Amtrust International Underwriters DAC v. 180 Life Sciences Corp.

Background

This insurance-coverage case concerns directors-and-officers liability policies issued by AmTrust International Underwriters DAC and Freedom Specialty Insurance Company. The policies were purchased by KBL Merger Corp. IV, which later changed its name to 180 Life Sciences Corp. The AmTrust policy had a $3 million limit, and Freedom’s excess policy provided $2 million of coverage above the AmTrust policy and followed the AmTrust policy’s terms.

The Securities and Exchange Commission investigated the merger and subpoenaed Krauss and George Hornig. 180 Life advanced millions of dollars in subpoena-related expenses for Krauss and more than $100,000 for Hornig. 180 Life demanded coverage from the insurers. AmTrust filed this declaratory-relief action, arguing that 180 Life was not an insured under the policy issued to KBL and that policy exclusions barred coverage. Freedom also argued that its policy did not provide coverage.

In an earlier order, the court had decided that 180 Life was the named insured, that the SEC investigation became a claim under the policies after subpoenas were served, and that the subpoena-related expenses were defense costs qualifying as loss within the basic scope of coverage. The court did not then decide that the expenses were covered because the insurers might rely on the policies’ change-in-control exclusion.

Motion and Legal Standard

180 Life sought partial summary judgment on whether the policies’ advancement clause required the insurers to pay the subpoena-related defense costs while the final coverage question remained unresolved. Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law.

The advancement clause required the insurer to advance defense costs above the applicable retention at least every 90 days and before final disposition of the claim. It also required repayment if an insured ultimately was not entitled to payment of the loss.

Court’s Analysis

The court applied California insurance law. It held that the advancement clause applies to potentially covered claims, not only claims later determined to be actually covered. The clause’s requirement of payment before final resolution, combined with the insurers’ right to seek repayment if coverage ultimately failed, showed that the insurers had to advance costs while coverage remained uncertain.

The court then considered whether the SEC subpoenas and related expenses were potentially covered. It had already found that the subpoenas were claims and that the expenses were defense costs within the policies’ basic coverage. That shifted the burden to the insurers to prove that the change-in-control exclusion specifically barred coverage.

The exclusion applied to claims alleging, in whole or in part, wrongful acts committed or attempted after the November 6, 2020 merger. The subpoenas requested documents concerning both pre-merger and post-merger periods, but they did not themselves identify any wrongful acts. The insurers presented no evidence that Krauss or Hornig were suspected of, or were being investigated for, post-merger misconduct. The court therefore found that the insurers’ speculation was insufficient to establish that the exclusion applied.

The court noted that the insurers might later develop enough evidence to invoke the exclusion. If the expenses ultimately proved not to be covered, the insurers could seek repayment of amounts they had advanced. On the record before it, however, the court found a potential for coverage.

Disposition

The court granted 180 Life’s motion for partial summary judgment. It ordered AmTrust to advance to 180 Life all defense costs above the retention threshold that 180 Life had advanced or would advance to Krauss and Hornig in connection with the SEC subpoenas. After the AmTrust policy was exhausted, Freedom was ordered to advance those defense costs under its policy. The order terminated the motion identified as ECF 62.