What Do the Definitions in Your Claims-Made Policy Actually Mean and Why Are They So Important?

04.24.2014

We can probably all agree that, generally speaking, a “claim” is a demand for money and a “wrongful act” is a negligent error or omission.  However, what seem like simple terms can take on a whole new meaning in the context of your insurance policy.  The plaintiffs in Kilcher v. Continental Casualty Company, 2014 WL 1317296 (8th Cir. Apr. 3, 2014) learned this lesson the hard way when the Eighth Circuit Court of Appeals reversed the judgment of the district court and held that the acts of a financial advisor with regard to selling various financial products to her customers, their children, and their spouses were “interrelated wrongful acts” constituting only one claim.

In 2003, the plaintiffs, siblings Crystal Kilcher, Daniel Kilcher, Anthony Muellenberg, and Troy Muellenberg, began investing with Helen Dale, a financial advisor and registered agent of Transamerica Financial Advisors, Inc. (“TFA”).  Dale gave similar investment advice to each of the plaintiffs.  Specifically, she recommended the purchase of whole life insurance policies and fixed annuities.  Heeding her advice, each plaintiff purchased a $10 million whole life insurance policy, with premiums ranging from $5,000 to $6,000 per month.  Crystal and Daniel later purchased millions of dollars of whole life insurance on their spouses, as well as whole life insurance policies on their children.  Dale also recommended supplemental insurance products and riders that provided benefits that were simply unsuitable for the plaintiffs’ respective situations.  The plaintiffs also invested in various annuities that generated little interest but charged high fees.  The plaintiffs continued to make investments through Dale until mid-2007, when another financial advisor discovered that the plaintiffs’ portfolios were ill-suited for their investment goals. 

The plaintiffs then filed individual claims against Dale and TFA with the Financial Industry Regulatory Authority (“FINRA”), alleging that Dale had breached her fiduciary duties, had misrepresented the nature of the investments, and had sold them unsuitable investments designed to generate high commissions for Dale.  The FINRA arbitration proceedings were consolidated, and the plaintiffs eventually withdrew their claims from arbitration.

Some years later, after the plaintiffs had filed claims in state court and after the court held that Dale owed a fiduciary duty to the plaintiffs, the parties entered into a settlement agreement.  Pursuant to this agreement, Continental Casualty Company (“Continental”), Dale’s insurer under a professional liability policy, agreed to pay $1 million under the policy.  In turn, the plaintiffs agreed to dismiss the pending state court action against Dale.  The settlement agreement did not, however, decide whether the plaintiffs had submitted only one claim under the insurance policy, or multiple claims.  Thus, the plaintiffs filed a declaratory judgment action against Continental.  The issue before the federal district court was: did the plaintiffs’ claims against Dale involve the same “wrongful acts” and/or “interrelated wrongful acts” as defined by the policy?  Continental agreed that if the plaintiffs prevailed and the district court held that they had submitted more than one claim, it would pay an additional $1 million.

The Agent/Broker Dealer Solutions Policy under which Dale was insured was a claims-made policy, meaning that it provided coverage for loss resulting from a “Claim” for a “Wrongful Act” in the rendering or failing to render professional services.  The Policy provided a maximum of $1 million in coverage per claim, with an aggregate limit of $2 million.  According to the Policy, more than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts would be considered as one Claim.   

Construing this language, the district court held that the plaintiffs had submitted more than one claim against Dale, as each plaintiff had met with Dale separately, invested individually, invested different amounts in different policies and annuities, suffered losses in different amounts, and would have to present his or her own evidence to carry their respective burdens of proof.  The district court also decided that the plaintiffs had stated at least two separate claims because Dale’s wrongful acts involved: (1) the sale of unsuitable investments; and (2) “churning,” which occurs when a broker abuses her customer’s confidence for personal gain by initiating transactions that at excessive.  Continental appealed, arguing that the district court erred in finding no logical connection among the plaintiffs’ claims.

On appeal, the Eighth Circuit focused its analysis on whether Dale’s wrongful acts constituted “Interrelated Wrongful Acts” that would be considered as one claim under the Policy.  The Court highlighted the Policy’s broad definition of “Interrelated Wrongful Acts,” which stated that wrongful acts were interrelated if they are logically related “by reason of any common fact, circumstance, situation, transaction or event.”  Importantly, all of the wrongful acts were committed by Dale, whose motivation was to generate commissions for herself.  Each plaintiff was a young, unsophisticated investor who had a professional relationship with Dale and who trusted Dale to act in his or her best interest.  Further, Dale deceived each plaintiff in the same way—she advised all of the plaintiffs to purchase unsuitable whole life insurance policies and unsuitable annuities.  The Court went on to hold that the offering of unsuitable investments is logically connected to the churning claim.  In other words, the Court found that a logical connection existed between Dale’s wrongful acts, and thus, the plaintiffs had only made a single claim triggering the $1 million coverage limit.

While the Court acknowledged that this result was an unfavorable outcome for the plaintiffs, to whom Dale owed a fiduciary duty, it explained that its duty is to interpret the language of the professional liability insurance policy.  Even though Dale had harmed each plaintiff individually and uniquely, this was not enough to overcome the Policy’s broad definition of “Interrelated Wrongful Acts.”  The interpretation of this language of the Policy meant the difference between the plaintiffs receiving the coverage limit for a single claim or the aggregate coverage limit of the Policy.  The Kilcher opinion is not an outlier—other courts have reached similar conclusions.  In Bryan Bros. Inc. v. Cont'l Cas. Corp., 704 F. Supp. 2d 537, 543 (E.D. Va. 2010), the United States District Court for the Eastern District of Virginia held that thefts involving the same scheme to defraud made by the same person and using the same modus operandi lead to the conclusion that the thefts were logically connected and were thus “interrelated acts” under the policy.  This decision was later affirmed by the United States Court of Appeals for the Fourth Circuit.  See Bryan Bros. Inc. v. Cont'l Cas. Co., 660 F.3d 827 (4th Cir. 2011).

While it may seem overly analytical to question the definition of such terms as “claim,” “interrelated,” and “wrongful act,” it is essential to understanding your policy.  If these terms are defined in broad strokes, your coverage may be much more limited than you think.  These outcomes make it critically important for policyholders to truly understand their scope of risk and the necessity of carrying adequate per claim or occurrence limits.  Failure to fully understand the scope of the interrelated wrongful acts definition can find policyholders with inadequate insurance coverage in many instances.

Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or jwisegarver@hf-law.com.