On March 11, 2010, the Court of Appeals for the Sixth Circuit affirmed a district court decision permitting an insured to shift the burden of primary coverage for various securities-related claims to its previous insurer by purchasing an extended reporting period (ERP) and adding an endorsement to its current primary policy making it specifically excess of the prior policy.
In Abercrombie & Fitch Co. v. Federal Insurance Company, Case No. 09-3096, Abercrombie’s insurer for the 2004-2005 policy period (Federal) refused to pay defense costs related to securities class actions, shareholder derivative suits, and an SEC investigation on the grounds that Abercrombie had improperly “colluded” with its subsequent insurer (National Union) to shift the burden of primary coverage to Federal, thereby prejudicing Federal’s right of contribution from National Union in breach of the policy’s cooperation clause. According to Federal, Abercrombie’s decision to purchase the ERP and to add an endorsement to the National Union policy making that policy excess to the Federal policy abrogated Federal’s right to pro rata contribution from National Union. In response, Abercrombie argued that the cooperation clause did not apply to Abercrombie’s negotiations or agreements with other insurers, and that the provision applied only to the parties’ rights and obligations in connection with the defense and settlement of claims made against Abercrombie.
The Sixth Circuit agreed with Abercrombie and distinguished between business decisions made by an insured that “prejudice” an insurer’s “position,” and the rights and obligations of insureds and insurers that are specifically listed in a typical cooperation clause. The Court noted that the ERP provision in the Federal policy did not limit Abercrombie’s ability to elect ERP coverage in the event that a claim was made after the Federal policy elapsed but before Abercrombie’s time for selecting the ERP option expired. The Court also held that Federal had waived any argument based on the duty of good faith and fair dealing because it did not raise the argument before the district court.
