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Scottsdale Insurance not liable under D&O policy

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Scottsdale Insurance Co. is not obligated to provide coverage to current and former officers of an electronics firm under exclusions in its directors and officers liability policy, says a federal appeals court, in upholding a lower court ruling.

Orange, California-based Westinghouse Digital L.L.C. was sued by Taipei, Taiwan-based Tatung Co. for $19 million in 2009 for breach of a product supply agreement, according to court papers in Douglas Woo et al. v. Scottsdale Insurance Co.

Scottsdale, Arizona-based Scottsdale denied coverage. Scottsdale said the Tatung litigation began in at least February 2009, which was prior to its policy’s continuity dates of April 30, 2010, and April 30, 2011. It also denied coverage on the basis the litigation arises from an arbitration award and judgment that found Westinghouse’s chief executive officer, Richard Houng, had engaged in fraud.

The U.S. District Court in Pasadena, California, ruled in Scottsdale’s favor, and plaintiffs appealed.
A three-judge panel of the 9th U.S. Circuit Court of Appeals in San Francisco upheld the lower court ruling. “At least two clauses included in the parties’ insurance contract, namely the exclusions for prior knowledge and prior litigation, expressly preclude coverage for the entirety of the Tatung lawsuit,” said the appeals court.

“The prior knowledge exclusion precludes coverage for the Tatung suit because an insured, albeit not necessarily the insureds here seeking coverage, knew of the facts and circumstances form which the Tatung suit derived,” said the ruling.

“Similarly, the prior litigation exclusion precludes coverage for the Tatung suit because the suit arose out of a demand letter issued before April 2010.

“Because these exclusions render coverage impossible for any of the claims raised in the Tatum lawsuit, insurer has no duty to defend insureds therein,” said the ruling, in upholding the lower court ruling.