## Facts

- In October 1999, after press reports about cost overruns and schedule delays on Raytheon defense contracts, Raytheon announced $638 million in charges, reduced earnings expectations, and its stock price dropped.
- A 1999 securities fraud class action was filed against Raytheon and officers alleging misleading public statements and nondisclosure about contract losses and cost overruns, harming purchasers of Raytheon stock during a specified period ending October 12, 1999.
- By May 2003, Raytheon had a claims-made primary liability policy issued by Federal Insurance Company and an excess policy issued by Axis Surplus Insurance Company that followed the primary policy’s form.
- The Federal policy contained a prior-and-pending litigation exclusion and related provisions addressing claims arising from the same or substantially the same facts, circumstances, or allegations as earlier proceedings; Axis had a similar exclusion.
- In May 2003, an ERISA class action was filed by employee benefit plan participants alleging breaches of fiduciary duty, including imprudently offering Raytheon stock while concealing material information about Raytheon’s financial condition and contract cost overruns.
- The ERISA complaint substantially overlapped the securities action in its factual allegations about misrepresentations and omissions concerning contract performance, financial results, and stock-price-related losses, though it involved different plaintiffs, different legal theories, and included some allegations extending beyond October 1999.
- Raytheon sought defense and indemnity coverage for the ERISA action; Federal and Axis denied coverage and filed declaratory judgment actions seeking rulings of noncoverage.
- The district court entered judgment for the insurers, holding the ERISA action was excluded by the prior-and-pending litigation exclusions; Raytheon appealed.

## Issues

1. Whether the 2003 ERISA action was excluded from coverage because it was based upon, arose from, or in any way involved the same or substantially the same facts, circumstances, or allegations as the 1999 securities fraud class action.
2. Whether differences in plaintiffs, causes of action, and some later-in-time allegations prevented application of the prior-and-pending litigation exclusion.
3. Whether the exclusion in the primary policy, as incorporated into the excess policy, also barred coverage under the excess layer.

## Decision

- The First Circuit affirmed the declaratory judgments for Federal and Axis.
- The court held the ERISA action fell within the Federal policy’s prior-and-pending litigation exclusion because it arose from the same or substantially the same facts, circumstances, or allegations as the earlier securities action.
- The court rejected Raytheon’s argument that different legal theories and different plaintiff groups avoided the exclusion, emphasizing the exclusion’s focus on factual overlap.
- The court concluded that additional allegations extending beyond the time period of the securities class action did not remove the ERISA action from the exclusion where the core alleged misconduct was substantially the same.
- Because the Axis excess policy followed the Federal policy and contained a similar exclusion, coverage was likewise barred for Axis.

## Legal Principles

- A prior-and-pending litigation exclusion written in broad terms may bar coverage for a later-filed claim when the later claim arises from, is based upon, or involves the same or substantially the same facts, circumstances, or allegations as earlier litigation pending before the policy’s specified date.
- Application of such an exclusion turns primarily on substantial factual overlap, not on whether the later suit asserts different legal theories or is brought by a different plaintiff group.
- A later claim may remain excluded even if it includes some additional factual allegations or extends beyond the earlier litigation’s time frame, so long as it is grounded in substantially the same alleged misconduct.
- When an excess policy follows form to the primary policy and incorporates the relevant exclusion, a coverage bar under the primary exclusion generally applies equally to the excess insurer for the same claim.

## Conclusion

The First Circuit held that the insurers owed no coverage for the ERISA fiduciary-duty class action because the claim was sufficiently factually connected to a prior securities fraud class action to trigger the policies’ prior-and-pending litigation exclusions, and that conclusion barred both primary and excess coverage.


Federal Insurance Co. v. Raytheon Co., 426 F.3d 491 (1st Cir. 2005)