2019 saw a flurry of decisions under directors and officers (D&O) insurance policies, including a bizarre and self-prompted change of heart by the Seventh Circuit.

• Seventh Circuit withdraws decision, affirms coverage for Emmis shareholder lawsuit despite notices to multiple insurers. 

In the Emmis Communications case, the U.S. Court of Appeals for the Seventh Circuit withdrew a controversial opinion that broadly interpreted an exclusion in Emmis' directors and officers liability policy, barring coverage for losses in connection with claims of circumstances "as reported" under Emmis' other insurance policy. The appeal to the Seventh Circuit stemmed from a district court ruling of summary judgment in favor of Emmis, rejecting the insurer's broad reading of the exclusion and concluding that the use of "as reported" in the past tense must "refer[] to events that had already occurred at the time of drafting." A three-judge panel in the Seventh Circuit initially reversed the district court and upheld the insurer's denial of coverage. However, on Emmis' petition for panel rehearing, the Seventh Circuit vacated the judgment in favor of the insurer, withdrew its initial opinion and affirmed the district court summary judgment decision. The reversal, while very rare, alleviated concerns about the chilling effect the court's broad reading of the exclusion may have on policyholders' decisions to provide notice under all potentially applicable insurance policies.

Hunton insurance recovery partner Michael Levine commented that "if you take Illinois National's interpretation of this language to its logical extreme, any common fact could conceivably trigger the exclusion. It could be something as minor as the mere fact that two claims were filed against the same corporate defendant. Emmis showed the Seventh Circuit why that interpretation led to an absurd result." The case is Emmis Communications v. Illinois National Insurance, 937 F.3d 836 (7th Cir. 2019).

• Delaware court says appraisal action constitutes a "securities claim"; triggers D&O coverage. 

The Delaware Superior Court held that an appraisal action, which included $39 million in attorney fees, prejudgment interest and costs incurred in defending litigation that arose out of Solera Holdings Inc.'s acquisition by Vista Equity Partners LP, constituted a covered "securities claim" under Solera's directors and officers liability insurance policy. The claim arose when Solera, a software company, announced a deal whereby it would be acquired by Vista and go private. A number of Solera's shareholders filed an appraisal action in March 2016 in Delaware Chancery Court, contending that the company's valuation was too low. Solera presented the appraisal claim to its D&O insurers to recover the attorneys' fees and costs incurred in defending the appraisal proceeding, but the insurers denied coverage. Solera filed suit, alleging breach of contract and seeking a declaratory judgment that the insurers were obligated to cover Solera's defense expenses and prejudgment interest awarded in the appraisal action. The court denied the insurers' motion for summary judgment and held that an appraisal action is a "securities claim" within the meaning of that term, defined in the D&O policies as "any claim for an alleged violation of law or rule regulating securities."

Solera marks the first opinion finding that an appraisal action is a covered securities claim under a D&O policy. Hunton insurance recovery partner Syed Ahmad commented that "this is a significant ruling because of the court's analysis about the reference to 'violation' which is in a variety of policy provisions. The court's rationale is another example of why the specific terms in a policy matter, and they matter a great deal. The court's reliance on dictionary definitions is also important because it provides another pathway to advance an interpretation of a term in a way that supports coverage." The case is Solera Holdings v. XL Specialty Insurance, 213 A.3d 1249 (Del. Super. Ct. 2019).

• Governmental civil investigations trigger insurer's duties to defend and indemnify. 

The Delaware Superior Court held that a government-conducted civil investigation constitutes a "claim" sufficient to trigger coverage under a professional liability insurance policy. Conduent alleged that the insurer breached its obligations by refusing to defend and indemnify Conduent for costs incurred in connection with a Medicaid fraud investigation. After considering cases reaching differing conclusions, the court concluded that the civil investigation demand from Medicaid was a "claim" because it stated a "demand for … non-monetary relief" targeted at the insured. The court then considered whether the civil investigation demand alleged a "Wrongful Act," as required by the policy, and found no material distinction between an investigation of an alleged unlawful act and an allegation of an unlawful act, concluding that this was merely a "distinction without a difference." The case is Conduent State Healthcare v. AIG Specialty Insurance, No. N18C-12-074 MMJ CCLD (Del. Super. Ct. June 24, 2019).

• Court rejects insurers' argument that insureds breached D&O insurance policies by failing to cooperate and settling lawsuits for $222 million without consent. 

The Delaware Superior Court ruled that insurers could not rely on written consent and cooperation clauses in directors and officers liability insurance policies to avoid coverage for settlements by Dole Food Company Inc. in shareholder disputes involving fraud in a go-private transaction. The court also held that settlement payments by the company to its shareholders were not an excluded "increase in the consideration paid," but a covered loss. The insurance dispute stemmed from a lawsuit shareholders brought in 2015 against Dole's former CEO, DFC Holdings, LLC, and David Murdock, who owned 40% of Dole's stock and was a director and officer of Dole. The shareholders alleged that Murdock used DFC to acquire the remaining shares of Dole at an artificially low price in order to take the company private. The court found that Murdock, the former CEO and DFC breached their duty of loyalty. San Antonio Fire & Police Pension Fund brought similar claims against Dole and Murdock. Both cases settled. The combined settlements reportedly totaled $222 million.

According to Dole, DFC and Murdock, they notified the D&O insurers of their intent to settle the shareholder disputes, shared information relevant to the ongoing settlement negotiations and formally asked the insurers to contribute funds toward the resolution. The insurance company refused to fund the settlement amount and instead sued the policyholder seeking a declaration of no coverage under the policies.

The court determined that, based on the record, there was a question of fact as to whether the insurers unreasonably withheld their consent to the settlements. The court similarly concluded that there was a genuine issue of material fact as to whether the insurers had a reasonable opportunity to participate before the settlements were finalized, and could not rule that the policyholders breached the written consent provision. The court also ruled that the settlements were a "loss," which the policies defined, in relevant part, as "all monetary amounts which the insureds become legally obligated to pay on account of a claim, including damages, settlement amounts and judgments." The case is Arch Insurance v. Murdock, No. N16C-01-104 EMD CCLD (Del. Super. Ct. May 7, 2019).

(c) 2020 Hunton Andrews Kurth. All rights reserved. Republished here with permission.