Most D&O policies contain, either within the basic policy form or added by endorsement, exclusions for claims based on or arising out of the facts and circumstances of underlying litigation that has occurred or that is pending as of the inception date of the policy. Many policies also contain exclusions for claims covered by or reported under previous D&O insurance. The D&O application may also contain exclusionary language regarding circumstances likely to give rise to a claim. When these other types of exclusions are present, it may appear that a prior-and-pending-litigation exclusion, like the example below, is redundant and imposes no further restriction of coverage.
The Insurer shall not be liable to make any payment for Loss in connection with any Claim: litigation made as of the Pending or Prior Date set forth in Item 5. of the Declarations, or alleging or derived from the same or essentially the same facts as alleged in such pending or prior litigation.
Philadelphia Ins. Cos. PI-ES-1560
The problem with exclusions like the previous example is that they refer to litigation in a general sense and do not require that the insureds be named in such prior litigation or even that the insured corporation or individual insureds be defendants. A lawsuit in a prior period may name only the corporation as a defendant. If such an action is not filed with the D&O insurer as a potential claim, a subsequent amendment of the action during the next policy period naming the individual insureds as codefendants could cause problems. Since claims from prior or pending litigation might be excluded, the only hope for coverage may be in the policy for the prior year in which the original litigation was either commenced or pending. This, of course, assumes the insured had sufficient detail to meet the reporting requirements and trigger the prior policy. Additional information on this topic is provided in the Claims-Made Coverage Features discussion in the Coverage Format section.
Another potential scenario involves the corporation bringing an action against a third party and later being on the receiving end of a countersuit naming the individual directors and officers as codefendants. In such a situation, the insured might have no reason to suspect that a future claim against it might develop and, thus, no reason to attempt to trigger the policy, yet coverage may be denied by a future policy's prior-or-pending-litigation exclusion.
While a few prior-or-pending exclusions refer to litigation or claims pending as of a specified date, some insurers amend the exclusion to apply to litigation prior to or pending as of the policy's retroactive date. Still other insurers may agree to eliminate the prior-or-pending exclusion entirely. Exclusions where the prior-or-pending date is earlier than the policy's retroactive date are less restrictive, since the policy may grant coverage for litigation commenced after the pending-or-prior date but before the policy's retroactive date. Prior-or-pending-litigation exclusions sometimes contain onerous language. Consider the following example. The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured: C. based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any prior and/or pending civil, criminal, administrative or investigative proceeding involving the Company and/or any Insured Persons as of the Prior and Pending date stated in Item 7 of the Declarations, or any fact, circumstance or situation underlying or alleged in such proceeding;
Nav-Pro NAV-DOL-001 (10/01)
Notice that the above language relating to prior or pending litigation excludes claims that may only indirectly have as their basis circumstances, consequences or facts underlying or alleged in some prior or pending litigation. Some exclusions contain language that bars claims having as their basis facts or circumstances that are only similar to that alleged or underlying in some prior or pending litigation, and these exclusions can be particularly ambiguous. A few policies contain prior-or-pending exclusion wording that precludes coverage for not only litigation and administrative proceedings, but for hearings as well: This insurance does not apply to any Claim made against any Insured arising out of any of the following: Any litigation, proceeding, administrative act or hearing brought prior to or pending as of the Pending or Prior Litigation Date as shown in Item * of the Declarations, as well as any future litigation, proceeding, administrative act or hearing based upon any such pending or prior litigation, proceeding, administrative act or hearing or derived from the essential facts or circumstances underlying or alleged in any such pending or prior litigation, proceeding, administrative act or hearing.
TIG Ins. Co. 24705 (9/96)
This example illustrates some of the variety of language used in defining the scope of the exclusion. Some exclusions may also contain reference to arbitration, demands and other activities that may only be precursors to litigation.
It is understandable that insurers do not wish to assume liability for claims that were or should have been reported as potential claims under a prior policy year. It is also likely that insurers use the exclusion to encourage insureds to renew coverage with the expiring insurer rather than to seek coverage elsewhere and run the risk of buying a policy with a more recent prior-or-pending date.
Insureds might find themselves without any coverage in situations where a policy contains an overly restrictive prior-or-pending-litigation exclusion. The simplistic solution is to avoid policies that contain prior-or-pending-litigation exclusions. However, since most D&O policies contain the exclusion, this approach may not always be practical. When an insured has been with the same insurer for consecutive years or is considering renewing coverage with the same insurer, an attempt should be made to amend the exclusion to apply only to prior or pending litigation as of the initial policy-inception date. Because of the wide range of language used, the wording of prior-and-pending exclusions, when present, should be carefully reviewed.
Practical Application
An example of application of the Prior and Pending Litigation clause involved Axis Insurance Company and New York-based Patriarch Partners LLC (Patriarch). In 2009, Patriarch received a letter from the SEC informing it of an "informal inquiry". Such inquiry eventually led to a subpoena issued against the company in February 2012.
In 2011, Patriarch was in the process of renewing its D&O liability insurance policies that provided $20 million in protection. Patriarch's insurance broker recommended that Patriarch consider purchasing an additional $5 million in coverage. Patriarch accepted an Axis quote for the additional coverage and agreed to a prior and pending litigation warranty. Such warranty was intended to eliminate the potential for Axis assuming claims that Patriarch might have known were percolating but hadn't yet been filed.
In 2012, just over six months after the Axis policy became effective, the SEC served Patriarch with a subpoena, followed more than three years later with an administrative enforcement action that ultimately exhausted all of Patriarch's underlying $20 million of D&O coverage. In 2015, Patriarch notified Axis it had exhausted its underlying coverage and tendered the claim to Axis to assume defense.
Based on the prior and pending litigation warranty of the policy, Axis denied coverage. Litigation was filed by both parties in the U.S. District Court of New York, which ruled that the SEC investigation was in fact a claim that was pending prior to inception of the Axis policy. A three-judge appeals court panel found that by the effective date of the prior and pending litigation warranty, Patriarch 'was aware' of 1) the SEC Order of Investigation, 2) escalating severity and focus of the SEC investigation, 3) subpoena of a former employee, and 4) notice of an impending subpoena of Patriarch. The appeal finding affirmed the lower court's decision.