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INSURANCE NOTES

Court Applies “Interrelated Wrongful Acts” To Exclude Coverage Where Amended Pleading Added New Facts, Parties and Theories Of Liability

09.08.2011

In Feldman v. Illinois Union Ins. Co., 2011 WL 3890981 (9/6/2011), the Court of Appeal affirmed summary judgment of no coverage under a “claims made” policy based on the policy’s “Interrelated Wrongful Acts” provision, even though the amended pleading filed during the policy period added new facts, parties and theories of liability. 

Illinois Union issued a Directors and Officers Liability policy to ZF Solutions providing coverage for claims first made and reported during the policy period. The policy had a provision that “[m]ore than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest of the following times: [¶] (a) the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made. . . .” “Interrelated Wrongful Acts” was defined as “more than one Wrongful Act which have as a common nexus any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, events or transactions.” 
 
Feldman was the president of ZF Solutions, successor to ZF Devices. ZF Solutions sued NSC for failure to produce devices called for by contract. Before the Illinois Union policy period, NSC filed a cross-complaint for breach of contract against ZF Solutions and ZF Devices for failure to pay for devices provided under the contract. The cross-complaint alleged that ZF Devices assigned the NSC contract and assets to ZF Solutions “for the fraudulent purpose of escaping liability of ZF Devices’ debts, particularly the debt to [NSC] under the Agreement.” 
 
A year later, during the Illinois Union policy period, NSC filed an amended cross-complaint, naming for the first time Feldman as a cross-defendant on new causes of action for breach of fiduciary duty, fraudulent conveyance and violation of the California Unfair Competition Law (Business & Professions Code §17200 et seq.). The amended cross-complaint detailed communications and efforts by NSC to assist ZF Devices in remaining financially viable and transactions by Feldman and others designed to defraud NSC. 
 
Feldman tendered the amended cross-complaint to Illinois Union. Illinois Union denied coverage on the grounds that the NSC claim had originally been made when the original cross-complaint was filed, before inception of the Illinois Union policy, and the “Interrelated Wrongful Acts” provision of the policy deemed the claim to be first made at the time of the original cross-complaint. 

The underlying litigation went to trial resulting in liability against both sides. Feldman thereafter sued Illinois Union. Feldman argued that the declination of a defense was wrongful because the amended pleading alleged “new and different wrongful acts,” which were “not causally connected and independent of the wrongful acts alleged in the cross-complaint.” The trial court granted summary judgment for Illinois Union based on the “Interrelated Wrongful Acts” provision. 

On appeal, the Court of Appeal recited that the duty to defend is broad, that even a “potential” for coverage imposes a duty to defend, that a complaint is to be “liberally construed” in favor of potential coverage and that any doubt as to the facts is to be resolved in favor of the insured. Then, the Court compared the allegations of NSC’s original complaint, filed before the Illinois Union policy period began, and its first amended complaint, filed during the policy period, to determine whether NSC’s claim involved “Interrelated Wrongful Acts” or was “first made” during Illinois National’s policy period.  
 
The Court noted that the amended cross-complaint added new parties, facts and causes of action. Nevertheless, the Court concluded:
It is apparent from a comparison of the cross-complaint and amended cross-complaint that the later pleading included many new details of the events contributing to the alleged liability of Feldman, [other new defendants] as well as the ZF entities. But these details all pertained to the allegedly fraudulent assignment and transfer of ZF Devices assets to ZF Solutions, made with the intent (and effect) of avoiding the former companies’ . . . obligation to NSC. 

Quoting from the definition of “Interrelated Wrongful Acts,” the Court determined that all of the new legal theories, facts and causes of action had “as a common nexus, any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, events or transactions” in relation to the original cross-complaint. The Court concluded that these pleadings were therefore properly deemed to constitute a single claim, which was originally made at the time of the filing of the original cross-complaint, before the inception of the Illinois Union policy.


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