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An Insured’s Misrepresentations In Warranty Resulted In Disclaimer (NY)

January 25, 2019

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<p style="text-align: justify;">In <em><a href="http://blog.wcmlaw.com/wp-content/uploads/2019/01/Patriarch-Partners-LLC-v.-Axis-Insurance-Company.pdf">Patriarch Partners, LLC v. Axis Insurance Company</a></em>, the Second Circuit declined to alter its prior decision involving the interpretation of a policy warranty and its impact on coverage.  In so doing, the court implicitly incorporated the terms of the insured’s warranty, into the policy, to find there was no coverage for a multimillion dollar government investigation.</p>
<p style="text-align: justify;">In 2011, Patriarch Partners, LLC, a private equity investment firm, obtained an excess directors and officers policy through Axis Insurance Company which provided $5 million in excess insurance.  Patriarch had $20 million in primary coverage.  Axis was concerned about potential new liabilities, thus, it required Patriarch to execute a warranty statement that would eliminate liability in the event Patriarch had prior knowledge of a claim.  Patriarch presented a warranty signed by its sole officer stating it was not aware of any “facts or circumstances that would reasonably be expected to result in a Claim.”  Unbeknownst to Axis (but not to Patriarch), the Securities and Exchange Commission had been investigating Patriarch as early as 2009.  In 2012, after the Axis policy took effect, the SEC served a subpoena on Patriarch.  Patriarch subsequently sought coverage for the costs related to the SEC’s investigation.</p>
<p style="text-align: justify;">In the ensuing coverage action, the Second Circuit relied on the terms of the warranty and found that no coverage existed because Patriarch had been aware of facts and circumstances that could reasonably be expected to result in a claim.  The Second Circuit rejected Patriarch’s argument that it would have to have specific knowledge that the “claim” would reach the $20 million threshold, thus, triggering the Axis excess policy, in order for Axis to disclaim coverage on this basis. The court further rejected Patriarch’s argument that the relevant facts and circumstances had to be subjectively known by Patriarch’s founder, who signed the document, citing general principals of agency.  Interestingly, the court’s holding relied mostly on the warranty itself, even though the warranty was not directly incorporated into Axis’s policy.</p>
<p style="text-align: justify;">Ultimately, this opinion highlights the importance of full disclosure in an insurance application or warranty in order for coverage to attach.</p>
<p style="text-align: justify;">Thanks to Doug Giombarresse for his contribution to this post.  Please email <a href="chayes@wcmlaw.com">Colleen E.  Hayes</a> with any questions.</p>

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