Insurer Wins Misrepresentations Dispute in Court After ‘Inaccurate Information’ Identified

When an acquired company lied on its insurance application and provided false information, it could not gain coverage for a misrepresentations suit.
By: | June 6, 2019

Tech start-up ServiceMesh had designed a technology for “policy-based cloud management.” Its long-term strategy was to be acquired by a company that would utilize its tech.

ServiceMesh began reaching out to potential business partners, discussing, among other things, the potential acquisition of the company. One company, Computer Sciences, began conducting due diligence shortly after connecting with ServiceMesh.

However, where ServiceMesh saw this as an acquisition guarantee, Computer Services alleged all due diligence activities were more generally conducted to explore the possibility of working with ServiceMesh. Acquisition was not the end goal in these stages, though eventually, Computer Sciences did acquire ServiceMesh. The deal closed for more than $260 million.

Then things got hairy.

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Computer Sciences filed suit against Scott Pulier, ServiceMesh’s CEO, alleging he made intentional misrepresentations in order to entice Computer Sciences to acquire ServiceMesh. Specifically, the lawsuit alleged ServiceMesh entered into fraudulent contracts with the Commonwealth Bank of Australia to increase its apparent revenue in order to inflate the earnout payment in the acquisition deal.

Pulier in turn filed suit against Computer Sciences, arguing it was required to advance him the costs for defending himself.

The insurer, Scottsdale Insurance Co., had issued a policy to ServiceMesh before the acquisition. In the policy’s application, ServiceMesh had said it was not currently involved in any “actual, negotiated or attempted merger, acquisition or divestment.”

When hearing of the Pulier action, Scottsdale denied coverage based on material misrepresentations in its insurance application. ServiceMesh was, in fact, in talks with Computer Sciences at the time of application.

Eventually, however, Scottsdale agreed to reimburse ServiceMesh for Pulier’s defense costs, subject to a reservation of rights. In total, Scottsdale ended up paying defendants the entire $5 million policy limit.

Then Scottsdale filed suit to recoup the amounts paid under the policy, arguing that it could “deny coverage based on the Policy’s Warranty Exclusion because ServiceMesh made material misrepresentations in its insurance application.”

Though ServiceMesh tried to cite breach of contract, the court decided in Scottsdale’s favor.

Scorecard: Because ServiceMesh filed an insurance application with inaccurate information, the court sided with Scottsdale Insurance Co.

Takeaway: Insureds looking for coverage in times of need are best equipped if they are transparent about all aspects of their business with their insurance brokers and carriers.

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]