Insurers won $100 million when the Fourth Circuit ruled Under Armour's accounting practices and misleading statements constituted a single D&O claim.
The decision from the United States Court of Appeals for the Fourth Circuit on January 20 reverses a lower court ruling that would have given Under Armour access to a second layer of directors and officers coverage. At stake was whether government investigations into how the company shifted revenue between quarters counted as a new claim under a 2017-2018 policy, or whether it was tied to earlier shareholder lawsuits about rosy financial projections.
The answer, according to the court: it's all connected.
The trouble started back in 2016 when Sports Authority, a major Under Armour retail customer, went into bankruptcy and eventually liquidated. Even as that relationship crumbled, Under Armour kept telling investors to expect strong growth, projecting revenue increases of around 25 percent.
In February 2017, investor Brian Breece filed a class action lawsuit claiming Under Armour and its executives misled the public about the company's financial health. More shareholder complaints followed, including allegations that CEO Kevin Plank and other insiders sold stock while sitting on bad news.
Under Armour's insurers agreed to cover those claims under a 2016-2017 policy. Continental Casualty Company provided $10 million in primary coverage, with nine excess carriers including Endurance American Insurance Company adding layers of $10 million each, for a total of $100 million in coverage.
Then came the government. In June 2017, the Securities and Exchange Commission started requesting documents about Under Armour's efforts to hit 20 percent quarterly revenue growth. The investigation stayed quiet until November 2019, when the Wall Street Journal reported that both the SEC and Justice Department were looking into whether Under Armour had been pulling future sales into current quarters to make things look better.
When that news broke, the securities litigation expanded to include accounting allegations. The plaintiffs' third amended complaint, filed in October 2020, accused Under Armour of using improper accounting practices that violated generally accepted principles and SEC regulations. The company eventually settled the shareholder suits for $434 million and paid the SEC $9 million.
Under Armour turned to its insurers for the 2017-2018 policy period, expecting another $100 million in coverage. The company reasoned the accounting issues were different from the earlier complaints about misleading statements.
The insurers disagreed, pointing to policy language that treats related claims as a single claim. Under that provision, the later accounting allegations would be deemed to have been made back in 2016, falling under the earlier policy.
The case turned on the policy's "related claims" provision. Under Armour's policy said that claims arising from wrongful acts that are "logically or causally related" count as one claim, with the date set by whenever the first claim came in.
Circuit Judge Quattlebaum, writing for the unanimous panel, started with dictionary definitions. Something is logically related when it's reasonably or rationally connected to something else. The causally related test asks whether things are connected by cause and effect.
The court found the connection clear. The company pulled revenue forward from future quarters to make its current numbers look good, which let executives keep making optimistic statements to investors. Without the accounting maneuvers, those public projections would have been much harder to justify.
The court pointed to the SEC's own analysis, which found that without the pull forwards, Under Armour would have missed its better than 20 percent revenue growth streak in the fourth quarter of 2015 and third quarter of 2016. Both the accounting practices and the public statements served the same goal: convincing shareholders the company was still growing despite retail sector troubles.
Under Armour argued other courts had found similar situations involved separate claims. But Judge Quattlebaum distinguished those decisions, noting the accounting manipulation and misleading statements here were interrelated parts of a single scheme. The pull forwards covered up Under Armour's actual financial condition, which made the public statements possible.
Under Armour also pointed to language in a later 2019-2021 policy that seemed to acknowledge the government investigation claims belonged to the 2017-2018 period. But that policy's exclusion applied "subject to all terms, conditions, limitations and exclusions" of the 2017-2018 policy, which didn't help Under Armour's case.
For the insurance industry, the decision offers useful guidance on how courts will interpret "logically or causally related" language in directors and officers policies. When alleged wrongdoing is part of a coordinated scheme with a common purpose, courts are likely to treat it as related claims subject to one policy limit.
The ruling supports how insurers have been using single claims provisions to manage exposure when multiple legal actions stem from interconnected problems. It also gives claims handlers a roadmap for analyzing whether later-arising issues relate back to earlier matters.
