One of the perennial management liability insurance coverage issues is whether a policy’s contractual liability exclusion precludes coverage for related tort claims filed alongside claims for breach of contract. Often, these issues turn on the specific wording of the exclusion involved. A recent insurance coverage decision from the Northern District of Illinois addressed these issues in the context of an underlying lawsuit involving both a breach of contract claim and a claim for tortious interference with contract. As discussed below, the court concluded, based on the specific language involved, that the exclusion did not preclude coverage for the tortious interference claim.

The Court’s March 31, 2026, opinion can be found here. An April 9, 2026 LinkedIn post about the court’s decision by Paul Curley of the Kaufman, Borgeest & Ryan law firm can be found here.

Background

Metropolis Condominium Association is a homeowners’ association for a condo building in Chicago. The building contains a parking garage. Metropolis had a management agreement with Addis, a parking garage manager, to operate the garage. Addis operated the garage pursuant to a collective bargaining agreement (CBA) with the Teamsters Union.

Under the garage management agreement, Metropolis was required to pay Addis for operating expenses, including the salaries, wages, payroll taxes, and fringe benefits of the union members. Addis apparently sought to have the union release it from the CBA. The union refused. Addis’s principal then formed a new non-union company, TBF Parking, to perform the work previously performed by Addis. Addis then stopped making monthly contributions to the union funds.

In 2019, the union sued Addis and TBF seeking recovery of the unpaid fringe benefit contributions. Addis and TBF were ultimately found liable for unpaid contributions of $327,253. The union sought to collect the funds from TBF, but it was insolvent.

In April 2023, the union sued sued Metropolis (the Funds lawsuit), asserting claims for breach of contract and tortious interference with contract. The Funds lawsuit ultimately was settled in April 2025.

Metropolis sought to have its insurer defend and indemnify it for the Funds lawsuit. The insurer filed a lawsuit against Metropolis seeking a judicial declaration that, owing to the policy’s contract exclusion, it did not have a duty to defend or indemnify Metropolis. Metropolis countersued the insurer contending that the insurer had breached its contract. The parties filed cross-motions for summary judgment.

Relevant Policy Language

The policy’s contract exclusion provided in relevant part that:

We are not liable to pay, indemnify or defend any claim for any actual or alleged liability of an insureds under the terms, conditions or warranties of any oral or written contract or agreement….

The Court’s March 31, 2026, Opinion

In a March 31, 2026, opinion, Northern District of Illinois Judge Matthew F. Kennelly, applying Illinois law, denied the insurer’s summary judgment motion and granted Metropolis’s summary judgment motion.

The insurer had argued that the coverage for the Funds lawsuit was precluded by the contract exclusion because it “was brought against Metropolis because of and due to Metropolis’s liability under the terms of the Management Agreements.”  Metropolis argued that the tortious interference with contract theory of liability in the Funds lawsuit did not arise under the terms of any contract. Metropolis argued further that under Illinois law if any portion of a complaint is covered, a duty to defend insurer must defend the entire lawsuit.

Judge Kennelly started his analysis of the coverage issue by reviewing the underlying allegations in the Funds lawsuit. The first count – the breach of contract claim – was based on allegations that Metropolis had breached its obligations under the garage management agreement. The second count in the underlying lawsuit – the tortious interference claim – alleged that Metropolis was liable because it induced Addis/TBF to breach the CBA. Metropolis pointed out that it was not a party to the CBA.

Judge Kennelly observed that the tortious interference allegations “did not rely on Metropolis’s liability under the terms of the management agreement.” Rather, he observed, the tortious interference allegations “alleged inducement of another entity’s breach of the CBA, to which Metropolis was not a party.”  That is, Judge Kennelly said, with reference to the contract exclusion’s language, the tortious interference claims against Metropolis “did not involve a claim ‘for …alleged liability of [Metropolis] under the terms … of any …contract.’” The Funds lawsuit therefore, Judge Kennelly said, “alleged a theory of liability against Metropolis that is not barred by the contract exclusion term.”

The insurer sought to argue that the exclusion nevertheless applied to preclude coverage, relying on various prior court decisions that had enforced the contract exclusion. Judge Kennelly not only found that the cases on which the insurer sought to rely were factually distinct, but he also noted that the contractual exclusion in the cases on which the insurer sought to rely was different than the exclusion at issue in this case. The other cases involved contractual exclusion that had a broad preamble, excluding coverage for claims “based upon or attributable to liability under any contract.”

The contract exclusion at issue in this case, Judge Kennelly said, was more limited and did not include the broader language present in the policies involved in the cases on which the insurer sought to rely. The exclusion at issue here precluded coverage only for alleged liability “under” the terms of any contract; none of the tortious interference allegations, Judge Kennelly said “were based on Metropolis’s liability under the terms of the CBA, management agreements, or any other contracts.” The tortious interference claim, Judge Kennelly held, does not fall within the policy’s contract exclusion.

Discussion

Long-time readers know that the wording of contract exclusions is an issue that I have long argued insurers “regularly get wrong.” Specifically, I have argued that the contract exclusion should not have the broad “based upon, arising out of, in any way involving” preamble, but rather should have the narrower “for” wording.

My argument has always been that the exclusions with the broad preamble sweep far too broadly, precluding coverage for claims that ought to be covered. (Indeed, as I discussed at length here, the Seventh Circuit, applying Wisconsin law, has said that an E&O policy’s contract exclusion with the broad preamble improperly rendered that policy’s coverage “illusory.”)

The specific problem with the overbroad wording is that it extends the reach of the contract exclusion not only to contract claims but to tort claims that are not based on contractual liability. (I have written about cases where courts have applied the contract exclusion to preclude coverage for tort claims, for example, here and here.)

That was in fact what the insurer was trying to do here, to extend the contract exclusion to try to preclude coverage for tort claims that are not based on contractual liability. Interestingly, in order to try to make this argument, the insurer sought to rely on cases involving policies that had the broader “based upon, arising out of” language. However, as Judge Kennelly found, the exclusion at issue here was narrower, did not have the broad language, and therefore did not reach a claim that did not involve contractual liability.

Also interestingly, to me at least, is that Judge Kennelly did not base his analysis of the exclusion here on the fact that it had the narrower “for” wording. That certainly would have been what I would have argued; that is, if I were arguing for Metropolis here, I would have argued that the tortious interference claim was not a claim “for” contractual liability. However, Judge Kennelly based his analysis on a slightly different wording issue, which is that the tortious interference claim was not a claim “under” a contract, as was required under this policy in order for the contract exclusion to apply.

This is the point in my discussion of these issues where I invoke my privileges as the oldest guy in the room. (Which often is the case for me these days.) As the old guy, I may be among the few these days that remembers how things worked before the contract exclusion was added to the policy.

In those days, the insurers argued that contractual liability claims were not covered because contractual liability is a voluntarily undertaken liability, rather than a liability imposed by law. The insurers would argue that liability insurance policies were intended to provide insurance only for liabilities imposed by law, not for voluntarily undertaken liabilities, like those based on a contract. (The reason I know that insurers made these arguments is that I made these arguments myself on behalf of insurers as a young carrier-side attorney early in my career.)

When entity coverage became a standard part of private company D&O insurance policies, insurers added the contractual liability exclusion as a precaution. (Public company D&O insurance policies do not have a contractual liability exclusion because the entity liability coverage in public company D&O insurance policies applies only to Securities Claims.) Unfortunately, rather than restricting the scope of the contractual liability exclusion to preclude coverage only for the voluntarily undertaken liabilities, some insurers worded their exclusion broadly, so as to preclude coverage not only for voluntarily undertaken liabilities but also to preclude coverage for liabilities imposed by law – that is, the very types of claims for which the policies were intended to provide coverage.

My view is that the contractual liability exclusion should be applied so as to preclude coverage only for the voluntarily undertaken liabilities, but not to preclude coverage for the liabilities imposed by law. For that reason, the appropriate preamble for the contractual liability exclusion is the “for” wording, not the broad “based upon, arising out of” wording.

Though the Court’s analysis in this case was not exactly as I would have expected, the case is a good illustration of the way that a narrowly tailored exclusion operates – and of the way the policy should operate. This insured should have coverage under its policy for tort claims, even if, as we can all agree, the policy is not there to insure the policyholder’s voluntarily undertaken contractual liabilities.

One last bit of history. There was a time when many carriers’ forms used the broad “based upon, arising out of” preamble for the bodily injury/property damage exclusion found in most private and non-profit D&O insurance policies. Worded this way, the BI/PD exclusion swept far too broadly. A concerted effort on behalf of policyholders got the insurers to change their wording. Most D&O insurance policies’ BI/PD exclusions now use the “for” wording rather than the broader “based upon, arising out of” wording. Indeed, the “for” wording for the BI/PD exclusion is now pretty much standard. Time to bring the contractual liability exclusion into the modern era as well; the industry needs to move to a “for” wording standard for the contractual liability exclusion.

In the following guest post, Stephen Hourigan presents his view that Delaware’s courts have reimagined the role of Corporate Boards’ Audit Committees, yet the D&O insurance underwriting approach has yet to catch up to these changes. Stephen is the Founder and CEO of Penguin AI. We would like to thank Stephen for allowing us to publish his article as a guest post on this site. Here is Stephen’s article.

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“Tools D&O Carriers Use to Assess Governance Risk Were Built for a Doctrine That No Longer Exists”

For D&O carriers, the audit committee has always been the linchpin of governance risk assessment. A functioning audit committee — independent, well-composed, meeting regularly — has been the primary indicator that a board is exercising meaningful oversight. It is the structure that governance rating agencies score, that renewal questionnaires probe, and that underwriters use as the proxy for whether a board actually knows what it needs to know.

That proxy is no longer sufficient. The four most consequential governance failures of the past decade prove it.

The Structural Problem No Rating Captures

Every major Caremark claim of the past decade traces to a single structural failure: the audit committee did not receive the information it needed, when it needed it, through a channel independent of management. Not because the committees didn’t exist or weren’t independent. But because every reporting system available to them passed through the management layer before it reached the boardroom — and in each case, that management layer had both the motive and the authority to shape what arrived.

MSCI, ISS, and carrier renewal questionnaires assess structural governance characteristics. They ask whether the audit committee exists, has independent members, meets with appropriate frequency, and whether the company has an ethics hotline. These are meaningful questions. They are also the wrong questions for the risk environment Delaware’s courts have created.

Boeing and Wells Fargo: The Pattern Established

By 2016, Boeing’s engineers were raising written concerns about the 737 MAX’s MCAS system. The signals were specific, documented, and traceable. They stopped at program management. The board’s Safety Committee met regularly and never saw them. The DOJ resolution reached $2.5 billion; the Caremark derivative settlement reached $237.5 million — at the time one of the largest in Delaware history.

Boeing’s governance ratings were strong the day before the crashes. Every structural indicator said the board was functioning. The functional reality was the opposite.

Wells Fargo’s fake accounts scandal ran from at least 2011 through 2016. The ethics hotline was operational. Every channel functioned as designed — routing employee intelligence through the Community Banking management layer whose compensation was tied to the very targets driving the fraud. The board’s first material signal about the conduct’s scope came from the Los Angeles Times, more than two years after the pattern was established in the company’s own systems.

The OCC’s response was unprecedented: civil money penalties assessed against individual board members. The regulatory message was unambiguous — the existence of a reporting system is not sufficient. The question is whether that system is structurally independent of the management layer being reported against. Wells Fargo’s governance infrastructure satisfied every conventional metric. The DOJ resolution reached $3 billion.

Walmart and McDonald’s: The Doctrine Hardens

In Walmart’s case, the company’s own internal investigator concluded in 2005 that bribery allegations in Mexico were credible and recommended aggressive independent investigation. Senior legal leadership redirected the investigation back to the implicated executives. The audit committee operated for six years on a version of events management had prepared for it.

The Delaware court’s response produced what is now the governing standard: a compliance program that management can bypass is not a functioning monitoring system. Boards cannot satisfy Caremark obligations through reporting structures management controls.

McDonald’s extended that requirement further still. The 2023 Delaware Chancery ruling established that individual officers carry direct Caremark liability for compliance failures within their own domains. The defendant universe in governance litigation expanded materially — every named C-suite officer whose area includes a compliance function now carries personal fiduciary exposure for the same structural failure that produced board-level claims in Boeing, Wells Fargo, and Walmart.

The Question Carriers Should Be Asking

The carriers writing D&O coverage for public companies today are pricing governance risk against a Caremark doctrine that was last updated in their underwriting methodology before Walmart’s real-time monitoring mandate, before McDonald’s officer liability extension, and before Boeing’s $237.5 million demonstration that a structurally isolated audit committee is not a defense — it is the claim.

The static annual governance snapshot — whether from MSCI, ISS, or a renewal questionnaire — was adequate for a legal environment where Caremark claims were rare. It is not adequate for the environment Delaware’s courts have created over the past decade.

The right question at renewal is not whether the audit committee exists and meets. It is whether the audit committee has access to management-independent, authenticated, real-time intelligence from the organizational front line — and whether a contemporaneous record exists demonstrating that management actually responded to what the board’s oversight system surfaced.

Each of the four companies in this analysis would have answered no to that question. Their governance ratings would have suggested otherwise.

The gap between what Delaware requires and what carriers currently assess is unpriced risk sitting in every D&O book today. The carriers who close that gap first will see the next Boeing or Wells Fargo in their renewal data rather than in their claims reports.

The audit committee has been reimagined by the courts. The underwriting methodology hasn’t caught up yet.

Stephen Hourigan

One of the interesting features of the rise of AI has been the advent of “AI-and” businesses – that is, businesses whose strategy is to apply AI tools to traditional business models. When “AI-and” business results fall short, securities litigation has sometimes followed. In the latest example of this kind of litigation, earlier this week a plaintiff shareholder filed a securities suit against Upstart Holdings, a company whose business model involves applying AI tools to traditional credit rating and lending services, after the results from the company’s AI-updated credit rating tool disappointed investors. A copy of the new Upstart Holdings complaint can be found here.

Background

Upstart is a cloud-based artificial intelligence (AI) lending platform. The company uses its own AI models to quantify loan risk. The company claims that its credit rating approach generally leads to higher loan and credit approvals and lower interest rates relative to traditional lending practices, providing more predictable returns to its capital partners (banks, credit unions, and institutional investors). The company periodically updates its AI models to try to improve its approval process.

In May 2025, the company launched the latest iteration of its AI-based approval model. The updated model was called “Model 22.” The company touted the accuracy of Model 22, claiming that it would increase loan approval rates and, accordingly, the company’s revenue. Indeed, in both May 2025 and August 2025, the company raised its annual revenue guidance.

On November 4, 2025, the company released its financial results for 3Q25. The company’s reported quarterly revenues missed its previously issued guidance as well as consensus estimates, and the company also lowered its guidance for 4Q25 and full year 2025.

In an earnings call that same day, the company blamed its disappointing 3Q results on Model 22, which the company said had “overreacted” to macroeconomic signals during the quarter, lowering approvals and conversion rates. The company also acknowledged that it had “knowingly” calibrated the AI model to be “more conservative on the credit side,” and that negative impacts of Model 22’s “over-responsiveness” to macroeconomic signals would continue to negatively impact the company’s 4Q and full year revenues. The company’s share price fell approximately 10% on this news.

The Lawsuit

On April 7, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Upstart and certain of its executives. The complaint purports to be filed on behalf of investors who purchased the company’s securities between May 14, 2025, and November 4, 2025.

The complaint alleges that during the class period the defendants failed to disclose that: “(i) Model 22 frequently overreacted to negative macroeconomic signals in performing its risk-separation processes; (ii) accordingly, Model 22’s overall accuracy and propensity to increase loan approval rates was overstated; (iii) Model 22’s overly conservative assessment of credit and macroeconomic conditions was having a significantly negative impact on Upstart’s revenue results, rendering the Company’s previously issue FY 2025 revenue guidance unreliable and/or unrealistic; and (iv) as a result, Defendants’ public statements were materially false and  misleading at all relevant times.”

The complaint alleges that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

As I noted at the outset, this company represents an example of the new AI adaptive approach to a traditional business model, in which the company pursues an “AI-and” strategy. Here, the company basically provide a credit rating and loan approval service. The difference is that the company claimed to provide superior services through its application of AI tools. It sought to differentiate itself by portraying its approach as an “AI-and-credit rating” model.

As more and more companies seek to differentiate themselves by trying to characterize their strategy as an “AI-and” business model, problems can arise when the supposed advantages of the  AI-enhanced business model falls short of expectations, as happened with this company. Some readers may accurately perceive the allegations that can follow in the wake of the shortfall as “AI washing”-type allegations. The important point here is that “AI-and” businesses can be particularly susceptible to these kinds of allegations, as their AI-differentiated business approach is built on the premise that the AI-based approach will produce superior results – a premise that potentially sets the company up for a fall (and possibly for securities litigation) if and when the AI-based approach falls short of expectations.

I have to say that after a lifetime of watching how various circumstances can lead to securities litigation, this case surprised me a little bit. My decades of experience caused me to expect that this company’s business model might lead to problems if its AI-based model proved to be too liberal in granting credit approval to marginal credit risks. Ironically (at least in my view) this company ran into problems not because its model was too liberal, but rather when the company’s revised AI model proved to be too conservative. Honestly, it is not usually business models that prove to be too conservative that cause companies problems.

In any event, this case joins the growing list of AI-related securities lawsuits that have been filed so far this year. Based on my count, this case is the eighth AI-related securities suit to be filed so far in 2026. It seems likely that when we reach year-end and we tally up all of the securities suits filed during the year, the AI-related securities suits will represent a significant part of the year’s total securities lawsuit filings.

In recent years, leveraged buyouts have once again become a significant source of corporate and securities litigation risk, particularly where founder‑led or controller‑influenced companies pursue take‑private transactions with private equity sponsors. A newly filed Delaware Chancery Court complaint arising out of the 2025 take-private of Skechers U.S.A., Inc. (the “Skechers Complaint”) provides a timely example. The Skechers Complaint illustrates how these transactions can give rise to fiduciary duty claims, especially when minority stockholders allege that a controlling stockholder influenced both the timing and structure of a transaction to their own benefit. The case may also offer a useful lens through which to examine how recent developments in Delaware statutory and case law may affect the standard of review applicable to controller-led transactions.

The Skechers Complaint

The Skechers Complaint, filed on March 16, 2026, by the Police and Fire Retirement System of the City of Detroit, alleges that Skechers’ $9.4 billion sale to private equity firm 3G Capital is a controller-driven transaction that deprived minority shareholders of fair value. According to the complaint, Skechers’ founders, Robert and Michael Greenberg (the Greenbergs), controlled approximately 60% of the company’s voting power through a dual‑class structure and allegedly used that control to dictate the timing, structure, and terms of the transaction with 3G for their own benefit and to the detriment of unaffiliated stockholders.

Skechers’ sale to 3G Capital was announced in May 2025 and closed in September 2025. The Skechers Complaint alleges that unaffiliated shareholders were offered either $63 per share in cash or a mixed consideration of $57 in cash plus an equity unit in the post-merger private entity. The plaintiff alleges that the mixed consideration was effectively illusory for unaffiliated shareholders, as the equity units were unlisted, non-transferable, and subject to significant restrictions. The Skechers Complaint further alleges that the Greenbergs elected the mixed consideration but also secured enhanced governance rights and continued leadership roles, enabling them to retain influence over the company following the transaction. 

The plaintiffs further contend that the transaction was opportunistically timed to exploit temporary market dislocation. According to the Skechers Complaint, tariff-related uncertainty in early 2025 depressed Skechers’ stock price, allegedly allowing 3G to reduce its offer from an earlier indication reportedly in the low-to-mid $70s per share to $63 per share. The plaintiffs allege that this reduction was unjustified given contemporaneous statements suggesting that the tariff impacts were temporary and did not impair the company’s long-term value. 

Finally, the Skechers Complaint alleges significant process deficiencies by the company, and its directors and officers. The plaintiffs allege that the Greenbergs engaged in months of private negotiations with 3G before involving the board, effectively positioning 3G as the only viable bidder. In addition, the Skechers Complaint alleges that when the board eventually became involved in the transaction that it formed an independent committee only shortly before approving the deal. However, the plaintiff alleges that the independent committee lacked independence, failed to conduct a meaningful market check, and relied on revised downward projections that aligned with the reduced deal price. These combined factors allegedly rendered both the sale process and the share price unfair to minority shareholders. 

Discussion

The recent Delaware Supreme Court decisions upholding SB 21 and in Moelis could reshape the legal framework applicable to disputes involving controller-led transactions, like the deal outlined in the Skechers Complaint. Transactions involving controlling stockholders that satisfy specified procedural protections, such as approval by a fully empowered and independent special committee and a majority-of-the-minority vote, may now qualify for business judgment review rather than the more exacting entire fairness standard.

Against that backdrop, the allegations in the Skechers Complaint, if substantiated, appear aimed at placing the transaction outside of this emerging safe harbor framework. The plaintiff alleges that the process was dominated by the company’s controlling stockholders, that the special committee was either ineffective or insufficiently independent, and that the transaction lacked meaningful procedural safeguards. If proven, these allegations could preclude application of the more deferential standard of review and instead subject the transaction to traditional entire fairness scrutiny, under which defendants would bear the burden of demonstrating both fair dealing and fair price.

The Skechers Complaint further alleges that the controlling stockholders structured the transaction to provide themselves with differential consideration and ongoing governance rights, including through rollover equity and post-closing influence. The plaintiff appears to advance these allegations in an effort to align the claims with the types of controller conduct that Delaware courts have historically scrutinized under the entire fairness framework. If substantiated, such allegations could reinforce arguments that the transaction was not conditioned on protections sufficient to replicate an arm’s-length process.

More broadly, the complaint reflects recurring themes in litigation arising out of controller-led leveraged buyouts, including allegations of pre-signing negotiations conducted outside the board’s oversight, limited market checks, and the use of revised projections that allegedly supported a lower transaction price. While these are, at this stage, unproven allegations, they are consistent with the types of claims that have historically given rise to fiduciary duty litigation in Delaware, particularly where minority stockholders contend that they were deprived of fair value in a conflicted transaction.

Ultimately, the Skechers Complaint may underscore that, notwithstanding recent efforts by Delaware lawmakers and courts to provide a clearer pathway for controller transactions to receive business judgment deference, those protections remain highly dependent on the integrity of the process employed. Where, as alleged here, plaintiffs contend that the transaction was shaped by a controlling stockholder without the full benefit of independent safeguards, Delaware courts may still be asked to apply the exacting entire fairness standard. While the allegations in the complaint remain unproven, the case serves as a reminder that controller-led take-private transactions continue to present meaningful litigation risk, particularly where the procedural framework is subject to challenge.

One of the more interesting recent developments in the world of directors’ and officers’ liability and insurance has been the rise of collective actions and mass actions outside the U.S. Class actions are of course a well-established part of the litigation scene in the U.S., but at least traditionally class, mass, or collective actions have been rare outside the U.S. However, as discussed in a December 29, 2025, memo from the Labaton Keller Sucharow law firm entitled “Global Class Action Litigation: Causes, Effects and What’s Next” (here) a variety of changes in a number of jurisdictions has led to an increase in collective litigation outside the U.S., a development that could have important future implications for potential D&O liability.

As the law firm memo notes, since 2021, “hundreds of securities class or group actions have been filed outside the United States, mostly in Europe, Australia, and parts of the Asia-Pacific region.” These proceedings have arisen “alongside a broader change in patterns for various types of class and mass actions globally.” The changes have been driven by “new collective redress frameworks, more active institutional investors, and a maturing litigation-funding market.”

One region where these changes have been pronounced is in Europe and in the UK, as I have noted in previous posts on this site (most recently here). The UK, for example, has adopted an opt-out mechanism for antitrust claims, as discussed here, and has recently seen a rise in cases involving “group litigation orders,” as discussed here. Indeed, the growth in the U.K. of legal matters involving these kinds of mechanisms has started ringing alarm bells in at least certain quarters.

The European Union, for its part, has adopted a proposal for an EU collective redress mechanism, as discussed here. The specifics of the EU mechanism, the adoption of the mechanism in EU member states, and the developments so far are detailed in a November 3, 2025, memo from the A&O Sherman law firm entitled “Class Actions in the European Union” (here). As the memo notes, “the expected impact of the Directive is a multiplication of representative actions in the EU and a new risk of large cross-border representative actions initiated by one of several qualified entities” representing claimants across the EU.

While many EU jurisdictions have under their local laws limited these representative actions to consumer actions only, other jurisdictions have extended the mechanisms to data protection, public health, antitrust, and environmental matters as well. Many jurisdictions (e.g., German, Netherlands, France, and Poland) expressly provide that representative actions can be brought for the benefit of businesses as well as consumers.

The Labaton law firm’s memo notes that these kinds of changes to the procedural frameworks, in the EU and elsewhere, have the effect of “promoting collective actions by removing procedural hurdles” that “may make litigating varieties of class and mass actions outside the U.S. more attractive.”

In addition to the EU changes noted above, the Labaton law firm memo also notes recent recommended changes to the statutory regimes regarding collective actions in New Zealand and Singapore. The memo also notes that collective investor actions are allowed under the laws of China (as discussed further here), specifically noting the recent approximately $40 million settlement under the new Chinese opt-out mechanism in the Essence Information Technology case. (Readers interested in a more detailed overview of the Chinese collective action mechanism should refer to the recent detailed memo from the Jingtian & Gongcheng law firm here.)

With respect to the development of collective actions outside the U.S., the Labaton law firm memo identifies “two consequential structural developments” of particular importance: “the diffusion of opt-out collective actions and the growth of third-party litigation funds, or litigation funding.”

The memo expressly notes that opt-out claims are growing in Europe (and as discussed above, in the UK as well). The memo notes that in markets where “opt-out regimes are permitted or courts are receptive to broad aggregation,” plaintiffs “can bring larger cases with more ease and less cost.”

The A&O Sherman law firm memo to which I linked above notes that under the EU directive, member states can decide whether the claimants must actively join (opt in) or can passively benefit from (opt out) representative actions. However, the directive also requires that the opt-in mechanism should be required for representative actions where claimants do not habitually reside in the member state where the representative action is brought. Claimant who reside in a jurisdiction other than where the action is brought must therefore opt-in.

As the Labaton law firm memo notes, litigation funding has been a contributory factor to the rise of collective actions outside the U.S. as well. Litigation funding traditionally has not been widely utilized in many jurisdictions, such as, for example, within the EU;  however, litigation funding increasingly is an important part of the conversation.

As the A&O Sherman law firm memo notes, in September 2022, the European parliament adopted a resolution with respect to litigation funding, providing minimum standards for litigation funders. Interestingly, and as discussed in detail here, in December 2025, the European Commission announced that it would not proceed with plans to regulate litigation funding, following a member forum earlier in the year, leaving the matter to be addressed at the member state level.

The Labaton law firm memo suggests that “together, opt-out regimes and litigation funding may lead to growth in non-U.S. securities litigation filings,” as the combination could “materially increase the supply of large, well-capitalized non-U.S. investor claims.” The international securities litigation environment will, the memo concludes, “continue to evolve and is worth watching.”

I offer the following additional personal observations on this topic, for whatever they may be worth.

It has been my privilege for years to be able to travel to and attend insurance and legal industry forums around the world. Often at these forums, I am the only American in the room. Early on, I became very accustomed to an almost universal revulsion toward the U.S. class action system, which was viewed as excessive, expensive, and abusive.

However, as time has gone by, an interesting thing has been happening.

Increasingly, jurisdictions around the world have, slowly but surely, adopted various elements of the U.S. class action system. To be sure, no country has adopted anything like the whole U.S. class action system. The fact is that in a modern, complex, global economy, there is a need for legal mechanisms allowing mass claims to be processed collectively. Collective actions can be efficient and even cost-effective, as an increasing number of jurisdictions are recognizing.

 If I were to pick one thing that I think is the most important global development over the last ten or fifteen years, it is the increasing recognition across many jurisdictions of the need for collective action mechanisms as a procedural way for complex claims involving masses of claimants to be addressed. I believe that these kinds of mechanisms will continue to be increasingly available in jurisdictions around the world.

As readers of this blog know, enforcement activity under the False Claims Act (FCA) has continued to expand, particularly in light of the Trump Administration’s recent efforts to prioritize fraud enforcement through its Task Force to Eliminate Fraud. At the same time, a new development may fundamentally alter the FCA enforcement landscape. On March 21, 2026, Eli Lilly and Company filed a petition for a writ of certiorari asking the United States Supreme Court to declare the FCA’s qui tam provisions unconstitutional (Eli Lilly Writ or Writ). 

The Writ does not merely challenge the outcome of the underlying FCA case; rather, it raises a sweeping constitutional question about whether private whistleblowers, known as relators, may exercise core executive branch enforcement authority. Eli Lilly Writ thus presents an issue that, if taken up by the Supreme Court, could reshape not only FCA litigation but also the broader framework of privatized enforcement mechanisms. The following discusses the Writ, including underlying action, and potential impact to D&O underwriters.

Background on FCA Qui Tam Actions

By way of brief background, the False Claims Act (FCA), which contains the qui tam provisions allowing private individuals (relators) to sue on behalf of the government, was enacted on March 2, 1863, during the American Civil War. Known as the “Lincoln Law” or “Informer’s Act,” it was passed to combat widespread fraud by suppliers providing defective goods to the Union Army. The modern qui tam landscape was shaped by significant amendments in 1986, which increased the incentives for realtors to 15-30% of amounts recovered, attorney fees and costs. 

The phrase qui tam itself is an abbreviation of the longer Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” which translates to “who sues on behalf of the King as well as for himself.” Consistent with that structure, modern FCA enforcement has relied heavily on private relators. According to Department of Justice statistics, between 1986 and 2025, more than 76% of FCA actions were initiated as qui tam suits, and aggregate relator awards exceed $300 million. These figures underscore the central role that private enforcement plays in FCA litigation and the powerful financial incentives that drive relator activity.

Thus, a substantial percentage of FCA cases are initiated by relators rather than the government itself. This structure effectively creates a system of privatized enforcement in which private individuals can prosecute claims in the name of the United States, which lies at the heart of Eli Lilly’s constitutional challenge.

The Eli Lilly Writ

The Eli Lilly Writ arises out of an underlying qui tam action brought by relator Ronald Streck, who alleged that Eli Lilly improperly calculated “average manufacturer price” (AMP) for certain drugs covered by Medicaid. According to the relator, Lilly excluded certain price adjustments, specifically, increases tied to its “price increase value” mechanism, from its AMP calculations. Because AMP directly affects the rebates drug manufacturers must pay under the Medicaid Drug Rebate Program, the alleged underreporting resulted in reduced payments to the government.

The relator claimed that this approach allowed Eli Lilly to retain substantial sums while underpaying government obligations. A jury agreed, finding that Eli Lilly’s conduct resulted in over $60 million in government losses and over $600 million in additional revenue to the company. The Seventh Circuit affirmed, and held not only that the AMP calculations were false, but also that Eli Lilly acted with the requisite scienter.

However, rather than focusing its Supreme Court petition on the merits of the AMP calculation dispute, Eli Lilly advances a broader constitutional argument targeting the qui tam mechanism itself. Specifically, the company argues that the FCA’s qui tam provisions violate Article II of the U.S. Constitution, which vests executive power in the President.

Eli Lilly contends that FCA relators exercise quintessential executive authority by prosecuting claims on behalf of the United States, yet they are not appointed as officers of the United States, are not subject to presidential control or removal, and are not accountable to the Executive Branch. In the company’s view, this arrangement violates the Appointments Clause and the Take Care Clause of Article II by allowing private individuals to wield executive enforcement power outside the constitutional framework.

The Eli Lilly Writ emphasizes that relators operate as “private bounty hunters” who are motivated by personal financial gain rather than public accountability, and who can pursue litigation even when the government declines to intervene. According to Eli Lilly, this structure creates a system in which core executive functions, namely, the decision to enforce federal law, are effectively delegated to private parties without sufficient constitutional safeguards.

The Seventh Circuit rejected these constitutional arguments, affirming both the verdict and the validity of the qui tam framework. Although the appellate court upheld the longstanding constitutionality of FCA enforcement mechanisms, the Eli Lilly Writ argues that the issue warrants renewed scrutiny in light of evolving separation-of-powers jurisprudence. In particular, the company contends that more recent Supreme Court decisions emphasizing the importance of presidential control over executive functions call into question the continued validity of qui tam enforcement.

At its core, the question presented in the Writ is whether the FCA’s authorization of private relators to litigate claims on behalf of the United States, particularly where the government declines to intervene, is consistent with Article II’s allocation of executive power.

Discussion

The Eli Lilly Writ raises potentially far-reaching implications, not only for FCA enforcement but also for D&O exposure arising out of qui tam litigation. However, the significance of the Eli Lilly Writ lies less in the underlying merits of the AMP dispute and more in the constitutional framework it seeks to challenge.  

Eli Lilly’s argument centers around the concept of “privatized enforcement.” The company contends that allowing private individuals to prosecute claims on behalf of the government, without meaningful executive oversight, undermines the constitutional separation of powers. This argument directly targets a defining feature of the FCA: the ability of relators to proceed independently of the government. If accepted, this theory could call into question not only FCA qui tam actions but also other statutory schemes that rely on private enforcement mechanisms.

Notably, Eli Lilly’s Writ does not arise in a vacuum. As D&O Diary readers will recall, a September 30, 2024, decision from a federal court in Florida held that the FCA’s qui tam provisions are unconstitutional. That court relied in part on statements from Clarence Thomas, who has previously expressed skepticism about the constitutionality of qui tam actions in his June 2023 dissenting opinion in United States ex rel. Polansky v. Executive Health Resources, Inc. Justice Thomas suggested that allowing private relators to exercise executive authority raises serious Article II concerns, particularly where those individuals are not subject to presidential control.

The Florida decision and Justice Thomas’s prior statements may provide important context for Eli Lilly’s Writ. They could suggest that is at least some judicial appetite for reconsidering the constitutional foundations of qui tam enforcement. By framing the Writ around these concerns, Eli Lilly is effectively inviting the Supreme Court to revisit a long-standing statutory framework in light of modern separation-of-powers principles.

These constitutional questions arise against the backdrop of continued robust FCA recoveries. The Department of Justice recently reported that FCA settlements and judgments exceeded $6.8 billion through fiscal year 2025, further underscoring the scale of enforcement activity and the significance of the qui tam mechanism in driving those recoveries.

From a D&O perspective, the potential implications are significant. FCA qui tam actions have long represented a meaningful source of exposure for companies, particularly in heavily regulated industries such as healthcare, life sciences, and government contracting. These actions often involve complex regulatory frameworks, significant potential damages, and the risk of follow-on litigation, including securities class actions or derivative suits.

If the Supreme Court were to accept Eli Lilly’s argument and curtail or eliminate qui tam enforcement, the impact on D&O risk could be substantial. The volume of FCA litigation could decline, and companies might face fewer claims initiated by private relators acting independently of the government. At the same time, however, enforcement activity could shift more heavily toward government-initiated actions, potentially concentrating risk in cases where regulators choose to intervene.

Even if the Court declines to grant certiorari, the constitutional arguments raised in Eli Lilly’s Writ are likely to persist. Defendants in FCA actions may increasingly raise Article II challenges, particularly in jurisdictions that have shown receptiveness to these arguments. This could introduce additional uncertainty into FCA litigation and potentially affect settlement dynamics, as parties assess the viability of constitutional defenses.

For D&O insurers, these developments underscore the importance of closely monitoring not only enforcement trends but also the evolving legal theories that may affect exposure. Coverage issues may also continue to arise in the FCA context, particularly given the unique nature of qui tam actions. As noted in the attached materials, courts have reached differing conclusions on whether such actions constitute “securities claims” or “regulatory proceedings,” and issues related to exclusions, notice, and related claims frequently arise.

In addition, the procedural characteristics of qui tam actions, such as their filing under seal and the potential for extended periods of non-disclosure, can create additional complexities for D&O coverage, including challenges related to notice and prior-and-pending litigation provisions. These issues are unlikely to disappear, regardless of how the constitutional challenge ultimately unfolds.

Ultimately, the Eli Lilly Writ is a direct challenge to the constitutional foundation of one of the federal government’s most important enforcement tools. Whether or not the Supreme Court agrees to hear the case, the arguments advanced by Eli Lilly, particularly those grounded in Article II and separation-of-powers principles, could shape the future of FCA litigation and, by extension, the D&O risk landscape.

For now, D&O underwriters may want to take note of the current combination of aggressive FCA enforcement, increasing reliance on private relators, and emerging constitutional challenges creates a dynamic and evolving risk environment. As the courts continue to grapple with these issues, the outcomes may have profound implications not only for FCA liability but also for regulatory enforcement and D&O exposure.

In an interesting decision analzing how a D&O run-off policy’s Subsequent Acts Exclusion operates, a New York federal district court has ruled that acts after the cut-off date that aren’t unlawful don’t preclude coverage for an underlying claim based on alleged misrepresentations made before the cut-off date. Judge Jed Rakoff’s March 13, 2026, decision in the case, applying New York law, can be found here. A March 18, 2026 post about the decision on the Pillsbury law firm’s Policyholder Pulse blog can be found here.

Background

In January 2018, the controlling stockholder group of AmTrust Financial Services initiated a transaction to take the company private. The company’s executives publicly stated that the company’s preferred stock would remain listed after the transaction. The take-private transaction was completed in November 2018. About two months after the transaction closed, in January 2019, the company announced that it would delist the preferred stock. The delisting became effective on February 7, 2019.

In August 2019, investors sued the company and certain of its executives in a securities class action lawsuit (the Martinek action) filed on behalf of a class of the company’s preferred stockholders. Among other things, the complaint in the Martinek action described the January 2019 delisting announcement as “the public disclosure of the true facts” – what the court in the subsequent insurance coverage action described as a “corrective disclosure, not a wrongful act.”

AmTrust moved to dismiss the Martinek Action. The court in the Martinek action denied the motion to dismiss, finding that the company’s statements that it “will” maintain the preferred stock listings were actionable because “the very fact that Defendants decided to delist the preferred shares barely two months after the Merger closed … strongly suggests that Defendants knew this statement to be false when made.” The Martinek action later settled.

The company sought coverage under an Excess Run-Off Policy for defense costs and settlement amounts it incurred in the Martinek action. The insurer denied coverage on the grounds that the company’s action to delist the preferred shares took place after the subsequent acts cutoff date in the run-off policy. AmTrust sued the insurer in the Southern District of New York. The insurer filed a motion to dismiss.

The Relevant Policy Language

The Subsequent Acts Exclusion in the Excess Run-Off Policy provides in relevant part that:

No coverage will be available under this Policy for any Claim based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving a Wrongful Act committed or allegedly committed on or after November 29, 2018 ….

The primary policy, of which the Excess Run-Off policy sits excess, defines “Wrongful Act” as “any actual or alleged act, error, omission, statement, misleading statement, neglect or breach of duty by an Insured Person while acting in his capacity as such or due to his or her status as such,” and, solely with respect to entity coverage, “any actual or alleged act, error, omission, statement, misleading statement, neglect, breach of duty by the Company.”

The Court’s March 13, 2026, Opinion

On March 13, 2026, Southern District of New York Judge Jed Rakoff, applying New York law, denied the insurer’s motion to dismiss.

The insurer had argued that since the January 18, 2019, delisting announcement led to the Martinek action filing, this was the “Wrongful Act” that led AmTrust to incur the defense fees and settlement payments, and since the delisting occurred after November 28, 2018 date in the exclusion, it fell within the Subsequent Acts Exclusion.

Judge Rakoff said that the problem with the insurer’s argument is that “it never establishes that the January 2019 announcement or the February 2019 delisting constituted a ‘Wrongful Act’ as that term is defined in the policy.” The insurer, Judge Rakoff said, “simply assumes that the delisting qualifies, but neither the Martinek plaintiffs nor any court in that litigation characterized the delisting itself as wrongful conduct.”

The definition of Wrongful Act, Judge Rakoff said, requires that an action is unlawful. But the delisting itself was “not unlawful.” To the contrary, the court said, the Martinek complaint refers to the January 2019 delisting announcement as “the public disclosure of the true facts.” The underlying court’s denial of the motion to dismiss in the Martinek action was “grounded in its analysis of AmTrust’s pre-transaction representations” about how it will maintain the preferred securities.

The insurer tried to rely on the exclusion’s very broad lead-in language (that is, “based upon, arising out of, in any way relating to…”) Judge Rakoff said this broad language does not cure the “foundational defect.” That is, the broad language “amplifies the reach of the exclusion once a Wrongful Act after the cut-off is established, but it does not substitute for one.” Judge Rakoff said, “The predicate for triggering the lead-in language is absent because [the insurer] has not shown that the delisting was a Wrongful Act.” The exclusion “never activates, regardless of how broadly the lead-in language is read.”

Moreover, Judge Rakoff said, even if it were ambiguous whether the delisting announcement or event was a Wrongful Act, the insurer’s motion to dismiss would still have to be denied, as under New York law insurers bear a “heavy burden” in demonstrating that an exclusion applies. Since, as Judge Rakoff, there are “at the very least,” two “reasonable, alternative interpretations of ‘Wrongful Act,’” the insurer’s motion to dismiss must be denied.

Discussion

This decision is interesting because it explores an issue that arguably is not frequently examined, which is how the subsequent acts exclusion in a run-off insurance policy operates. Judge Rakoff’s opinion firmly establishes that it is not enough for an insurer seeking to deny coverage in reliance on the cut-off date in a runoff policy to show that there were acts after the cut-off date; the subsequent acts exclusion only operates to preclude coverage if the later acts were “wrongful” – or as Judge Rakoff said, “unlawful.” Because the delisting itself was a lawful act, the exclusion did not apply.

Judge Rakoff’s decision is interesting given that he reached his conclusion notwithstanding the extreme breadth of the definition of the term “Wrongful Act.” The key to his analysis is that it in order to constitute a Wrongful Act, the action must be “unlawful” – a not inapposite view, given that the phrase under discussion is a Wrongful Act.

The events involved here provide a good thought problem on which to consider what is required in order for the subsequent events exclusion in a run-off policy to apply. Mere acts after the cut-off date alone are not enough to trigger the exclusion. This part of Judge Rakoff’s opinion is worth noting, as run-off policies are virtually universal feature of insurance programs put in place in the M&A context, or – these days – in the de-SPAC context. The important point is that even with the run-off date cutoff date, the run-off policy still provides coverage for Wrongful Acts taking place prior to the cut-off date, which is what Judge Rakoff said was the case here, and that acts that are not wrongful that take place afte the cut-off date do not alter the analysis.

Judge Rakoff’s observation at the end of the opinion should also be duly noted — that is, his statement that under New York law, insurance policy exclusions are to be strictly construed and that insurers who seek to rely on exclusions as a defense to coverage bear a “heavy burden” to show that the exclusion applies.

One final note here. The motion to dismiss has been denied, but this case is not over. The proceedings in the case will now go forward, with the parties continuing to assert their remaining respective positions.  

In the following guest post, James Sterling, Claims Counsel, Euclid Financial & Professional Risks, and Mike Newham, Partner, RPC, consider the economic and underwriting risks associated with the private credit markets. A version of this article previously was published on LinkedIn and on Euclid’s website. My thanks to James and Mike for allowing me to publish their article as a guest post on this site. Here is the authors’ article.

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With the US leading the way in growing the Private Credit space and the European and AsiaPac markets also on the up, this article outlines the basics of the private credit market, as well as how this may impact the Financial Institutions (PI, D&O and Crime) underwriting space.

What is Private Credit

Private Credit is essentially: “commercial loans extended by traditionally non-bank financial institutions”. A nascent market at the turn of the century, it picked up speed after the GFC (when it was more commonly referred to as “shadow banking”), continued to strengthen during the COVID era and is now very much in vogue.

This is primarily due to commercial borrowers needs not being met by traditional bank loans, more relaxed financial regulations and potentially superior investor returns. Supply and demand is higher than ever (typical borrower enterprise values are between USD 25m – 1bn), with the larger banks also now competing in this space, alongside more traditional institutional investor vehicles (dominated by large-scale fund managers).

The definition is so wide and the market so big that it is impossible to avoid for any FI insurance specialist, with exposure existing across asset management, credit and insurance markets. This is not to say that all Private Credit businesses are risky but, within any expansive market – particularly if applicable regulation is more relaxed – issues will occur, whether misconduct or more ordinary failures.

The Economic Risk

Regulators in major financial centres are looking proactively at the industry, seeking to strike a balance between supporting the economy and innovation but also getting ahead of any systemic financial issues.

Concerns include:

• The current frequency of adverse financial headlines and potential for wider market contagion.
• The development of a secondary trading market and opaque loan portfolio valuations (potentially masking poor or under-performance): remember the GFC sub-prime crash?
• Though default rates seem lower, there is less public information, more investor patience and more willingness to restructure. In particular, the use of Payment in Kind (PIK) notes which allow debtors to defer repayments avoiding default but at an extra cost.
• More traditional lenders being double-parked: both lending to the institutional investors and having their own lending skin directly in the game.
• The growing interrelationship between the investment/growth in AI (another  potential “bubble”) and Private Credit funding of the same.
• And, of course, the increasingly volatile geopolitical and macroeconomic landscape (e.g. the recent war in Iran and the impact on oil prices and interest rates).

Regulators on Watch

ASIC (the Australian Securities and Investments Commission) has probably been the most engaged in this space, with the iProsperity Group collapse one of the most notorious ongoing criminal and civil cases emanating out of ponzi scheme and associated Private Credit fraud. The UK has also been stepping up its oversight, with the FCA (Financial Condict Authority) reviewing net asset (loan) valuation (NAV) processes (March 2025) and the Bank of England announcing plans to stress-test the sector (December 2025). This is seemingly in good time, given the February 2026 insolvency of Market Financial Solutions and purported wider market contagion (including inter-private credit lending).

And US Regulators have also had to increase monitoring and enforcement activity, with their hand forced by the collapses of auto enterprise borrowers First Brands & Tricolor (and the seemingly significant frauds subsequently exposed). There has also been recent high-profile news surrounding liquidity/redemption mechanics and portfolio valuation scrutiny impacting large fund managers such as Blue Owl, Blackstone and Blackrock, not least as a result of the concern over the impact AI may have on borrower software firms.

The Underwriting Opportunity

With risk comes opportunity and this certainly extends to the FI underwriting arena, where theoretically every risk is writeable at the right price and with suitable policy terms and conditions. When evaluating Private Credit risks, relevant underwriting factors might include:

• The Insured:
  • What is the Insured’s role (investment manager, originator, lender, arranger, servicer or other FI)?
  • What asset types are in scope (direct lending, real estate debt, NAV finance, specialty finance, structured credit)?
  • How material is Private Credit to the overall business (AUM, % revenue, concentration by fund)?
  • Are fund investors sophisticated enough to understand the risks?
  • How are loans funded and structured and who are the key counterparties?

• Due Diligence:
  • How diversified is the portfolio by sector, geography, borrower size and sponsor concentration?
  • What are typical leverage metrics and underwriting standards (e.g. EBITDA multiples, covenants, loan to value ratios)?
  • Are loans (or fund interests) sold, syndicated or otherwise traded, and what controls govern pricing and transfer?
  • What stress-testing is performed (rate shocks, recession/default spike, liquidity squeezes) and how are results used in decision-making?

• Portfolio performance:
  • What metrics are applied to arrears, defaults, restructurings and recoveries?
  • To what extent are PIK features used and what is the rationale and monitoring approach?
  • How common are “bullet” repayment structures and what refinancing/liquidity assumptions underpin them?
  • How are loans valued (policy, frequency and governance) and is there independent third-party validation?
  • What is the claims and incident history (including near-misses) and how has underwriting/growth affected controls and reporting?

• Compliance:
  • Is governance clear and documented (tone from the top, committee structure, delegated authorities and MI)?
  • What regulatory regimes apply (by domicile and investor base) and how is compliance with relevant guidance evidenced?
  • What conflicts of interest exist (e.g., “double-parked” lending, affiliated transactions) and what controls/independence safeguards apply?
  • What are the key macro sensitivities (interest rates, inflation, refinancing risk, sanctions, tariffs and other geopolitical factors) and how are they managed?

Policy Response

Whilst FI policies are not written to be a financial backstop to failed investments, coverage is often triggered as a result of the decisions/acts which lead to that failure. For example, when underwriting investment managers (who are increasingly prolific in this space), Private Credit might still be seen as a slightly novel “investment management” activity: do the IMI policies recognise that some managers are directly originating loans? Therefore, consideration should be given as to the scope cover being sought, not least for claims arising out of lending (including failure or refusal to lend) and valuation activity, as well as any restructuring/insolvency liabilities.

Claim Types

These are mainly claim types we have seen before, just with some different FIs now being implicated and potentially evolved policy terms:

• PI
  • Investors: alleging negligent underwriting, monitoring or valuation of loans (including whether reliance on offering materials was reasonable versus investors’ own due diligence).
  • Borrowers: challenging enforcement/recovery/default proceedings (particularly where insurance policies do not exclude  lenders’ liability claims).
  • Versus Service Providers: trustees, fund custodians, accountants, valuers, lawyers, brokers and insolvency specialists can all find themselves targets.

• D&O
  • Investor/shareholders: alleging misrepresentation of strategy, risk appetite, leverage or portfolio composition and for failures of oversight/governance.
  • Insolvency: alleging breach of directors’ duties in the period proceeding entering into an insolvency process.
  • Conflicts of Interest: Actual or perceived conflicts of interest.
  • Regulatory: investigations and enforcement actions.

• Crime
  • Internal/External Fraud: misappropriation of funds, fictitious borrowers/loans, collateral issues (non-existent, misvalued, multiple-pledged).

Concluding Comments

As the law firm RPC highlight: “private credit is not the one-size fits all, low-risk and high-reward panacea that its most enthusiastic proponents promote”.  Insurance market participants should understand that, with the growth of Private Credit, comes risk and opportunity. Clients who demonstrate robust risk management and transparency in their approach to exposures – through diversification, rigorous due diligence and expert delivery – will attract more underwriter competition. Brokers can help Underwriters understand each prospective client’s business model, funding structure, and approach to compliance and ensure coverage is tailored to the specific risks operating in the fast evolving Private Credit industry.                                                                                      

March 2026

Public company D&O insurance policies restrict “entity coverage” (that is, coverage for claims directly against the corporate entity, as opposed to those against individual directors and officers) to “Securities Claims.” If a claim against the company is not Securities Claim then there is no coverage for the company’s defense fees, settlements, and judgments. This obviously creates a huge incentive for the companies to try to show that the claims against them are Securities Claims – which, in turn, has spawned a great deal of coverage litigation addressing the question whether or not a particular corporate lawsuit is or not a Securities Claim.

In the latest example of these kinds of coverage disputes, last week the District of Maryland, applying Maryland law, held that an antitrust claim filed against a corporate entity was not a securities claim within the meaning of the applicable policy – not because the antitrust claim was not “Securities Claims,” but rather because the dispute did not involve alleged transactions in the securities of the company or its subsidiaries. The Maryland court’s March 24, 2026, opinion can be found here.

Background

Supernus Pharmaceuticals is a pharmaceutical company based in Maryland. In 2020, as a way to acquire the rights to distribute Apopkyn, a prescription medication for the treatment of Parkinson’s disease, Supernus acquired USWM Enterprises (“Enterprises”).

In 2022, Sage Chemical and TruPharma, two competitors of Supernus, sued Supernus, alleging that Supernus’s acquisition of Enterprises, and specifically its acquisition of the rights to distribute Apokyn, violated the antitrust laws, and that Supernus otherwise engaged in uncompetitive behavior.

Supernus submitted the antitrust lawsuit to its D&O insurer as a claim under its policy. The insurer denied coverage for the claim, on the grounds that the underlying action is not a “Securities Claim” within the meaning of the policy.

Supernus sued the insurer, seeking a declaratory judgment that the insurer improperly denied coverage for the claim, and alleging that the insurer breached its contract and the implied covenant of good faith and fair dealing. The insurer filed a motion to dismiss the coverage lawsuit.

Relevant Policy Terms

The policy defines the term “Securities Claim” as “any claim … which in whole or in part is: …  2. based upon, arising out of or attributable to the purchase or sale of, or offer to purchase or sell, any securities issued by the Company….”

The policy defines “Company” to be Supernus and its “Subsidiaries.” The term “Subsidiaries” is defined as (1) “any organization in which” Supernus (or one of its subsidiaries) owns “more than 50% of the outstanding voting securities representing the present right to vote” for directors or managers; (2) “any organization in which one or more Companies, in any combination”  have the right to elect a majority of directors or managers; or (3) “charitable foundations or trusts controlled by a Company.”

The March 24, 2026, Opinion

On March 24, 2026, District of Maryland Judge Adam B. Abelson, applying Maryland law, granted the insurer’s motion to dismiss on the ground that the underlying action does not trigger the Securities Claim coverage.

In finding that the underlying action was not a Securities Claim, Judge Abelson noted that the acquisition in dispute in the underlying action was a cash transaction and did not involve “securities issued by the Company.” To the extent the acquisition involved any securities, the securities were issued by Enterprises prior to its acquisition by Supernus, not by Supernus or by Enterprises at a time when Enterprises was a subsidiary of Supernus. The relevant policy provisions, Judge Abelson said, “are plain and unambiguous” – “because the claims in the Underlying Action do not arise from securities issue by the Company, Supernus is not entitled to Securities Claim coverage.”

Supernus had tried to argue that it nevertheless was entitled to coverage because Enterprises was a subsidiary of Supernus by the time the insurance claim was made. Judge Ableson rejected this argument, saying that “accepting all of Supernus’s allegations as true there is no reasonable way to conceive of [the underlying] claims as arising out of securities ‘issued by the company.’” The relevant question is not whether Enterprises was a subsidiary at the time the underlying claim was made; the relevant question, the court said, “is whether Enterprises was a subsidiary of Supernus when it issued securities.” It was not, the court said, and so “under the plain language of the policy,” the underlying claims do not give rise to coverage.

The court did briefly acknowledge the question whether or not the fact that the underlying action was an antitrust claim rather and a claim for violation of the securities laws should or should not bar coverage. Judge Abelson did not address this issue on the merits, noting simply that the insurer did not deny coverage because the underlying antitrust action was not a Securities Claim. Rather, the insurer based its coverage denial on the fact that the underlying action did not arise out of the issuance of securities by Supernus or its subsidiaries, so, the court found, it did not need to address whether the underlying claims arose out of alleged antitrust law violations rather than claims alleging violations of the securities laws.

Discussion

The starting point for any analysis of this decision – as indeed for any insurance coverage related decision – is the policy language at issue. Here, the relevant portion of the definition of Securities Claim specifically referenced the purchase or sale, or offer to purchase or sell, and securities “issued by the Company,” with the definition of Company including any company Subsidiaries. The “issued by the Company” language was, in the end, outcome determinative here, as the court concluded that the underlying acquisition did not involve any securities issued by the company.

I emphasize this point that the phrase “issued by the Company” was critical to the outcome because it is not found in all public company D&O insurance policies’ definitions of the term “Securities Claim.” Or, to put it another way, the specific policy wording matters. I make this point because it is absolutely indispensable in reviewing the many court decision interpreting the meaning of the term “Securities Claim” to focus on the specific policy language at issue in any particular case. In many of the cases, the specific policy language at issue explains the outcome in any particular case, which can make it difficult to differentiate among the various coverage case decisions.

I will say this, it is interesting to me that the court felt it did not need to reach the issue whether or not the underlying antitrust claim came within the meaning of the phrase “Securities Claim.” The court felt it did not need to reach this issue because it was not the basis of the insurer’s coverage denial.

Though the court did not reach the issue, the question whether or not the underlying antitrust claim could fairly be characterized as a Securiteis Claim within the meaning of the policy presents an interesting question. It is worth noting that while the the court not reach the issue, it did quote authority on which Supernus sought to rely to the effect that “courts interpreting materially identical definitions of ‘Securities Claim’ have consistently confirmed that coverage does not require an express allegation of a securities law violation.”

Certainly, in prior cases, other policyholder have tried to argue that a wide variety of other kinds of disputes can be brought within the definition of the term “Securities Claim.”

Disputes of this kind, seeking an expansive definition of the term securities claim, have required courts to find, for example, that a bankruptcy trustee’s fraudulent transfer claim is not a Securities Claim, as discussed here. Indeed, the Delaware Supreme Court has in fact twice been called in to rule that a fraudulent transfer claim is not a Securities Claim, both times in cases involving bankrupt companies that had previously spun out of Verizon, as discussed here.  The Delaware Supreme Court has also separately held that an appraisal action is not a “Securities Claim,” as discussed here.

Other court have held that a tolling agreement is a “Claim” but not a “Securities claim,” as discussed here; that a breach of fiduciary duty claim is not a “Securities Claim, as discussed here; and that a formal SEC investigation is not a “Securities Claim,” as discussed here.

In a separate proceeding the Ninth Circuit held that the claims against a mortgage originator and securitizer involving the company’s issuance of mortgage-backed securities were not  “Securities Claims” on ground similar to those involved here, in that the mortgage backed securities the company issued as part of its ongoing business were not securities “of the Company” within the meaning of the policy.

These cases arise because of the incentives the public company D&O policy creates. Because the entity coverage is limited to “Securities Claim,” companies have an incentive to try to argue that they claims that have been filed against them are, in fact, Securities Claims. Indeed, there undoubtedly will be another case another day involving allegations that underlying antitrust claims come within the policy’s definition of the term “Securities Claim.” When that day comes, it will worth remembering that even though the court here granted the insurer’s motion to dismiss, the court did not hold that the antitrust claims asserted here were not Securities Claims.

The recently filed securities class action against Beyond Meat (Beyond Meat SCA) illustrates how accounting judgments, industry-wide demand shifts, and corporate turnaround narratives can create D&O exposure. Filed in January 2026, the complaint alleges that Beyond Meat and senior executives misled investors during 2025 by failing to timely disclose a material asset impairment while publicly emphasizing operational discipline and a path toward EBITDA-positive performance. As discussed below, the allegations arise amid a broader deterioration in the plant-based meat sector, documented in a March 10, 2025, CNBC report, and alongside emerging academic research questioning the assumed health advantages of plant-based meat alternatives.

Taken together with the allegations of the Beyond Meat SCA, the marketplace shift and emerging academic findings may provide a useful lens for assessing certain D&O underwriting risk.

Beyond Meat SCA

The Beyond Meat SCA asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 on behalf of investors who purchased Beyond Meat securities between February 27 and November 11, 2025. The Beyond Meat SCA plaintiffs allege that, as demand for plant-based meat products weakened and the company suspended or downsized operations in key markets, the carrying value of these assets exceeded their fair value well before the third quarter of 2025, making a material impairment charge reasonably likely.

However, despite the alleged conditions, the Beyond Meat SCA asserts that the company repeatedly represented in its public filings that no impairment of long-lived assets had occurred and framed impairment risk in generic, forward-looking terms. According to the investor plaintiffs, those disclosures were misleading because they portrayed impairment as a hypothetical future contingency rather than as an imminent accounting consequence of already-known operational conditions.

The complaint emphasizes that under GAAP, specifically ASC 360 (Property, Plant, and Equipment), impairment testing is triggered by indicators such as declining demand, excess capacity, facility underutilization, or adverse changes in expected cash flows. Plaintiffs allege that these indicators were present for Beyond Meat well before Q3 2025 and were, in fact, acknowledged by management in earnings calls and restructuring announcements. The plaintiffs frame Beyond Meat’s alleged repeated statements that no impairment had been identified as obscuring the degree to which the company’s balance sheet no longer reflected its operational reality, and therefore constituted an actionable omission.

In addition, purportedly throughout the class period, Beyond Meat’s executives emphasized cost reduction, operational efficiency, and a path toward EBITDA-positive operations by the end of 2026. The plaintiffs allege that the repeated references to “optimization,” facility rationalization, workforce reductions, and demand-driven restructuring were not merely strategic initiatives but signals that the economic utility of certain assets had materially declined; conditions that should have been accompanied by more fulsome impairment disclosure rather than continued assurances that the balance sheet remained unimpaired.

Finally, the Beyond Meat SCA alleges that Beyond Meat’s risk factor and MD&A disclosures failed to satisfy Item 303 of Regulation S-K, which requires disclosure of known trends or uncertainties reasonably likely to have a material impact on financial results. Rather than identifying impairment as a known and likely consequence of declining revenues, suspended operations in China, underutilized manufacturing facilities, and efforts to sublease or exit headquarters space, the company allegedly relied on boilerplate warnings that impairments “may” or “could” occur.  When Beyond Meat disclosed an October 2025 an unquantified material impairment, delayed its earnings release, and eventually took a $77.4 million non-cash impairment charge, the stock sharply declined.

Discussion

The Beyond Meat SCA illustrates how quickly accounting judgments can become disclosure disputes when industry conditions deteriorate, and corporate narratives lag operational reality. Notably, in sectors experiencing demand contraction and shifting consumer perceptions, like plant-based meat, impairment analyses, risk factor disclosures, and forward-looking performance messaging may face heightened scrutiny.

As the March 10, 2025, CNBC article detailed, the plant-based meat industry had lost much of its early momentum due to declining consumer demand, retailer pullbacks, pricing pressure, and oversupply. While this reporting predated many of the disclosures at issue in the complaint, it provides context for plaintiffs’ argument that Beyond Meat’s challenges were not sudden or unforeseeable.  

Also, academic research, like that published in the June 2024 American Journal of Clinical Nutrition, examined diets incorporating plant-based meat alternatives and found no clear cardiometabolic advantage over comparable animal-based diets. While the study is not referenced in the Beyond Meat SCA, it undercuts a foundational assumption that helped fuel early enthusiasm for plant-based meat products, namely, that they delivered inherent health benefits. For D&O exposure purposes, such research might lead to scrutiny of growth projections, asset valuations, and strategic investments tied to industries like life sciences, nutrition, or consumer products.

Thus, the Beyond Meat SCA highlights how impairment timing may be a securities litigation trigger, particularly when an industry may be contracting. Asset impairments coinciding with declining demand, excess capacity, and restructuring activity can become support for investor-plaintiff arguments that impairment risk was not speculative but already known. For boards and executives, the challenge lies in balancing reasonable accounting discretion with the obligation to disclose when assumptions underlying asset valuations have materially shifted. And D&O underwriting exposure may increase when management’s intent and knowledge are contested.

In addition, the Beyond Meat SCA underscores the tension between non-GAAP performance narratives and GAAP balance-sheet realities. Beyond Meat’s emphasis on EBITDA-positive goals may have sought to reassure its investors during a period of volatility; however, it became support for plaintiffs’ argument that the Beyond Meat narrative was misleading when it was not reconciled with contemporaneous balance-sheet impairments. For D&O carriers, this may reinforce the importance of scrutinizing how management teams frame profitability pathways relative to underlying asset values.

Finally, the Beyond Meat SCA may also reinforce the vulnerability of boilerplate risk disclosures. The complaint repeatedly characterizes the company’s impairment-related risk factor language as “generic” and not tailored to the alleged known risks of a likely material impairment affecting PP&E, lease ROU assets, and prepaid lease costs. Naming senior executives likewise underscores potential D&O exposure given the prominence of signed Sarbanes-Oxley certifications and management’s role in SEC filings and investor-facing communications that can become focal points when an impairment charge surfaces abruptly.