Hunton Insurance Recovery Blog

D&O, E&O, and other professional liability insurers often raise the insurability, or rather “uninsurability” loss defense. Consistent with our prior analysis of the ways the Ohio district court erred in assessing insurability, the Sixth Circuit’s recent decision in Huntington National Bank v. AIG outlines how courts should evaluate insurability defenses, particularly in the absence of public policy rendering a loss uninsurable.

A New York federal court recently held that an insurance company was entitled to recoup legal fees paid under a directors and officers liability policy in defense of a criminal action against an ex-CEO who was convicted of bribery. On a motion for reconsideration, the court affirmed its earlier ruling that the CEO’s conduct fell within the policy’s “Dishonest and Willful Acts Exclusion,” reasoning that the criminal case had been finally adjudicated despite a pending appeal. Because there was no coverage, the insurer could seek repayment of all defense costs it had paid to date. Not only is the court’s recoupment decision potentially inconsistent with New York law, but it also raises thorny questions regarding just when a judgment is “final” for the purpose of triggering D&O policy exclusions.

In another pro-policyholder ruling in Delaware, a Delaware Superior Court judge has denied a group of insurers’ application for certification of interlocutory appeal in the long-running D&O dispute, Verizon Communications Inc. et al. v. National Union Fire Insurance Co. of Pittsburgh, PA, et al., C.A. No. N18C-08-086 EMD CCLD (Del. Super. March 16, 2021). The court’s most recent decision arises out of a February 23 ruling that Verizon could recover $24 million in legal fees incurred in defense of a fraudulent transfer lawsuit brought by a bankruptcy trustee. When the insurers’ sought to appeal this interlocutory decision, the court refused, concluding that the benefits of an immediate appeal, if any, do not outweigh the probable costs. The decision will permit the orderly resolution of what the court deemed to be “standard contract law principles,” which the insurers had failed to demonstrate negated coverage.

On March 3, 2021, the Delaware Supreme Court issued a landmark decision holding that Delaware law should be applied in disputes over directors and officers liability (“D&O”) insurance policies sold to companies incorporated in Delaware. RSUI Indem. Co. v. Murdock, et al. No. 154, 2020, C.A. No. N16C-01-104 CCLD (Del. Mar. 3, 2021). The court addressed this and other key issues in the long-running dispute over D&O insurance purchased by Dole Food Company, specifically addressing issues raised by Dole’s eighth-layer excess insurer, RSUI, which provided $10 million coverage excess of $75 million.

The court decided multiple important issues, finding that liability for alleged fraud is insurable under Delaware public policy, RSUI’s Profit/Fraud Exclusion did not bar coverage because there had been no “final adjudication” of fraud, and the “larger sums rule” governed allocation issues. However, among these important rulings, the most significant may be the Supreme Court’s ruling that Delaware governs the interpretation of D&O insurance issued to a company incorporated in Delaware.  The court specifically rejected the insurer’s arguments that California law (which might preclude coverage) should apply under a policy that was purchased and issued in California to a Delaware corporation headquartered in California.

The US Securities and Exchange Commission has levied $125,000 in civil penalties on Cheesecake Factory as part of a settlement to resolve the agency’s allegations that the company made materially misleading statements to investors about the impact of the COVID-19 pandemic on its business. While this is the first such case reported by the SEC, it is only one in a string of recent third-party liabilities companies have faced that implicate directors’ and officers’ liability insurance coverage.

In March, we reported on the initial filing of several securities class action suits arising from the coronavirus pandemic (COVID-19). For example, at the start of the pandemic, shareholders of Norwegian Cruise Lines Holdings, Ltd. filed a class action alleging that the company and certain officers violated the Securities and Exchange Act of 1934. The lawsuit alleged that the cruise line made false and misleading statements about COVID-19 in order to persuade consumers to purchase cruises. This allegedly caused the share prices to be cut in half.

Insurance companies frequently raise the so-called “dishonesty” exclusion that is typically found in most professional liability and directors and officers insurance policies.  Last week, the U.S. Court of Appeals for the Sixth Circuit took a substantial step toward curtailing that practice.  In a coverage dispute with eight-figure implications, the appellate court found in favor of the policyholder and ruled that publishing false statements does not equate to dishonesty and thus is not sufficient to support application of a dishonesty exclusion.

In a recent article in the ABA Business Law Section publication Business Law Today, Hunton insurance recovery lawyers Syed Ahmad and Geoffrey Fehling discuss several important D&O insurance coverage issues to consider in M&A transactions. In the article, the authors discuss the intersection of M&A and insurance and how mergers, acquisitions, and other deals can impact the potential risks and protections afforded by D&O and other insurance policies . A copy of the article can be found here.

On June 17, 2019, the First Circuit held that an insurer’s duty to defend was triggered because the underlying complaint set forth claims that required a showing of intent as well as claims that sought recovery for conduct that “fits comfortably within the definition of an ‘accident.’” In Zurich American Ins. Co v. Electricity Maine, LLC, Zurich sought declaratory judgment that, under a D&O policy, it had no duty to defend the insured, Electricity Maine, an electrical utility company being sued in the underlying class action. Zurich argued it had no duty to defend because the underlying complaint failed to allege that Electricity Maine engaged in conduct that qualified as an “occurrence” or that caused “bodily injury” under the terms of the policy. The First Circuit disagreed.

The Northern District of Illinois in Astellas US Holding, Inc. v. Starr Indemnity and Liability Co., 2018 WL 2431969, at *1 (N.D. Ill. May 30, 2018) held that a U.S. Department of Justice subpoena demanding documents relating to a government investigation constitutes a “Claim.”