On April 20, 2023, the U.S. District Court for the Northern District of California granted a preliminary injunction in a closely watched D&O coverage case. The court directed the insurer to advance the defense costs of Carlos Watson, Ozy Media's CEO. The case is Clear Blue Specialty Insurance Co. v. Ozy Media Inc. et al.
The dispute arose from a D&O Employment Practices Liability and Fiduciary Liability insurance policy issued by Clear Blue Specialty Insurance Company to Defendants Carlos Watson, Samir Rao, and Ozy Media, which Ozy applied for on August 5, 2021. The application required the applicant to inform the insurer in writing of any material changes in the answers to the questions in the application prior to the policy inception date. Ozy answered "no" to application questions asking if Ozy or any person within the company had been involved in state or federal antitrust litigation, or had been involved in any civil, criminal or administrative proceeding alleging violation of any federal or state securities laws within the last three years. According to the application, the policy would have been voided in the event of any material misrepresentation or omission in the application or other submitted materials. The application also specified that any facts or situations not disclosed would be excluded from coverage.
On October 4, 2021, two months after the insurance became effective, a company called Lifeline Legacy Holdings LLC which invested in Ozy, filed a complaint against Ozy and Rao alleging violations of federal securities laws, the California Corporations Code, and fraud by concealment arising from a stock purchase agreement. The suit alleged that at the time that Lifeline invested in Ozy, Ozy and Rao were aware of an unlawful incident, which occurred on February 2, 2021, in which Rao impersonated a Youtube executive while in a phone call meeting with Goldman Sachs. During that meeting, Rao allegedly reported Ozy had been successful on the Youtube platform in order to convince Goldman Sachs to invest in Ozy. During the call, Sachs representatives discovered the impersonation attempt and refused to proceed with the investment. Ozy did not mention the impersonation attempt or any pending repercussions for those actions on the insurance application.
Around the same time the LifeLine litigation was initiated, Ozy received subpoenas from both the Securities and Exchange Commission and the Eastern District of New York relating to the incident with Goldman Sachs. Ozy provided Clear Blue notice of those subpoenas on October 30, 2021.
On September 25, 2021 the New York Times published an article about the Goldman Sachs incident, sparking Clear Blue to rescind the policy and return paid premiums to Ozy, basing the rescission on its belief that Ozy and its executives failed to disclose the allegations asserted against them in the underlying civil action and the SEC investigation.
This complaint was filed in November 2021, seeking a declaration that the policy was rescinded and Clear Blue had no duty to defend or indemnify Ozy in legal actions stemming from the Youtube executive impersonation. Ozy counterclaimed that Clear Blue breached the policy by refusing to advance defense costs for the underlying proceedings. Also in November, the insureds filed the instant action seeking a motion directing Clear Blue to advance defense costs and stay discovery pending the resolution of the underlying proceedings.
In February 2023, Rao pleaded guilty to conspiracy to commit securities fraud, conspiracy to commit wire fraud, and aggravated identity theft. Watson and Ozy were also indicted and charged with conspiracy to commit securities and wire fraud.
The question before the court was whether an insurer is obligated to advance defense costs after the insurer has rescinded the policy based on alleged material misrepresentations or omissions before a court has determined the propriety of the rescission. Clear Blue argued that all of its obligations were extinguished under the unilateral rescission, while the insureds argued that the insurer must carry out its contractual obligations under the policy until a court conclusively establishes the insurer's right to rescind.
The court concluded that case law and California insurance code suggested no duty to defend if an insurer unilaterally rescinded a policy "unless and until the rescission has been set aside," and that "[u]nless and until the Court concludes that the defendant's rescission was improper, it is premature to evaluate whether the defendant breached any obligation under the policy." The court ordered Clear Blue to advance Watson's defense costs as incurred pursuant to the D&O policy and granted the defendants' request for a stay.
According to Bradley Nash, insurance recovery partner at New York-based litigation boutique Hoguet Newman Regal & Kenney LLP, the firm that represented Ozy Media and Watson, "[w]e are pleased that Judge Davila recognized Mr. Watson's right to advancement of defense costs and entered an injunction to compel Clear Blue's compliance with its obligations under the policy."