Management liability insurer off hook for policy period lawsuit because claims first made well before then

by Christopher Graham and Joseph Kelly

Louisiana map

So your client or customer threatens a suit. And the time for suit is about to expire. You can avoid the suit. But you have to agree to extend time to sue. Sounds good. Otherwise you’ll be defending a lawsuit. Maybe you’ll have adverse publicity too. Maybe you can work things out with no suit. Maybe they’ll just drop it. So you agree. A year passes; no suit. More time passes; still no suit. Looks like the problem is over. You say, Hallelujah!

But then the sheriff shows up with that pesky summons and complaint. The suit is by the United States for the Coast Guard. It would be too late for it to sue. But you signed a tolling agreement giving it more time. Your company was sub-contracted work to convert old cutters into new and improved cutters. One of the cutters had a structural failure. The US government alleges you “knowingly misled the Coast Guard to enter into a contract for the lengthening of Coast Guard cutters by falsifying data relating to the structural strength of the converted vessels.” It alleges you violated the False Claims Act and alleges common law fraud, negligent misrepresentations and unjust enrichment.

You have claims-made private company D&O or management liability insurance. The claim involves wrongful acts. So you notify the insurer.

But wait a minute, says the insurer. Our policy covers a Claim first made during the policy period. We defined Claim as including “a written demand for monetary or non-monetary relief.” This Claim was first made well before then, back when you signed a tolling agreement.

Your tolling agreement acknowledges you were informed by the government that it believed it “may have certain civil causes of action and administrative claims against [you] under the False Claims Act, [citation omitted], other statutes and regulations including the Program Fraud Civil Remedies Act, [citation omitted], equity, or the common law, arising from [your] performance of conversion work on the U.S. Coast Guard Deepwater Program’s 110 Foot Island Class vessels.” And your agreement also states that, “as consideration for the United States not filing, or initiating claims against [you] under the False Claims Act, [citation omitted]or the Program Fraud Civil Remedies Act,” a certain period would be excluded to determine the timeliness of “any civil or administrative claims.”

You argue the Claim at least for negligent misrepresentation and unjust enrichment was first made when the government sued you. Those two claims aren’t explicitly mentioned in the tolling agreement. And they were in a suit filed during the insurer’s claims-made policy period. Insurer says pound sand! You say see you in court!

So what does the court decide? Insurer wins, as explained in XL Specialty Ins. Co. v. Bollinger Shipyards, et al, Case No. 12-2071, (E.D. La. Jan 3, 2014). As the court explained:

The tolling agreement between [subcontractor] and the United States stated that the government believed that it had claims against [subcontractor] arising from its performance of the conversion work for [general contractor], and memorialized [subcontractor’s] agreement to toll the statute of limitations so that the parties could discuss settlement of those claims before engaging in litigation. Clearly, then, under the language of the D&O Policy, the United States’ “claim” against [subcontractor] was first made in 2008, over two years before the policy period began.

So, as an insured, what should you do when asked to agree to toll the time for suit? Well, you better consider whether you have professional liability, D&O, or other insurance? And if you have insurance, you better notify your insurer. It appears this insured may not have had a management liability policy when asked to sign the tolling agreement. We say that because the insured didn’t sue under any policy in effect then.

But if it did have a policy then, it should have notified its insurer promptly after the government threatened suit and before signing any agreement. For an insured, the wisest course is to give prompt notice of anything that might be a Claim or turn into one.

Tags: Louisiana, D&O, tolling agreement, management liability policy, private company D&O policy, claim, policy period

Category: D&O Digest, Professional Liability Insurance Digest Comment »

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