Policyholder Pulse
In a recent decision from the Southern District of New York, Judge Jed S. Rakoff rejected an insurer’s attempt to stretch a “Subsequent Acts” exclusion beyond its text and denied a motion to dismiss a policyholder’s coverage action. The decision in AmTrust Financial Services, Inc. v. Forge Underwriting Ltd. underscores a familiar but critical point in New York insurance law: exclusions are strictly construed, and insurers bear a heavy burden when they attempt to defeat coverage at the pleading stage.
Background
The dispute arises from coverage for a securities class action relating to AmTrust’s publicly traded preferred stock. Between 2013 and 2016, AmTrust issued six series of preferred shares that were listed on the NYSE.
In 2018, AmTrust’s controlling shareholders pursued a take‑private transaction. During that process, the company publicly represented that the preferred shares would remain listed following the transaction. The merger closed on November 29, 2018.
Roughly two months later, however, AmTrust announced that it would delist the preferred shares. The delisting became effective in February 2019.
Preferred shareholders subsequently filed a securities class action alleging that AmTrust had misrepresented its plans regarding the future listing of the preferred stock. The complaint asserted claims under Section 10(b) of the Exchange Act and Section 20(a) against the company and certain executives. The case survived a motion to dismiss and later settled.
AmTrust sought coverage for its defense and settlement costs under its D&O insurance program, including an excess run‑off policy issued by Forge Underwriting Limited. The run-off program was designed to address Claims made after the transaction based upon Wrongful Acts committed before the transaction. Forge denied coverage based on a “Subsequent Acts Exclusion.” The endorsement barred coverage for claims arising out of any “Wrongful Act” committed on or after November 29, 2018—the date the take‑private transaction closed.
Forge argued that the operative “Wrongful Act” was the January 2019 announcement and the ensuing delisting. Because that event occurred after the policy’s cutoff date, Forge contended that the exclusion barred coverage and moved to dismiss AmTrust’s complaint.
Judge Rakoff disagreed.
The Court’s Analysis
The court’s reasoning turned on a simple but decisive point: Forge failed to demonstrate that the post‑transaction delisting was itself a “Wrongful Act” within the meaning of the policy.
Under New York law, the court held, an insurer invoking an exclusion bears a “heavy burden.” The insurer must establish that the exclusion is stated in clear and unmistakable language and that its interpretation is the only reasonable one. Any ambiguity must be resolved in favor of the insured.
Forge’s argument faltered at the threshold. The policy defined “Wrongful Act” to include misstatements, omissions, and breaches of duty. But the court found that the insurer never established that the delisting itself fell within that definition.
Indeed, the underlying securities plaintiffs characterized the January 2019 announcement not as wrongful conduct but as a corrective disclosure—the public revelation of previously concealed information. The misconduct alleged, in other words, consisted of AmTrust’s earlier statements that the preferred shares would remain listed.
Those statements were made before the November 29, 2018, cutoff date.
Judge Rakoff emphasized that the delisting itself was not alleged to be unlawful. The policy’s definition of “Wrongful Act,” the court observed, contemplates conduct that is actually improper—such as misstatements or breaches of duty. A lawful corporate action, such as a decision to delist securities permitted by exchange rules, does not automatically qualify.
The court also pointed to a related New York state court decision involving AmTrust that held the company had no duty to inform investors that it might someday voluntarily delist its securities. That ruling further reinforced the point that the delisting itself was a lawful corporate act rather than actionable misconduct.
Forge attempted to rely on the broad “arising out of” language in the exclusion. But the court rejected that approach as well. While such lead‑in language can expand the reach of an exclusion, it does so only after a qualifying wrongful act has been identified. It cannot substitute for one.
The insurer also relied on decisions in Xerox Corp. v. Travelers Casualty & Surety Co. of America and WDF Inc. v. Zurich American Insurance Co. that applied subsequent‑acts exclusions where wrongful conduct occurred both before and after a cutoff date. Judge Rakoff distinguished those cases because each involved independent wrongful acts occurring after the relevant cutoff date.
Here, by contrast, the only post‑cutoff event was a delisting that the securities plaintiffs themselves described as a corrective disclosure.
Finally, the court explained that even if the policy language were ambiguous on this point, that ambiguity would defeat the insurer’s motion in any event. At a minimum, there were competing reasonable interpretations of the term “Wrongful Act,” and under New York law that ambiguity must be resolved in favor of the insured.
Key Takeaways for Policyholders
Judge Rakoff’s decision offers several practical reminders for policyholders confronting aggressive coverage defenses.
- Under New York law, exclusions remain subject to strict construction. Insurers cannot deprive insurers of coverage unless the exclusion clearly and unambiguously applies to the claim at issue.
- In applying an exclusion such as one like this, where the run-off policy has been designed to address suits filed post-transaction for pre-transaction wrongful acts, insurers cannot recast lawful corporate acts as post-transaction wrongful acts simply because those events triggered litigation. The relevant inquiry focuses on the misconduct alleged in the underlying complaint.
- Broad causation language does not eliminate the need for a qualifying wrongful act. Even exclusions framed in expansive “arising out of” terms have limits—and still require the insurer to identify conduct that actually falls within the exclusion’s operative language.
The decision allows AmTrust’s coverage claims to proceed, but its broader significance lies in the court’s refusal to allow an insurer to expand a policy exclusion beyond its text. As the ruling makes clear, courts applying New York law will continue to hold insurers to the language they drafted—no more and no less.