Court Rules on Limits of D&O Insurance Exclusions

A NY court ruled future non-wrongful acts don't affect D&O coverage for prior acts.

In a significant ruling, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York recently delineated the limits of Directors and Officers (D&O) insurance policy exclusions. The court decreed that future acts which are not wrongful do not nullify coverage for prior wrongful acts.

This ruling arose from the case of AmTrust Financial Services, Inc. v. Forge Underwriting Ltd., where AmTrust faced a challenge when their preferred shares were delisted in February 2019, subsequent to a November 2018 transaction. Forge Underwriting sought to deny coverage based on exclusions related to subsequent acts.

The court found Forge's exclusions ambiguous since the delisting itself was not considered a wrongful act. Judge Rakoff stated, "The delisting itself was not alleged to be unlawful," affirming that New York law requires such exclusions to be interpreted narrowly.

This decision obligates insurers to clearly establish the grounds for exclusions, aligning with precedents like Xerox v. Travelers, requiring due diligence in claims evaluations. For corporate legal departments, this presents a clear directive to reassess and possibly reshape D&O strategies and the handling of claims to adhere to this clarified legal landscape.

Yes, but: While the ruling provides clarity, insurers may respond by modifying policy terms to explicitly detail exclusions, affecting future policy negotiations.

What's next: Legal teams will track subsequent adjustments in policy language by insurers, anticipating changes in industry practices.