Insurance policies often have general exclusions for known losses or prior acts. The reason for this is that most insurance is for fortuitous risks–risks that will take place in the future; not risks that already have taken place. For large policyholders that have ongoing litigation, it is not uncommon for a new carrier to craft a specific exclusion to preclude coverage for an existing claim or set of circumstances that already exists. The First Circuit recently addressed a specific litigation exclusion to determine whether it was broad enough to cover new litigation and investigations arising out of the same investment product.
In USB Financial Services, Inc. of Puerto Rico v. XL Specialty Insurance Co., No. 18-1148, 2019 U.S. App. LEXIS 19946 (1st Cir. Jul. 3, 2019), the First Circuit addressed an appeal by policyholders of a summary judgment order granted to the insurance carriers based on the application of a specific litigation exclusion. The circuit court affirmed.
Basically, there were a series of investigations and lawsuits over a certain financial product sold by the policyholders. The policyholders sought new insurance going forward and the new carriers sought a specific litigation exclusion for the prior investigations and lawsuits. Using a major broker and a well-known policyholder law firm, the policyholders negotiated a new policy along with the specific litigation exclusion. The exclusions was broad and when the policyholder sought to negotiate a narrowing of the exclusion by replacing broad language with more narrow language, the carriers rejected the policyholders’ changes and the policyholders accepted the exclusion.
The exclusion precluded coverage of “any Claim in connection with any proceedings set forth below, or in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any such proceeding or any fact, circumstance or situation underlying or alleged therein.” New investigations and lawsuits arose concerning the same financial product and the policyholders sought coverage. The carriers disclaimed.
In affirming the grant of summary judgment to the carriers precluding coverage based on the exclusion, the court held that the common and usual meaning of the words of the exclusion were unambiguous and no coverage was available for any claim in any way involving the prior matters or any fact, circumstance or situation underlying or alleged in the prior matters. Moreover, the court found that it was equally clear what the intention of the parties was as demonstrated by the negotiations that preceded the issuance of the insurance policies when the policyholders tried to modify the exclusion and the carriers refused. Thus, held the court, although the language was undoubtedly broad, it was the language the policyholders bargained for during negotiations. The court found that the policyholders were aware that the breadth of the unchanged exclusion and nevertheless agreed to purchase the policies as they read.
The court also rejected the argument that the scope of the exclusion rendered the policies illusory. The court also rejected the argument that the exclusion should be construed in favor of the policyholders noting that those principles seek to protect a weaker party when there is a disparity at the bargaining table. Here, the court found those concerns not to be present because the terms of the exclusion were clear and the parties negotiated the polices at arms-length. The court noted that the policyholders were sophisticated financial players, which engaged a major insurance broker and a major policyholder law firm to negotiate the policy and the specific litigation exclusion. The court concluded that the policyholders could have reasonably expected that they bargained for the plain reading construction that the court gave the exclusion in this case.