar fact, circumstance, or situation.’”



Given the 16-month time lag between the service on the company of the second lawsuit and the provision of notice of claim to the insurer – not to mention the 20-month lag between the pre-suit demand letter and the notice – it was always going to be a tough battle for Zahoruiko to convince a court that he had provided notice of claim as soon as practicable.


Just the same, as I noted in my discussion of another recent case under Maryland law and involving supposed late notice issues (here), the mere passage of time alone is not sufficient to satisfy establish “prejudice.” I have to say that notwithstanding the company’s undeniable time lag in providing notice of claim, I do not find Judge Bryant’s analysis of the prejudice question entirely satisfying.


In order to show how the insurer was prejudiced, she refers to the waiver of defenses in the forbearance agreement. The 2009 entry into the forbearance agreement happened before the pre-lawsuit demand and before the 2010 lawsuit was filed and therefore before the company’s notice of claim obligations commenced. The company’s entry into the forbearance agreement may well have prejudiced the insurer, but that prejudice was not the result of the late notice. As the recent Maryland case noted, there is a causal element to the prejudice requirement – the late notice must have cause the prejudice in order for the supposed prejudice to be relevant. I would argue that the entry of the forbearance agreement is irrelevant to the late notice issue.


To be sure, it may well be that the other grounds on which the insurer claimed to be prejudiced might have been sufficient to convince Judge Bryant that the late notice was prejudicial to the insurer, but I am concerned that the lack of precise analysis of these issues arguably could have tipped the analysis – the insurer, after all, has the burden of showing prejudice, and if you take away the problems of the forbearance agreement, there is a better argument that the insurer did not meet its burden.


I am also not sure the related claim issue is as clear cut as Judge Bryant found, either. The way she saw it, there were two notes and two lawsuits, with each lawsuit separately and unrelatedly involving each of the two separate notes. The fact is that the company and Zahoruiko entered the second note as part of the settlement of the first lawsuit about the first note. I don’t think it takes much imagination to suggest that the two notes and therefore the two lawsuits involve a common nexus of facts, and I certainly think it could be argued that the two lawsuits arose out of a single continuous sequence of events and circumstances. My only point here is to reiterate a point that I have made numerous times on this blog that “relatedness” questions are peculiarly elusive, and the question of what makes any two sets of circumstances related is vexatious and uncertain.


There is a larger issue here that might make all of these issues entirely moot. As I understand it, Zahoruiko was named as a defendant in the 2010 lawsuits because of his failure to meet his obligations under the 2003 Note. The only obligations Zahoruiko himself had under the 2003 Note was as a guarantor on the note. In his status as guarantor, Zahoruiko was acting in his personal capacity, not as an officer of the company. Courts have generally held that when a corporate officer acts in a personal capacity by providing a guarantee for a corporate debt, the individual is not acting in an insured capacity under the D&O insurance policy. (For the discussion of a recent case analyzing these issues, refer here.)


Judge Bryant’s opinion simply states that “the parties do not dispute that [Zahoruiko] was an ‘insured person’ under the policy.” I wonder whether in fact he was an insured person when acting in the personal capacity as the guarantor of the company’s debt. If he wasn’t an insured person, all of these other questions are moot.


C5 Conference in London in April 2017:  April is just around the corner. With that in mind, it is important to note that C5 will be holding its annual D&O Liability Insurance Forum in London, on April 25-26, 2017.


The conference will explore how political changes could affect regulation and enforcement within the industry. The event will also host key sessions on how Third Party Litigation Funding can help claimants, and how growing risks such as cyber-attacks and climate change could impact upon D&O claims. In addition, speakers will discuss the connection between antitrust enforcement and D&O claims activity. The event will host thought leaders from leading companies such as Volkswagen and Tesco to share insights on settled cases across Europe.


I will be participating in the event as a panellist in the conference’s opening panel, together with Noona Barlow of AIG and Mary O’Connor of Willis Towers Watson, on the topic “How Geopolitical Events are Shaping the World and Implications for D&Os.”


As has always been the case in the past, this year’s conference should be excellent. Further information about the conference, including registration information can be found here. Information about the conference’s speakers can be found here. Please note that readers of The D&O Diary are eligible for a 15% discount. In order to obtain the discount, use the code P15-999-DOD17.