Claims-made policies often cover acts that occur before a policy period, so long as they result in a covered claim during the policy period. This is a fundamental difference between claims-made and occurrence policies. But the retroactive scope of a claims-made policy is not limitless. Many claims-made policies contain ‘retroactive dates’ that cut off an insurer’s liability for occurrences before that date.
Financial lines claims – as opposed to bodily injury or property damage claims – often result from a series of intangible occurrences. This can lead to coverage disputes over the proper application of a retroactive date. Insurers frequently address this problem by drafting ‘related acts’ language that deems all related acts to occur at the time of the first act.
Another option is excluding coverage for claims ‘arising out of’ acts that occur prior to the retroactive date. This is called a ‘Prior Acts Exclusion.’ By using broad prefatory language – such as ‘arising out of’ – an insurer can expand the scope of the exclusion to apply even if the subject acts continue beyond the retroactive date.
In Zucker v. U.S. Specialty Insurance Company, No. 15-10987 (11th Cir. May 16, 2017), the Eleventh Circuit recognized Florida’s expansive view of the phrase ‘arising out of’ in applying a Prior Acts Exclusion to bar coverage. BankUnited was the parent company for BankUnited FSB, a federally-charted savings bank. The financial crisis sent both banks into dire straits. In September 2008, the banks stipulated with the Office of Thrift Supervision that they had engaged in unsafe lending practices.
BankUnited began negotiating with U.S. Specialty Insurance Company for a potential directors and officers liability policy. In light of BankUnited’s ongoing financial problems, the insurer presented two options: a primary policy with a November 2008 retroactive date and a $350,000 premium, or an excess policy with no retroactive date and a $650,000 premium. BankUnited chose the cheaper policy with the November 2008 retroactive date.
In early 2009, the parent bank began transferring multimillion-dollar refund checks to the subsidiary bank. After both banks fell into insolvency, the parent’s bankruptcy plan administrator, Clifford Zucker, made claims against three former executives for, among other things, approving the tax refund transfers in 2009. Zucker alleged that the transfers were fraudulent. U.S. Specialty denied coverage pursuant to the Prior Acts Exclusion. Specifically, it argued that the 2009 transfers ‘arose out of’ the pre-2009 wrongful acts that led to the banks’ insolvency.
Zucker settled the fraudulent transfer claims for $15 million and accepted an assignment of the executives’ insurance rights. Zucker then sued the insurer for coverage and bad faith under Florida law. The trial court found that the Prior Acts Exclusion applied, and Zucker appealed. The Eleventh Circuit affirmed the coverage denial.
First, the Court noted that ‘arising out of’ under Florida law ‘means ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ ‘flowing from,’ ‘incident to’ or ‘having a connection with.” Taurus Holdings, Inc. v. U.S. Fidelity & Guar. Co., 913 So. 2d 528, 532 (Fla. 2005). Notably, in language that is sure to be quoted by insurers for the foreseeable future, the Eleventh Circuit observed that ‘the ‘arising out of’ standard is not difficult to meet.’
Turning to the facts of the case, the Eleventh Circuit found that Zucker’s complaint alleged that BankUnited’s corporate officers committed wrongful acts, some of which occurred before November 2008, that harmed the company financially. Thus, Zucker essentially admitted that the ‘wrongful conduct of the corporate officers contributed to the insolvency that made the 2009 tax refund transfers fraudulent under Florida law.’ As the Court noted, a claim ‘arises out of’ a wrongful act if it ‘has a connection with’ it:
And while Zucker is right to say that insolvency itself is not an inherently wrongful act, what matters here is that an essential element of his claim – the Parent Bank’s insolvency – has a connection with some prior wrongful acts of the Parent Bank’s officers and directors that occurred before the policy’s effective date.
This case is helpful to insurers in two ways. First, it supports the broad application of the Prior Acts Exclusion. Second, the Eleventh Circuit has now acknowledged what insurers have been arguing for years – the ‘arising out of’ standard established in Taurus is ‘not difficult to meet.’ Because many exclusions are preceded by the ‘arising out of’ language, the impact of this holding extends beyond Prior Acts Exclusions.