One of the perennial D&O insurance coverage issues is the question of whether or not two or more claims are or are not interrelated. Under the operation of provisions typically found in most D&O insurance policies, if two or more claims are interrelated within the meaning of the policy, they are deemed to be a single claim that was first made when the first of the claims was filed. This seemingly technical determination can have important implications because it controls whether only one or whether multiple insurance towers apply to the claims. A recent ruling in a coverage dispute in the Western District of Washington provides interesting insight into the kinds of problems relatedness disputes can present. It is also an interesting example of a case in which even though there undoubtedly were overlaps between two claims, the court ultimately determined that the claims were unrelated for D&O insurance coverage purposes. The court’s August 8, 2022 opinion in the case can be found here.
Smartsheet is a software company. In 2017, Smartsheet was privately held. Insight Venture Partners VII LP had invested significant amounts in the company. Ryan Hinkle was Insight’s designee on Smartsheet’s board. In April 2017, Insight launched an effort to purchase, through a tender offer, over 6 million shares of Smartsheet’s shares at a price of approximately $8 per share. Insight ultimately acquired 5.3 million shares of Smartsheet’s stock from other private investors.
In December 2017, after the completion of the tender offer, Smartsheet filed a draft Registration Statement with the SEC to issue common stock through an initial public offering. Smartsheet completed its IPO on April 27, 2018, with the company’s share price closing at $19.50 per share on the first day of trading.
In December 2019, Patrick Colacurcio filed a class action lawsuit against Insight and Hinkle (the Colacurcio Class Action). The lawsuit alleged that the defendants induced the plaintiffs to sell their Smartsheet shares in the tender offer at artificially reduced prices in part because, they alleged, Hinkle improperly failed to disclose the company’s plans for a future IPO, plans of which Hinkle, it was alleged, was aware owing to his role on the Smartsheet board.
Separately, in June 2018, the wife of Smartsheet’s founder and director, Brett Frei, filed an arbitration demand on Frei alleging that, as part of a divorce settlement, Frei had induced her to sell her Smartsheet shares before the tender offer, and at a price far below the tender offer price. The arbitration demand is referred to as the Frei demand. His wife alleged that Frei withheld from her that she could have sold her shares in the tender offer for far more. His wife also alleged that Frei violated a representation and warranty in the divorce settlement agreement that Smartsheet was not intending to go public within 18 months of the agreement. His wife alleged claims against Frei for breach of his fiduciary duties in his capacity as a Smartsheet director.
Smartsheet maintained programs of insurance both for the period April 27, 2018 to April 27, 2019 (the “2018 Policy”) and for the policy period April 27, 2019 to April 27, 2020 (the “2019 Policy”). Smartsheet submitted both the Colacurcio Claim and the Frei claim to its D&O insurance insurers as claims under the policies. The insurers took the position that because the two claims are interrelated, the constituted a single claim within the meaning of the policy; that the claims made date for the single claim is to be deemed first made at the date of the first of the claims; and that the two claims triggered only the 2018 policy (as the one that was in force when the Frei claim – the first filed of the two claims – was made), and that the 2019 policy was not triggered.
Smartsheet filed an action against the insurers seeking a judicial declaration that the insurers had breached the insurance contracts, acted in bad faith, and violated the Washington Insurance Fair Conduct Act. Specifically, Smartsheet sought a judicial declaration that the two claims were not interrelated and therefore that the later of the two claims triggered the 2019 policy. The insurers filed motions to dismiss.
Relevant Policy Language
The primary policy specified that Related Claims are Claims for Wrongful Acts “based upon, arising from, or inconsequence of the same or related facts, situations, transactions or events or the same or related series of facts, situations, transactions or events.”
The August 8, 2022 Opinion
In an August 8, 2022 opinion, Western District of Washington Judge Marsh Pechman denied the insurers motions to dismiss. In doing so, she first rejected Smartsheet’s argument that the Frei demand was not a claim within the meaning of the policy. Pechman also concluded that the Frei Demand and the Colacurcio Class Action are unrelated and distinct policies with the meaning of the relevant policy language.
In reaching this conclusion, Pechman stated that the two actions “share only limited overlap and several key distinctions.” She did note that “it is true that both concern alleged misrepresentations and omissions relating to the Tender Offer and the IPO.” But, she said, “the alleged misrepresentations and omissions are distinct.”
The Frei Demand, she said, relates to Frei’s alleged misrepresentations and omissions to his wife about the tender offer; he is alleged to have made this misrepresentation and omissions only to his wife. The Colacurcio Class Action, on the other hand, concerned Hinkle’s and Insight’s “purported efforts to hide from investors the plan to take Smartsheet public after the Tender Offer.” The injuries alleged in each of the two actions “are distinct.” The misrepresentations and omissions “were made by two different individuals” and there is no allegations that Hinkle and Frei acted in concert or as part of any common scheme or business practice. The only logical connection is that the fact that the claims involved the same securities, the Tender Offer, and “to some extent,” the IPO.
The alleged misrepresentations and harms “share little logical connection.” The two actions attack “two distinct misrepresentations made by different directors with different motives.” There is, therefore, Judge Pechman said, “insufficient overlap to make the claims related.”
Judge Pechman did note that the Frei Demand omitted material information about the plans to take Smartsheet public, and that those allegations share “some similarity” to those in the class action. However, she said, “the allegations about the IPO are not central to [the wife’s] arbitration demand.” The Frei demand focuses on the fact that the wife never had the opportunity to participate in the tender offer – what Frei knew about the Tender Offer and failed to disclose is, Judge Pechman said, “the primary harm.” The wife’s injury is distinct from that of the class. Even with this overlap in allegations as to the IPO, Judge Pechman found that “the claims, misrepresentations/omissions, and harms alleged in the Frei Demand materially differ from those in the Colacurcio Class Action.” She added that the two claims focus on “different harms, involve different time periods, and attack distinct fraudulent acts.”
Although these days I usually find myself on the policyholder side of insurance coverage disputes, I previously spent enough time on the insurer side to see why the insurers raised the relatedness argument. After all, both claims involve the same securities of the same company. Both claims raised allegations pertaining to the Tender Offer and to the IPO. It is not true that there is absolutely no relationship between the two claims – just not enough, or so Judge Pechman held.
In the end the court’s decision raises the fundamental question of what degree of relationship is necessary to establish “relatedness” for insurance coverage purposes. Behind this fundamental question are two even more basic – but also contradictory – propositions: first, that at a certain level of generalization, everything in the universe is related in some way, and, second, that at another level everything in the universe is also different in some way. The question in the context of interrelatedness dispute is what level of generalization is the relevant one to determine the question.
For me, the most important aspect of Judge Pechman’s ruling is her conclusion the two claims involved two distinct sets of wrongful acts. In the Frei claim, Frei allegedly misled his wife – and only his wife – with respect to the Tender Offer, while in the Colacurcio Class Action, Hinkle alleged made different misrepresentations or omission about the IPO to a different set of investors. Different actors, acting at different times, making different misrepresentations to different persons, and causing different harms. At a fairly important level of generalization, the two claims do not overlap.
And yet, there is the fact that both claims contained alleged misrepresentations or omissions about the IPO. Judge Pechman considered this argument and concluded that the IPO-related allegations in the Frei Demand were not central to the wife’s arbitration demand, and that the “primary harm” was what Frei knew about the tender offer and failed to disclose in connection with the negotiation of the settlement agreement. And even “acknowledging” what Judge Pechman recognized as the “overlap” in the IPO-related allegations in the two lawsuits, Judge Pechman still found that the claims, misrepresentations/omission, and harms alleged in the two disputes “materially differ” and that, she found, was sufficient for her to conclude that the two claims are not related for insurance coverage purposes.
It is worth noting that it is not always going to be the case that the policyholder wants the court to conclude that multiple policies are triggered. It should be kept in mind that a separate self-insurer retention will apply with respect to each policy period that is triggered. In a situation involving multiple small claims, the policyholder may argue that only a single insurance program was triggered, and therefore that only one retention applies. For the same reasons, the D&O insurers may not always argue that only a single insurance program was triggered; the insurers may find it advantageous to argue that multiple programs were triggered, and therefore that multiple retentions apply.
One final note. Readers may have noted that I referred to the Frei’s wife not by her name but simply as his wife. I did this deliberately, but not to deny her her personhood. The reason I didn’t call her by name is that her name is also Colacurcio, the same name as the plaintiff in the Colaciurcio class action. (I suspect they are brother and sister or otherwise related somehow, but Judge Pechman’s opinion does not say.) I found the references to the ex-wife Colacurcio confusing in the context of other references to the class action plaintiff Colacurcio. I omitted the ex-wife Colacurcio’s name simply to avoid confusion. I meant no disrespect to anyone.
Many thanks to the several loyal readers who sent me a copy of Judge Pechman’s opinion.