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September 2011

Feldman v. Illinois Union Ins. Co. - "Interrelated Wrongful Acts" Provision Precludes Coverage for Amended Pleading

An "Interrelated Wrongful Acts" Provision in a Claims Made Insurance Policy Precludes Coverage Where Claims Filed During the Policy Period Shared a Common Nexus with Claims Filed Before the Inception of the Policy.

(September 6, 2011) 198 Cal. App. 4th 1495; 11 C.D.O.S. 11504

The California Court of Appeal, Sixth Appellate District, affirmed a grant of summary judgment to an insurer who refused to defend its insureds in an underlying action.  The court concluded the claims-made policy's "interrelated wrongful acts" provision precluded coverage because the amended pleading filed during the policy period shared a common nexus with the original pleading filed prior to the inception of the policy.

Illinois Union Insurance Company (Illinois Union) insured ZF Micro Solutions, Inc. ("ZF Solutions) and its directors and officers from July 1, 2002, to July 1, 2003 under a liability policy.  The Illinois Union policy  provided coverage for claims first made and reported during the policy period.  The policy contained the following restriction on coverage: "More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest of the following times: [?] (a) the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made. . . ."  The policy defined the term "Interrelated Wrongful Acts" as "more than one Wrongful Act which have as a common nexus any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, events or transactions."

David Feldman was the president and chief executive officer of ZF Solutions.  ZF Solutions was the successor company to ZF Micro Devices, Inc. ("ZF Devices").  ZF Solutions designed, marketed and sold semiconductor devices.

On April 25, 2002, ZF Solutions sued National Semiconductor Corporation (NSC) for failing to produce devices for ZF Solutions in accordance with the parties' contract.  On May 28, 2002 (before the Illinois Union policy period), NSC filed a cross-complaint against both ZF Devices and ZF Solutions for failure to pay for devices in accordance with the same contract.  NSC's cross-complaint contended ZF Devices assigned ZF Solutions the NSC contract and other assets for the fraudulent purpose of escaping liability for ZF Devices' debt to NSC under the contract.  NSC's cross-complaint contained two causes of action: 1) breach of contract against both ZF Devices and ZF Solutions; and 2) "Successor Liability" against ZF Solutions.

On April 25, 2003 (during the Illinois Union policy period), NSC filed an amended cross-complaint.  In this pleading, NSC added Feldman and two others as cross-defendants and asserted new causes of action against the cross-defendants: breach of fiduciary duty, fraudulent conveyance, invasion of privacy and violation of the California Unfair Competition Law (California Business & Professions Code §17200 et seq.).  In this new pleading, NSC described in more detail its efforts to assist ZF Devices to remain financially viable.  NSC also elaborated on the details of the transfer of assets, which NSC characterized as the product of collusive transactions designed to defraud creditors such as NSC.  The amended cross-complaint also included facts related to a new allegation, that Feldman had secretly recorded two confidential telephone conversations with NSC executives, and later disclosed a transcript of each conversation to third parties without NSC's consent. These facts formed the basis of the cause of action for invasion of privacy.

Feldman tendered NSC's amended cross-complaint to Illinois Union.  Illinois Union denied coverage, asserting that NSC's claim had originally been made in the original cross-complaint, before the inception date of the Illinois Union policy, and the policy's "Interrelated Wrongful Acts" provision deemed NSC's claim to be first made at the time of the filing of the original cross-complaint.

Feldman, ZF Solutions and ZF Devices then sued Illinois Union for declaratory relief, breach of insurance contract and breach of the covenant of good faith and fair dealing. The trial court granted Illinois Union's motion for summary judgment on the basis the "Interrelated Wrongful Acts" provision encompassed both NSC's original cross-complaint and its amended cross-complaint.

The Court of Appeal affirmed the summary judgment.  To determine whether NSC's claims  involved "Interrelated Wrongful Acts," the court compared the allegations of its original complaint to its first amended complaint.  The court found, although the amended cross-complaint included new facts, defendants and causes of action, these new allegations all pertained to the alleged fraudulent assignment and transfer of assets from ZF Devices to ZF Solutions, which was alleged in the NSC's original cross-complaint.  Thus, the court concluded the claims of the original and amended cross-complaints were "interrelated wrongful acts," and therefore constituted one claim made at the time of the filing of the original cross-complaint, before the inception of the Illinois Union policy.  The court further found, while the invasion of privacy cause of action was not interrelated to the allegations in the original cross-complaint, it was clearly excluded under the terms of the policy.

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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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