- with Inhouse Counsel
- with readers working within the Insurance industries
The United States District Court for the Southern District of New York, applying New York law, has held that a subsidiary exclusion barred coverage for a lawsuit alleging fraud in connection with investments in a failed business venture. Scottsdale Ins. Co. v. McGrath, 2025 WL 2509190 (S.D.N.Y. Sept. 2, 2025). The court also held that an adversary proceeding alleging fraudulent transfer did not constitute "Loss" because the relief sought was solely restitutionary and therefore uninsurable under New York law.
Two actions were filed against a former manager after a failed business venture entered bankruptcy. One lawsuit was filed in connection with a loan provided to the failed business venture. The plaintiff alleged that the former manager sold unregistered securities, made fraudulent statements in the sale of securities, failed to disclose material information, breached a pledge agreement, fraudulently induced the plaintiff to enter the contract, negligently misrepresented information about the business venture, breached his fiduciary duty, and breached a guaranty agreement. The failed business venture's bankruptcy trustee also filed an adversary proceeding against the former manager alleging fraudulent transfer in connection with the same loan.
The former manager sought coverage for the lawsuit and the adversary proceeding under the company's management liability policy. The insurer denied coverage on the basis that the lawsuit did not allege "Wrongful Acts." Alternatively, the insurer contended that the subsidiary exclusion applied. The subsidiary exclusion barred coverage for "Loss" "on account of any Claim" against "any of the Directors and Officers of any Subsidiary . . . alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving any Wrongful Act actually or allegedly committed or attempted by a Subsidiary or Directors and Officers thereof: (i) before the date such entity became a Subsidiary or after the date such entity ceased to be a Subsidiary; or (ii) occurring while such entity was a Subsidiary which, together with a Wrongful Act occurring before the date such entity became a Subsidiary, would constitute Interrelated Wrongful Acts." The insurer also asserted that coverage was not available for the adversary proceeding because the policy's definition of "Loss" did not include "matters uninsurable under the laws pursuant to which this [p]olicy is construed." The insurer reasoned that, because a claim for fraudulent transfer is solely restitutionary in nature and New York law does not allow insurance for restitutionary damages, the insurer did not have a duty to defend the adversary proceeding.
The court granted the insurer's motion for summary judgment. The court first determined that lawsuit sufficiently alleged "Wrongful Acts," beyond the breach of contract claims, including allegations of misrepresentation, misstatements, breach of fiduciary duty, fraud, negligent misrepresentation and securities fraud. However, the court also concluded that the policy's subsidiary exclusion applied to bar coverage for the lawsuit. The court determined that the lawsuit alleged "Wrongful Acts" committed prior to the failed business venture becoming a "Subsidiary," and that these allegations were not merely "background context." Because the subsidiary exclusion excluded coverage for the entire "Claim," the insurer was relieved from its duty to defend even though the lawsuit also alleged "Wrongful Acts" occurring after the venture became a "Subsidiary." As to the adversary proceeding, the court found that it was solely restitutionary in nature, and therefore there was no possibility it could result in a covered "Loss" because, under New York law, restitution is not insurable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
