No Coverage for Shareholder Suits Due to Relation-Back Clause 

The Eighth Circuit Court of Appeals, applying Minnesota law, affirmed the district court’s finding that a prior acts exclusion in a directors and officers liability policy barred coverage for shareholder suits stemming from an insured’s failure to disclose related-party transactions to the SEC before going public.

Tile Shop Holdings, Inc. (“Tile Shop”), the operator of a chain of retail stores, went public in 2012. Its June 2012 SEC filings failed to disclose some related-party transactions—transactions dealings with an “immediate family member of a director or executive officer.” About fifteen months after Tile Shop went public, an investment research firm uncovered that the Tile Shop “secretly control[led] its largest supplier” and had “use[d] this dubious entity to report fictitious margins.” The alleged misconduct led to shareholder class-action suits under the Securities Act of 1933 and Securities Exchange Act of 1934 and derivative suits against Tile Shop’s officers and directors for breaches of fiduciary duty and unjust enrichment. Both sets of lawsuits eventually settled.

Tile Shop sought indemnification under its directors and officers policies.  Because the Tile Shop’s claims exceeded the $10 million policy limit of its primary insurer, American International Group, Inc. (“AIG”), Tile Shop sought coverage from its excess insurer, Allied World National Assurance Company (“Allied”). Allied denied coverage because of a policy exclusion for wrongful prior acts. Title Shop sought a declaratory judgment and damages. On a motion for summary judgment, the district court found that the losses were indeed not covered due to the wrongful prior acts policy exclusion.

The appeal focused on whether the claims fell within the policy exclusion. The Allied policy follows-form to the AIG primary policy “except as therein stated.” The AIG policy only provides coverage for “Wrongful Acts” occurring on or after August 20, 2012.  The AIG policy also includes a relation-back clause: “Loss arising out of the same or related Wrongful Acts shall be deemed to arise from first such same or related Wrongful Act.” The excess policy did not contain a relation-back clause and did not otherwise refer to such a clause. Thus, the Eighth Circuit held there was no coverage under the Allied policy because the Tile Shop’s wrongful acts began well “before August 20, [2012] which made any “[l]oss[es]” from them excludable under the relation-back clause.” Tile Shop Holdings, Inc. v Allied World Nat’l Assurance Co., 981 F.3d 655 (8th Cir. Dec. 7, 2020).