The United States District Court for the District of New Mexico, applying New Mexico law, has held that a prior acts exclusion in a directors and officers policy barred coverage for an investor lawsuit alleging a scheme to commit fraud, notwithstanding that the lawsuit included allegations of misconduct after the prior acts date. Invictus Unlimited v. Federal Ins. Co., 2025 WL 1208201 (D.N.M. Apr. 25, 2025). The court also held that an individual defendant in the investor lawsuit did not qualify as an Insured Person under a second policy.
Investors filed a lawsuit alleging that two individuals (a husband and wife) engaged in a fraudulent conspiracy that rendered their investments in the company valueless. The wife was the sole manager and CEO of the company. The lawsuit alleged that after the wife mismanaged the company, the husband and wife orchestrated the sale of the company to a second company controlled by the husband, resulting in no return on the plaintiffs' investment in the original company. The investor lawsuit asserted claims against the husband and acquiring company for aiding and abetting the wife's breach of fiduciary duties, constructive fraud, civil conspiracy, and fraudulent tortious concealment.
The husband and the acquiring company sought coverage for the lawsuit under a D&O policy issued to the acquiring company. The husband also sought coverage under a D&O policy issued by the same insurer to the original company. The insurer denied coverage under both policies, determining that a prior acts exclusion precluded coverage under the policy issued to the acquiring company and that the husband did not constitute an Insured Person under the policy issued to the original company. The prior acts exclusion in the acquiring company's policy barred coverage for loss "on account of any Matter based upon, arising from, or in consequence of any Wrongful Act, fact, or circumstance committed, attempted, or allegedly committed or attempted in whole or in part" before the prior acts date. The original company's policy defined Insured Person to include the "lawful spouse" of an Executive or Employee named in the underlying action "solely by reason of such spouse's . . . status as a spouse." Coverage litigation followed, and the insurer moved for judgment on the pleadings.
The court granted the insurer's motion as to both policies. First, the court held that the prior acts exclusion in the acquiring company's policy barred coverage for the investor lawsuit. The court determined that numerous allegations in the investor lawsuit were alleged to have occurred before the prior acts date. It was irrelevant that certain alleged acts occurred after that date because the exclusion applied to claims alleging Wrongful Acts "in whole or in part" before the prior acts date. Second, the court held that the husband did not qualify as an Insured Person under the policy issued to the original company because he was not alleged to be an Executive or Employee of the original company. Moreover, while he happened to be the spouse of an Executive or Employee, he was not named as a defendant in the investor lawsuits "solely by reason of" such status.
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