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The U.S. District Court for the District of Delaware has recently held that a prior notice exclusion barred cover for securities and derivative actions that were meaningfully linked to circumstances disclosed years earlier in a letter to the insured's audit committee. The court concluded the later suits "arose out of" the same alleged accounting improprieties and misstatements identified in that letter, which had been reported as a notice of circumstances under an earlier D&O tower (coverage layers).
Background
A property and casualty insurance group maintained directors' and officers' towers for 2014-2015 and 2016-2017 with different insurers. The 2014-2015 primary policy allowed the insured to give written notice of circumstances that may give rise to a claim, with any subsequent claim "deemed first made" at the time of that notice for purposes of the policy period. The 2016-2017 primary policy contained a prior notice exclusion precluding cover for any claim "arising out of" circumstances previously noticed under a D&O policy in force before inception.
In 2015, the insured provided a notice of circumstances to the 2014-2015 tower based on a letter to the audit committee from an investment firm president. The letter alleged discrepancies in the company's financial statements, pointing to specific material weaknesses in internal control over financial reporting and suggesting material misstatements. In 2017, the company restated its 2014-2016 financials and related disclosures. Shareholders then filed securities and derivative suits alleging that the company and certain officers made materially false or misleading statements about internal controls and reported results. The insured noticed those suits to the 2016-2017 tower. While the primary carrier acknowledged cover, an excess insurer denied, citing the prior notice exclusion.
Policy Language and the Prior Notice Exclusion
Two policy clauses were determinative. First, the earlier policy's notice‑of‑circumstances clause deemed later claims arising from noticed circumstances to have been first made at the time of notice. Second, the later policy's prior notice exclusion removed cover for claims "arising out of any circumstances" previously noticed under a prior D&O policy. The question was whether the 2015 audit‑committee letter and the later shareholder suits were sufficiently connected such that the suits "arose out of" the earlier‑noticed circumstances.
The Court's Analysis
The court assessed whether the later suits bore a meaningful connection to the circumstances described in the 2015 notice. It found they did. Both the letter and the lawsuits centred on the same alleged conduct: specific accounting rule violations, material weaknesses in internal controls over financial reporting, and resulting material misstatements in the company's financial statements. The court emphasised that the theories of liability in the letter and the complaints identified the same control deficiencies for the same accounting issues, relied on the same evidentiary material, and the lawsuits even referenced the letter itself.
The insured argued that the complaints swept in additional alleged improprieties and that differences in parties and timing defeated linkage. The court rejected both points. The focus is on overlap, not divergence. Additional allegations do not sever a meaningful link where the core conduct is the same, and non‑identical parties or timelines "do not matter" when the underlying misconduct meaningfully aligns. On that basis, the prior notice exclusion unambiguously applied, and the excess insurer owed no defence or indemnity.
Takeaway
If later claims arise out of previously noticed circumstances, coverage under a subsequent tower is barred – courts look for overlap, not identity; extra allegations, different parties, or timing do not avoid the exclusion.
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