Hunton Andrews Kurth's insurance protection team recently published a customer alert discussing a dispute over D&O coverage following a credit union's claim of fraud after acquisition.
The Everest National Insurance Company has filed a lawsuit denying any obligation to cover a subsequent acquisition. a lawsuit filed by a credit union for fraud against two banks and their executives. The seller paid an extra premium over a longer reporting period to report claims based on misconduct prior to the acquisition, but the insurer refused coverage on the grounds that all claims claimed by the buyer are excluded under the D&O policy exclusion "insured against insured". The decision underlines the importance of not only ensuring continuity in D&O coverage before and after a transaction but also evaluating all possible damages scenarios that arise as a result of a transaction to ensure that all stakeholders are adequately protected.
In 2019, Verve, a credit union, entered into a purchase agreement with South Central Bank (SCB), a nationally chartered bank, and its parent company First Business Bancorp. According to the agreement, Verge agreed to buy virtually all assets in Statistics Sweden. After the sale, however, Verve claimed that it discovered significant accounting irregularities that they believed were hidden or otherwise incorrectly presented by Statistics Sweden and First Business Bancorp.
Verve filed a lawsuit against Statistics Sweden and First Business Bancorp, as well as three current and former executives and board members of Statistics Sweden. Verve The lawsuit sought to recover more than $ 1 million in damages due to alleged fraudulent accounting practices, fraudulent misrepresentations and fraudulent concealment of facts that led Verve to enter into the purchase agreement under false pretenses.
the defendant notified the lawsuit Verve according to a policy for board members and officers issued by Everest to First Business Bancorp. Verve's acquisition of virtually all of Statistics Sweden's assets automatically terminated future coverage according to the policy, but First Business Bancorp and Statistics Sweden purchased an “Extended reporting period activation”, which provided an additional five-year reporting period for receivables after alleged acquisition that occurred before the effective date.
First Business Bancorp and Statistics Sweden sought coverage according to the extended reporting of approval they purchased to protect the insured for claims after acquisition, wh
Everest's coverage measure
After there was no coverage under the policy Everest filed a declaration in court with a statement that it had no obligation to provide coverage for the lawsuit Verve . Everest questioned all liability to defend itself under the policy, arguing that there was no coverage under the insurance's "insured versus insured" exclusion, which prevented coverage for claims from any "company" or "insured person" in any capacity against another insured, who Statistics Sweden or First Business Bancorp.
The insurer claimed that Verve met the definition of "Company", as amended by the extended reporting, as the approval changed the definition to include an "acquiring entity" of all "subsidiaries" created or acquired during the insurance period or from the start date of the approval. Based on Verve's acquisition of virtually all assets in Statistics Sweden, Everest claimed that the lawsuit Verve constituted a claim as "The Company" (ie Verve, according to the expanded reporting) against other insured units (First Business Bancorp and Statistics Sweden) which are excluded from the coverage according to the policy.
While the insured has not yet responded and is likely to contest the insurer's coverage position, Everest's litigation highlights the importance of understanding the scope of extended reporting coverage (sometimes referred to as "runoff" or "tail"). is available to non-survivors entering into a merger or acquisition and the potential cover gaps that may arise.
At first, the policyholder seemed to have taken appropriate measures to identify a change in control of the planned acquisition of Statistics Sweden by Verve that could lead to the termination of future coverage under the company's current D&O policy. The policyholder also negotiated an extended reporting period of five years and protected the company and its executives and board members long after the automatic one-year reporting period planned in the standard D&O policy form. The policyholder then paid thousands of dollars for a proof of completion that extended the coverage of claims after the transaction, but as Everest's lawsuit shows, the negotiated coverage did not fully protect the company or its executives because Verve's claim after the acquisition was denied.
The specifications for the negotiations on the extended reporting in the Statistics Sweden dispute are unclear, but it seems that the insurer or the policyholder may not have considered the situation that arose, ie. . a claim for alleged wrongdoing prior to the transaction from the acquiring company (Verve). The parties appear to have intended to extend coverage for wrongful acts prior to the acquisition that are not related to the transaction, as well as to cover Verve's potential exposure as the acquiring company.
But they may not have considered the possibility of the same language extending the coverage. to Verve would not apply to erroneous documents prior to the acquisition that were associated with the transaction or that one of the applicants (in many cases probably the applicant) would be Verve as the acquiring company.
The dispute is far from settled but serves as a good reminder to pay close attention to the terms of any extended reported or runoff coverage negotiated as part of a merger, acquisition or asset sale. While the length or limits of such coverage are often central, as Everest's lawsuit shows, the exact parties and claims insured by runoff claims are also critical and can, if overlooked, lead to significant coverage gaps or uninsured losses in the event of a business-related claim. .