Articles Posted in D&O

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Delaware-superior-court-logoIn a prior post, we reported an important ruling of first impression by the Delaware Superior Court that a shareholder appraisal action against Pillsbury’s client Solera Holdings Inc. was a “Securities Claim” under Solera’s directors and officers liability insurance policies. In the same decision, the court ruled on two additional issues that no Delaware court had previously decided and that highlight the importance of understanding the specific terms of your company’s D&O policies.

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iStock-1039710166-disbelief-e1565975777783-300x255When a company receives a claim or lawsuit, it is critical to provide timely notice to its insurers. But when the claim is first made, sufficient facts may not yet be known to indicate which policy will respond. Many policies also contain language that purports to shift coverage to earlier insurance policies for claims that “relate back” to earlier events. As a best practice, policyholders and their brokers often provide notice of a claim under all policies that might cover a loss, to ensure that coverage is not defeated by failure to meet any obligation to give notice. This method of first providing notice for claims to multiple insurers, and then working with insurers to determine the correct policy to respond, is a well-established practice for managing insurance claims. Once the proper policy to respond to the claim is established, exclusions in the other policies kick in to avoid double coverage.

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Delaware-superior-court-logoPillsbury secured an important victory for its client, Solera Holdings Inc., when Delaware Superior Court Judge Abigail LeGrow held—in a matter of first impression anywhere in the country—that a shareholder appraisal action challenging the price Solera obtained for its shares when it sold itself to private equity firm Vista Equity Partners was a “Securities Claim” within the meaning of Solera’s directors and officers liability insurance policies. Last month’s groundbreaking decision in Solera Holdings, Inc. v. XL Specialty Ins. Co., may be found here.

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Pen-300x200Although it has become common for corporate directors and officers to face claims seeking to hold them personally liable for alleged damages resulting from actions taken in their official capacity, it wasn’t always this way. There was a time when such lawsuits were so rare that corporations were not even allowed to indemnify their directors and officers. But with the emergence and rapid growth of lawsuits against officers and directors—often fueled by a cottage industry of class action plaintiffs’ firms—corporate indemnification and Directors & Officers (D&O) liability insurance programs have become integral to a company’s ability to attract and retain strong management.

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Seal_of_the_United_States_Court_of_Appeals_for_the_Second_Circuit_svg-300x300When adding new or additional layers to an insurance program, policyholders are often asked to sign a “warranty letter” providing comfort to the prospective insurer that the policyholder is not aware of impending claims. Typical warranty letters include both subjective and objective representations, indicating that the policyholder has both no actual (or subjective) knowledge of any impending claims and no reasonable (or objective) expectation that such a claim will arise. If a claim later arises, these warranties may provide a basis for full rescission of a policy or create an exclusion for claims that the policyholder knew or should have known would be filed. And when a warranty is poorly worded or overly broad, it may give rise to a morass of coverage litigation.

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Some of the biggest pitfalls for policyholders lie camouflaged among seemingly “standard” policy conditions—often overlooked during the procurement or renewal process. This is especially true ofiStock-469102226-trap-300x225 allocation clauses, found most commonly in Directors & Officers (D&O), Errors & Omissions (E&O), and Professional Liability (PL) policies. In our policyholder-side coverage practice, we are seeing insurers relying on these clauses more and more as an excuse to pay only a small fraction of the defense in mixed-claim cases, i.e., suits involving both clearly covered claims and claims that the insurer contends are not covered. We urge policyholders and brokers to review such clauses carefully and seek to modify them as necessary to ensure the complete defense to which the policyholder is entitled under the law.

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Sometimes you just can’t win.

Under the law of most states, the doctrine of rescission provides that when a policyholder gives a materially misleading answer on an application for insurance, the court may hold it void ab initio,iStock-867667916-yes-no-recission-300x200 meaning the policy is unenforceable from the outset, as if there had never been any coverage. But in Western World Insurance Co. v. Professional Collection Consultants, a split panel of the U.S. Court of Appeals for the Ninth Circuit put a new twist on the doctrine. It rescinded a D&O policy when the policyholder gave an answer that the panel majority considered misleading—even though it was factually the truth.

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It’s that time of the year when Americans gather together, enjoy a feast, and fall asleep in front of the TV. But before the tryptophan kicks in, we also like to give thanks for the good things that have iStock-623763994-t-giving-300x200happened in the past year. Corporate policyholders can share in the tradition, as this year has produced a number of court decisions that favored insureds and protected their coverage expectations. Here are a few of the cases we are most thankful for:

Harleysville Group Insurance v. Heritage Communities, Inc.

This case out of the South Carolina Supreme Court gave generously to policyholders in a number of ways this year (giving us the opportunity to post in this blog again and again and again). The case involved defective construction claims against a developer. The developer’s insurer, Harleysville, provided a defense under a vague reservation of rights letter. After the underlying plaintiffs were awarded verdicts against the developer, Harleysville sued to avoid covering the judgments. The court ruled against Harleysville on four issues:

  1. Harleysville’s vague, general reservation of rights letter did not effectively reserve its rights to contest coverage under the terms and exclusions in the policy;
  2. Where the underlying verdicts did not apportion the damages between covered and uncovered losses, the insurer bore the burden of proving amounts allocable to uncovered losses. Where the insurer failed to meet that burden, it had to cover the entire verdict;
  3. Punitive damages awarded in the verdicts were found to be covered under Harleysville’s policy; and
  4. The owners’ association, which was asserting the dissolved developer’s coverage rights in the case, had standing to challenge the insurer’s reservation of rights letter.

Harleysville is a case that just keeps on giving.

Verizon Communications v. Illinois National Insurance Company

The duty to provide a defense, or reimburse defense costs, is one of the most important features of liability insurance. You could say it’s the stuffing, where indemnity is the turkey. The Delaware Superior Court emphasized that obligation in Verizon to the tune of $48 million in defense costs that the insurer had refused to pay. This decision was important because it rejected the insurer’s attempt to define the vague term “securities claim” narrowly to avoid its obligation to pay defense costs. More broadly, the court upheld the pro-policyholder interpretative doctrine of contra proferentem, rejecting the insurer’s argument that the doctrine should not apply where the insured is a large, sophisticated corporation. Applying the doctrine, the court held that unless it can be shown that the insured had a hand in drafting the policy language, ambiguous terms should be interpreted against the insurer. A more detailed analysis of the decision by this firm can be found here.

All State Interior Demolition Inc. v. Scottsdale Insurance Company and McMillin Management Services v. Financial Pacific Insurance Company

Thanksgiving dinner is always better with more guests. Additional Insured endorsements in policies extend the invitation to more parties that may require a seat at the table of insurance protection. This is especially important in the construction context, where developers and general contractors rely on numerous subcontractors’ insurance policies to protect them from liability arising from those subcontractors’ work. These two decisions rejected insurers’ attempts to narrow the application of additional insured endorsements.

In All State Interior, previously highlighted here, a New York County trial court interpreted an endorsement broadly, granting additional insured status to companies that didn’t technically contract with the subcontractor, and who weren’t named in the endorsement. The court, in essence, incorporated the terms of the contract between All State and the subcontractor into the endorsement to trigger additional insured coverage for the project owner, site lessor, and construction manager as All State’s “partners, directors, officers, employees, agents and representatives.”

In McMillin, the insurer’s policy granted additional insured status to McMillin, the general contractor of a project, for “liability arising out of [the subcontractor’s] ongoing operations,” and excluded additional insured status for the insured’s completed operations. The insurer denied defense coverage on the basis that the subcontractor had finished working on the project. The California Court of Appeal disagreed, stating that the endorsement’s phrase “arising out of” is broader than “during,” and so the liability did not have to arise while the insured was still working on the project.

Nooter Corporation v. Allianz Underwriters Insurance Company

When it’s time for dessert, allocating the available pie to make sure everyone gets what they deserve can be tricky. This year, Missouri joined the ranks of “all sums” states that maximize coverage for policyholders with long-tail claims stretching over several years. The “all sums” method of allocation allows an insured to allocate all of its damages from long-tail losses to a single year of coverage. This ruling by the Missouri Court of Appeals was based on the plain language of the policies, which promise to indemnify the insured for all sums the insured is legally obligated to pay for occurrences during the policy period. The court also ruled that all triggered primary policies across a period of years need not be exhausted before excess policies in the period selected by the policyholder can be triggered. The court ruled that only the primary policy in one year needs to be exhausted before that year’s excess policies are triggered. For a more thorough analysis of this case, click here.

Medidata Solutions, Inc. v. Federal Insurance Company

Rather than brave the stampedes of Black Friday, one can get good deals on holiday gifts on Cyber Monday. But to protect against cyber thieves, make sure your insurance coverage will protect you. In this case, the U.S. District Court for the Southern District of New York interpreted the computer fraud provision of a crime policy to do just that. Policyholder Medidata was the victim of fraud when someone tricked its employees into wiring money overseas, using spoofed emails that looked like they came from the company’s president. Medidata’s insurer denied its claim, stating that the computer fraud clause of the crime coverage required actual hacking into and manipulation of Medidata’s computer system. But the court sided with Medidata, ruling that the spoofing of emails violated the integrity of the insured’s computer system enough to trigger coverage, and actual entry by hackers was not required by the policy language or by precedent.

We at Pillsbury hope you all had a very Happy Thanksgiving!

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potholes policiesAs summer comes to a close, road repair crews across the country are identifying the street repairs and potholes that must be filled before the cold weather approaches. Now is also a good time for policyholders to identify some of the “potholes” that may accompany their claims-made insurance policies and get them filled before it is too late.

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It’s now accepted wisdom that virtually all public company mergers and acquisitions will be challenged with at least one lawsuit—over 95% of them are. A less well-publicized form of challenge—and one that is both fascinating and perplexing for those interested in securities litigation—is the unique creature of Delaware law known as the appraisal proceeding. Under Delaware General Corporation Law §262, shareholders dissenting from a merger on grounds that the share price they’ll receive is inadequate “shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock.” If the court finds that the deal price is lower than fair market value, the acquiring corporation must pay the difference to the dissenting shareholders, plus interest. The court may also award their attorneys’ and experts’ fees, which can be significant. This process has created a cottage industry of “appraisal arbitrage,” in which hedge funds purchase shares in hopes of securing a higher price for those shares through appraisal. Fortunately, D&O insurance might be available to cover the acquired company’s defense and other costs.

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