When a management liability insurance policyholder seeks to increase the limits of liability of their insurance program, the insurers will typically require a statement warranting that the policyholder is not aware of any facts or circumstances that could give rise to a claim. This warranty statement typically specifies that if there is a subsequent claim based on facts or circumstances of which the applicant has knowledge, the subsequent claim is precluded from coverage. This warranty exclusion is often referred to as the prior knowledge exclusion. In an interesting August 15, 2022 opinion in an insurance coverage dispute, Delaware Superior Court Judge Eric Davis held that as a result of the insured’s failure to disclose a pending SEC inquiry in a warranty letter, the prior knowledge exclusion in the letter precluded coverage for the underlying matters.



Infinity Q Capital Management, LLC is a registered investment advisor. It was established in 2014 by James Velissaris, the firm’s Chief Investment Officer. Scott Lindell is Infinity Q’s Chief Operating Officer and Chief Compliance Officer. Infinity Q is investment advisor to two funds, known by their acronyms, IQDAF and IQDVF.


From the firm’s 2014, Infinity Q maintained a program of Asset Investment Protector insurance (which includes, among other things, D&O insurance; E&O; and Investment Company Coverage). For several years, Infinity Q’s insurance program consisted of a single $5 million primary layer. In the 2019 renewal cycle, the firm considered increasing its insurance by adding additional layers of excess insurance, but as the record in the subsequent litigation showed, Velisssaris failed to follow up.


As part of the firm’s 2020 renewal cycle in August 2020, the firm did increase its limits of liability, adding on top of its primary $5 million insurance three additional $5 million excess layers from three separate insurers. In connection with the placement of the excess insurance, the firm provided each of the three excess insurers with a warranty letter, signed by Lindell, that the no person for whom the insurance is intended has any knowledge of any fact or circumstance that may give rise to a claim.


Earlier in 2020 and before its 2020 insurance renewal, Infinity Q had received at least two letters from the SEC requesting documents and advising Infinity Q that the agency was “conducting a an inquiry to determine if violations of the federal securities laws have occurred.” Specifically, the agency was examining the valuation of assets in the Infinity Q funds. The record in the subsequent insurance coverage litigation showed that in May 2020, Velissaris and and Lindell exchanged text messages about the SEC’s letter, which the judge in the subsequent coverage litigation observed are “of importance to the present dispute.” Among other things, Velissaris noted that “Should have Shaw increase the insurance. We had talked about it last year. But I forgot to follow up. Should we*” to which Lindell replied “Policy renews in July/August. We should definitely increase it this year.” The record also showed that as of August 10, 2020, the Trustees for the funds were advised that the SEC inquiry was “ongoing.” However, in the August 20, 2020 warranty letter, the SEC inquiry was not identified.


The SEC’s inquiry subsequently led to an SEC Enforcement action. Additional related matters also arose, including a variety of related civil litigation, including a securities class action lawsuit; a U.S. Attorney’s office investigation and an indictment of Velissaris. All of these various underlying matters have been treated as interrelated.


Infinity Q submitted these matters to its insurers. The primary insurer accepted coverage for the matters. The primary insurance is or soon will be exhausted by payment of defense expenses. The three excess insurers denied coverage for the matters in reliance on the prior knowledge exclusion in the warranty letter. The excess insurers contended that as of August 20, 2020 (the date of the warranty letter) one or more of the persons for whom the insurance was intended had knowledge of facts or circumstances that may give rise to a claim.


Infinity Q initiated an action in Delaware Superior Court seeking a judicial declaration that the excess insurers had an obligation under their respective policies to defend and indemnify Infinity Q and its directors and officers in connection with the underlying matters. Infinity Q filed a motion for partial summary judgment that the insurers had an obligation to advance defense expenses in the underlying matter. The insurers moved for summary judgment arguing the that the prior knowledge exclusion in the warranty statement precludes coverage.


The warranty statement provides in pertinent part that:


No person or entity for whom this insurance is intended has any knowledge or information of any act, error, omission, fact or circumstance that may give rise to a claim under the proposed insurance.

It is agreed that any claim for, based upon, arising from, or in any way related to any act, error, omission, fact or circumstance of which any such person or entity has any knowledge or information shall be excluded from coverage under the proposed insurance.

It is also agreed that [the excess insurer and its insurance subsidiaries] are relying upon the above representation and that this letter shall be deemed incorporated into any insurance policy issued for the proposed insurance.


The August 15, 2022 Opinion

In a detailed August 15, 2022 Opinion, Judge Davis granted the insurers’ motion for summary judgment and denied Infinity Q’s motion for partial summary judgment.


In ruling in the insurer’s favor, Judge Davis said that “the language of the relevant policies is straightforward and unambiguous.” He said that “the facts relating to the SEC … are stark and lead to the conclusion that Infinity Q (and its executives) had knowledge of any act, fact or circumstance that may give rise to a claim under the policies.” Infinity Q and its executives “needed to disclose and failure to disclose means that claims arising out of the SEC investigation are excluded from coverage.”


Judge Davis also rejected the insureds argument that the prior knowledge exclusion in the warranty letter was not part of the policy. He found that the Lindell, who signed the warranty letters, understood that the warranty letters were required in order to bind the excess coverage. The fact that excess policies themselves do not specifically mention the words “prior knowledge exclusion” does “not negate the applicability of the Warranty Letters exclusionary language which is specific, clear, plain, conspicuous and not contrary to public policy.”


Finally, Judge Davis rejected the insureds argument that the prior knowledge exclusion is severable (that is, that its preclusive effect only applies to persons with knowledge). He concluded that the severability language in the policy itself was not applicable to the prior knowledge exclusion.



The Court’s ruling in this case is noteworthy in and of itself, but it arguably is particularly noteworthy because Judge Davis is the author of the opinion. Readers of this blog will know that Judge Davis has been the author of a number of very policyholder friendly decisions in D&O insurance coverage disputes in his court. Judge Davis, for example, presided in the trial court proceedings in the long-running Dole Foods coverage litigation, in the course of which he issued several rulings highly favorable to the policyholders (as discussed most recently here).


In light of Judge Davis’s track record, his disposition of these motions in this case is particularly noteworthy. He not only ruled in the favor of the excess insurers here and against the insured but he was quite dismissive of the insureds’ arguments, particularly the insureds’ contentions that warranty letter’s prior knowledge exclusion was not applicable and that the exclusion was severable.


All of that said, the outcome of these motions can only be understood as a reflection of the distinctive (and arguably egregious) facts here. The record showed that the firm’s executives expressly discussed the need to increase their insurance limits within the context of an internal communications about the underlying SEC inquiry. Judge Davis had little trouble concluding that at the time the warranty letters were executed the firm’s executives were well aware of the SEC inquiry and that the executives should have disclosed the SEC inquiry in the warranty letter.


The sequence of events here almost represents a sort of negative model on how not to go about increasing insurance limits of liability. The insured firm missed a chance to avoid a lot of trouble when it failed to increase its limits of liability during the 2019 renewal cycle, before the trouble later arose. The sequence of events here is a reminder that the time to increase limits is when everything is going smoothly; the problem for every insurance buyer is that if you wait until problems arise to increase the limits, it is almost certainly going to be too late.


If nothing else, Judge Davis’s rulings here are a reminder of the importance of the representations and disclosures in connection with increased limits warranty letters. Notwithstanding the unusual facts involved here, Judge Davis’s application of the prior knowledge exclusion is a cautionary tale to all insureds and a reminder of the potential significance of the warranty disclosures.


Special thanks to a loyal reader for providing me with a copy of Judge Davis’s opinion.