In a noteworthy decision that raises a number of interesting issues, District of Minnesota Judge Ann D. Montgomery, applying Minnesota law, held that a company’s excess D&O insurance policy’s prior acts exclusion precludes coverage for the entirety of claims asserted against the company, even with respect to wrongful acts alleged to have taken place after the prior acts date. This case involves a number of twists and turns, while raising some important questions. Judge Montgomery’s June 4, 2019 opinion in the case can be found here. The Wiley Rein law firm’s June 20, 2019 post about the ruling on its Executive Summary Blog can be found here.



Tile Shop Holdings was incorporated on June 21, 2012. The company went public in December 2012. In November 2013, an online source published reports that the company had undisclosed material relationships with suppliers, in collaboration with whom the company had misstated its cost of goods sold and overstated its earnings and profits. In November 2013, the company was hit with two securities class action lawsuits; the securities suits were later consolidated. The company was subsequently hit with two derivative lawsuits as well. The company ultimately settled both the consolidated securities suit and the derivative suits.


The consolidated amended complaint  in the securities lawsuit contained allegations pertaining to several non-disclosed material relationships, which the complaint alleged should have been disclosed. The alleged relationships were alleged to have been in place from at least 2011 to 2013. The complaint alleged that the defendants made ten specific misrepresentations or omissions, all of which were alleged to have taken place after August 20, 2012.


Tile Shop had purchased a D&O insurance program consisting of a primary policy and an excess policy, for the policy period August 20, 2012 to August 20, 2013. Tile Shop renewed the D&O insurance program for the policy period August 20, 2013 to August 20, 2014.


Both the primary policy and the excess policy contained prior act exclusions. The primary policy’s prior acts exclusion stated that “In consideration of the premium charged, it is hereby understood and agreed that the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured alleging any Wrongful Act occurring prior to August 20, 2012 …. Loss arising out of the same or related Wrongful Act shall be deemed to arise from the first such same or related Wrongful Act.”


The prior act exclusion in the excess policy provides that “This Policy shall not cover any Loss in connection with any claim alleging, arising out of, based upon, or attributable to any wrongful act(s) committed, attempted, or allegedly committed or attempted prior to August 20, 2012.”


Tile Shop submitted the lawsuits to its D&O insurers as claims under the policy. The primary D&O insurer initially reserved its right to deny coverage based on the prior acts exclusion. The primary insurer ultimately paid $9.5 million of its $10 million limit of liability in defense and settlement of the claims. (Tile Shop agreed to pay the remaining $500,000 in response to the primary insurer’s expressed need for a “discount in respect to coverage issues remaining.”)


By contrast to the primary insurer, the excess insurer immediately denied coverage for the claims based on the prior act exclusion. Tile Shop filed a breach of contract action against the excess insurer. The parties filed cross-motions for summary judgment.


The June 4, 2019 Order

In a June 4, 2019 order, Judge Montgomery granted the excess insurer’s motion for summary judgment and denied Tile Shop’s summary judgment motion.


In ruling on the motions, Judge Montgomery noted that the exclusion in the primary policy (to which the excess policy followed form) tied the timing of the loss to the earliest occurrence of wrongdoing, so that, in Judge Montgomery’s words, “the exclusion applies to an ongoing wrong, or wrongful conduct repeated, and is defined by the wrongful act’s or acts’ first instance, not by instances of the same wrongdoing which came later.” In addition, she noted, the excess policy “amended by adding” a “broader exclusion,” referring as it did to “any Loss, any claim, any wrongful act” and also adding the terms “based upon or attributable to” which, she said, weakens “any direct liability causation requirement that may be read” into the exclusion.


Turning to the facts at hand, Judge Montgomery concluded that “the post-August 20, 2012 omissions rose from the same nuclei of wrongful conduct [i.e., the material undisclosed relationships, which dated back to 2011] as the pre-August 2012 omissions [in the company’s pre-merger SEC disclosures], and therefore the Tile Shop is not entitled to coverage.”  She added that “neither consolidated action asserted any claims that were not related to or attributable to the related-family transactions that were repeatedly omitted from filings.”


Finally, Judge Montgomery rejected Tile Shop’s somewhat esoteric argument that the pre-August 20, 2012 disclosures had been made by the pre-merger entity that was legally different from the post-merger entity, and therefore that the pre-merger statements could not be attributed to the post-merger entity.



I have a very strong inclination to get on my high horse and rail against the outcome of this case. As I noted in the recitation of the facts above, ALL of the alleged specific misrepresentations or omissions on which the plaintiffs relied as the basis of alleged liability in the underlying actions allegedly took place AFTER the past acts date. However, the full disclosure required by blogging ethics compels me to acknowledge several countervailing considerations.


First, the outcome here arguably is the result of a decision that was made at the time that Tile Shop bought the D&O insurance. Judge Montgomery recites that when Tile Shop first purchased the D&O insurance, it had the option to buy the insurance with full past acts coverage (that is, without a past acts exclusion). However rather than paying $220,000 for the primary insurance and $135,000 for the excess in a program with full past act coverage, Tile Shop elected to buy a primary policy with a past acts exclusion for $146,040 and an excess policy with a past acts exclusion for $90,500.


Obviously, the company’s decision to save a few bucks looks bad in retrospect. But the decision not to buy past acts coverage was a poor choice even judged by what was known at the time; by opting not to buy full past acts coverage, the company was electing not to purchase coverage for all of the company’s prior organizational and pre-merger activities, which would be a poor decision for any company. (There was a reason that the program without past acts coverage cost a lot less; that was because the program without past acts coverage provided a lot less coverage.)


Second,  one argument that I really want to make here is that, for crying out loud, the primary carrier paid substantially all of its limits toward the defense and settlement of the claims. Where does the excess carrier get off denying coverage? However, I have to admit that Judge Montgomery takes a little bit of the wind out of my sails on this point; she not only noted that the excess policy had its own prior acts exclusion, but she expressly stated that the excess policy’s prior acts exclusion was “broader” than the primary company’s policy. While I am not entirely sure I agree with her assessment in this regard, her conclusion that the excess policy had an exclusion that was separate and broader than the exclusion in the primary policy does provide the excess carrier with a hook to defend its decision to take a more aggressive position than the primary carrier.


Third, there are some very specific facts about the Tile Shop situation that are critical to understanding what happened here. The key to Judge Montgomery’s decision is that in two draft registrations statements that Tile Shop filed with the SEC in June and July 2012, respectively – that is, prior to the past acts date – the company omitted the related-party transactions. The company omitted this information in its subsequent SEC filings as well. The subsequent SEC filings are the ones that the plaintiffs in the D&O lawsuits relied upon as the basis for the defendants’ alleged liability, but the initial filings, the ones made before the past acts date, were the first occasions on which the allegedly misleading omissions were made. The subsequent filings repeated the omissions. In light of the sequence of events, which reflect a consistent pattern of activity that actually began before the past acts date, Judge Montgomery’s ruling is easier to understand, particularly in light of the exclusionary language.


In the end, my problem with this decision is not that Judge Montgomery reached the wrong conclusion; my problem is the exclusion itself.


The operative assumption about coverage for past acts and future acts is that even if past acts are excluded, all future acts (i.e., acts taking place after the prior acts date) will be covered. However, here the “deemer” clause (deeming related subsequent acts as being made at the time of the first act), and the exclusion’s comprehensive scope (arising out of, related to, etc.) operated to preclude coverage not just prior acts but also for all of the related future acts as well.


If nothing else, this case should provide a powerful tool for any insurance advisor that is trying to convince a penny-pinching client that it is worth it to spend the money to buy a policy with full past acts coverage (assuming full past acts coverage is available in the marketplace). As this case shows, electing not to purchase past acts coverage can be a poor choice.


The way that the past acts exclusion operated in this case is a cautionary tale for anyone involved in purchasing or placing D&O insurance. The past acts exclusion operated in a way here that it effectively swallowed up all of the coverage under the policy. This case shows that insurance professionals need to be extremely wary of past acts exclusions, as a broadly written past acts exclusion could effectively wipe out the “going forward” coverage as well. The lesson here is obvious – watch out for broadly written past acts exclusions.