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Claims made policies normally contain a prior acts date.  Firms face a dilemma when they have trouble renewing claims made coverage at a ‘reasonable’ price.  Sometimes it is tempting to renew coverage without the prior acts being maintained to save money.   This Directors and Officers case is outside of Attorney or Accountant Malpractice, but the concepts are the same.

During the financial crisis of 2008 Bank United Financial Corporation’s (Parent Bank) directors and officer (D&O) insurance carrier, Travelers Insurance, declined to renew the bank’s coverage because of the financial difficulties facing the bank.  Parent Bank found a new D&O insurer, US Specialty.  US Specialty was willing to offer prior acts coverage at renewal but at a significantly higher cost ($650,000).  US Specialty also offered a much lower cost renewal, but without prior acts coverage ($350,000).  Parent Bank decided to go with the lower cost solution putting some of the savings into purchasing higher limits but the policy barred coverage for losses attributable to conduct of the officers before November 10, 2008.  The 1st day of coverage was November 10, 2008.

Parent Bank had a Subsidiary Bank that was also struggling.  In January and March of 2009 Parent bank wire transferred $46 Million in tax refunds to Subsidiary Bank.  In May 2009 OTS close Subsidiary Bank and Parent Bank filed for Bankruptcy under Chapter 11 one day later.  Both wire transfers were now the subject of lawsuits against the officers of the Parent Bank as the Parent bank at the time of the wire transfers had obligations of over $126 million.   The lawsuit ultimately settled for $15 million to be paid by either US Specialty or the Insured Persons individually. 

The Insured Persons assigned their rights under the US Specialty policy to the bankruptcy administrator.  US Specialty denied coverage stating that even though the fraudulent wire transfers happened during the policy period, the wrongful acts that contributed to the claim arose out of acts that happened prior to the inception date of the policy.  The bankruptcy administrator brought suit against US Specialty over the denial of coverage.

In Zucker v US Specialty, the 11th US Circuit upheld the District Court’s finding that the acts that caused the claim occurred prior to the inception date of the US Specialty policy and are therefore barred from coverage.

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