No Coverage for Fraudulent Transfer Claims Where Acts Preceded Policy’s Effective Date

June 21, 2017 | Robert Tugander | Insurance Coverage

The U.S. Court of Appeals for the Eleventh Circuit has ruled that an insurance policy’s prior acts exclusion precluded coverage for claims against a bankrupt company’s officers relating to alleged fraudulent transfers.

The Case

The U.S. Treasury Department’s Office of Thrift Supervision (“OTS”) began investigating BankUnited FSB in January 2008. By August, news reports were circulating that BankUnited had engaged in risky lending practices during the housing boom that preceded the 2008 recession.

BankUnited and its parent bank entered into agreements with the OTS in September 2008 acknowledging that they had “engaged in unsafe and unsound practices that . . . resulted in [BankUnited] being in an unsatisfactory condition.”

Around that time, BankUnited’s parent bank learned that its insurer would not renew its directors and officers (“D&O”) insurance policy, so it obtained a new policy from a new insurer, effective November 10, 2008, that contained a prior acts exclusion.

In January and March 2009, BankUnited’s parent bank transferred $46 million to BankUnited. The parent bank subsequently entered bankruptcy and its creditors sued its officers for authorizing those allegedly fraudulent transfers. The parent bank’s insurer declined to indemnify the officers based in part on the policy exclusion that barred coverage for claims “arising out of” conduct that occurred before November 2008.

The U.S. District Court for the Southern District of Florida concluded that the policy’s prior acts exclusion barred coverage for the fraudulent transfer claims, and it granted summary judgment in favor of the insurer. The dispute reached the Eleventh Circuit.

The Eleventh Circuit’s Decision

The circuit court affirmed.

In its decision, the circuit court ruled that the claims against the parent bank’s officers fell within the policy’s prior acts exclusion because what made the transfers wrongful was the parent bank’s insolvency, which resulted from pre-November 2008 actions.

The circuit court explained that an essential element of the fraudulent transfer claims was the parent bank’s insolvency, which had a connection to some prior wrongful acts of the parent bank’s officers and directors that had occurred before the policy’s effective date. Given that, the circuit court concluded, the alleged fraudulent transfers “arose out of” pre-November 2008 misconduct and coverage was precluded by the policy’s prior acts exclusion.

The case is Zucker v. U.S. Specialty Ins. Co., No. 15-10987 (11th Cir. May 16, 2017).

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