United States: Delaware Court Adopts Pillsbury's Theories On Novel D&O Insurance Issues (Part 2)

Last Updated: September 30 2019
Article by Tamara D. Bruno

In 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.

Interest on the Fair Value of Appraised Shares

Under Delaware's appraisal statute, the dissenting Solera stockholders were entitled to interest on the fair value of their shares accruing from the effective date of the merger through payment of the judgment in the appraisal action. As a result, even though the court in the appraisal action found the shares' fair value to be less than the merger deal price, the court entered judgment against Solera for $38 million in interest on the lower fair value amount.

Solera's D&O carriers took the position that the interest award was not "Loss" within the meaning of the D&O policies, even though that term was explicitly defined to include "pre-judgment and post-judgment interest." The carriers argued that, because the fair value amount was undisputedly not a covered Loss under the policies, it "logically" followed that interest on the fair value amount was also not a covered Loss. Solera responded, and the court agreed, that the definition of "Loss" did not condition coverage of interest on the existence of otherwise covered Loss. This was in contrast to language commonly found in other D&O policies that provides coverage for interest "on a covered judgment." The court declined to add this language to Solera's policies, finding that "the Policy's drafters chose a broader definition of Loss that includes all pre-judgment interest that Solera is legally obligated to pay."

While the interest remedy in the Delaware appraisal statute is fairly unusual, the court's holding reaffirms the maxim that insurance carriers must provide the coverage they promised under their policies' plain terms, and where those terms are broad, so, too, is the coverage. Policyholders should also make sure they understand the scope and any limitations on covered "Loss" in their D&O policies before tendering a claim.

Prejudice Required to Deny Pre-Notice Defense Costs

For their final issue on summary judgment, the insurance carriers argued that they were not obligated to cover defense costs incurred before they were notified of the appraisal lawsuit because the carriers did not consent to those costs.

As is common, the primary D&O policy at issue included a provision stating that the insured may not "incur any Defense Expenses ... or admit liability for, make any settlement offer with respect to, or settle any Claim without the Insurer's consent, such consent not to be unreasonably delayed or withheld ...." Somewhat less commonly, the policy also contained a provision stating that coverage could not be denied solely based on untimely notice "unless the Insurer can demonstrate its interests were materially prejudiced by reason of such untimely notice."

Solera explained that the carriers could not deny coverage for its defense costs based on notice timing because (i) the policy explicitly requires material prejudice for the insurers to deny coverage based on late notice and (ii) Delaware courts have read a prejudice requirement into similar "consent" provisions when insurers were given notice after settlement, and defense costs fall under the same provision.

For the first time under Delaware law, the court held that the same interpretation of the consent provision applied to defense costs as to settlement, and so there must be a showing of prejudice for the carrier to avoid coverage. Specifically, the court stated:

I cannot find any reason why the implied prejudice requirement that Delaware courts apply to consent-to-settle clauses would not also apply to the Consent Clause in this case. Both consent-to-settle and consent-to-defense provisions are meant to allow the insurer a meaningful opportunity to participate in litigation and to protect the insurer from prejudice, but a strict interpretation of either provision would lead to forfeiture of coverage. Implying the prejudice requirement in both circumstances protects an insured who has breached a consent provision from the harsh result of forfeiture, but only if the insured can prove by competent evidence a lack of prejudice to the insurer.

This holding provides some protection for an insured to recover defense costs incurred before notifying its insurers, though it is also a reminder to provide notice as early as possible even where coverage may be unclear.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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