Interrelated Wrongful Act Provisions Do Not Create Coverage for Uncovered Claims
The U.S. District Court for the Western District of Washington, applying Washington law, has held that a D&O insurer had no duty to pay defense costs for an arbitration asserting solely excluded contractual claims even though it was deemed related to an earlier demand letter that included potentially covered breach of fiduciary duty allegations. Lesmir Corp. v. Houston Cas. Co., 2026 WL 1251650 (W.D. Wash. May 7, 2026).
The insured, a commercial real estate company, received a letter from investors alleging that its manager engaged in a pattern of misconduct arising from the management and operations of the insured’s affiliated companies (the “January 2023 Demand”). The investors asserted that these actions breached “respective operating agreements” and violated “fiduciary duties owed to the affiliated companies and its investors.” The insurer agreed to advance defense costs in connection with the breach of fiduciary duty allegations under a reservation of rights.
Subsequently, in August 2023, the same investors initiated an arbitration against the manager (the “Arbitration”). The Arbitration also alleged misconduct related to the management of the affiliated companies, and asserted four causes of action, all sounding in contract. The insurer concluded that while the allegations in the Arbitration appeared “to share a common nexus of fact” with the January 2023 Demand under the policy’s related claim provisions, the contract exclusion barred coverage for the Arbitration. After settling the matter, the insureds sued the insurer, seeking reimbursement for all defense costs incurred in the Arbitration on the basis that the Arbitration “arise[s] from” the covered allegations in the January 2023 Demand.
The court granted summary judgment to the insurer, concluding that amounts sought by the insureds were incurred in defense of the Arbitration—coverage for which was barred by the contract exclusion—rather than the January 2023 Demand. Rejecting the insureds’ argument, the court explained that while Washington courts have, in limited circumstances, required insurers to pay the full cost of defending claims “where defense costs were incurred in a single proceeding in which covered and uncovered claims were defended together and there was no reasonable way to segregate those costs,” those cases “do not establish a freestanding rule that any defense cost ‘reasonably related’ to a covered claim is recoverable.” The court held that the Arbitration was a “separate proceeding” from the January 2023 Demand, and “even assuming the two matters shared a common factual nucleus, factual overlap alone does not alter the nature of the claims actually asserted,” as “[t]he arbitration pleaded only breach of contract claims; it did not assert breach of fiduciary duty.” The court determined that the “reasonably related” principle advanced by the insureds also did not apply because “[t]he costs at issue were incurred in defending a proceeding that asserted only uncovered claims and are therefore readily distinguishable from any costs incurred in response to the January 2023 Demand.” Moreover, “[t]he mere possibility that fiduciary duty claims could have been asserted, or that they remained theoretically viable during the same period, does not transform the costs of defending a contract proceeding into costs incurred in defense of a fiduciary duty claim.”
Finally, the court rejected the insureds’ contention that the policy’s interrelated wrongful act provision, under which the insurer treated the January 2023 Demand, a prior letter, and the Arbitration as a single Claim, created coverage. The court opined that the policy’s interrelated wrongful acts provisions “serve a specific and limited function: they determine when a claim is deemed made for purposes of identifying the applicable policy period and avoiding duplicative retentions.” Such provisions, in the court’s view, “do not define the substantive scope of coverage for any particular demand or proceeding.”
