Delaware D&O Insurance Ruling on Provision for Related Claims
Will a new Delaware Supreme Court decision regarding directors’ and officers’ liability insurance make it harder for your business to cover future claims? A recent Delaware Supreme Court decision interpreting a related claims provision in a D&O policy declined to endorse a clear line test that would allow policyholders to better understand when multiple claims made during different policy periods may be considered as a single claim made in a full stop policy.
A clear line test would provide some necessary consistency in the application of related claims provisions. In the absence of such a criterion, insurance companies generally take the position that will minimize their payouts. When treating two claims as if one reduces coverage to the limits of a single policy, insurance companies are broadly interpreting what makes the claims related. However, where the applicable self-insured retention is greater than the value of any single claim, the insurance company will narrowly interpret these same provisions in the expectation that multiple claims will result in multiple retentions – putting any possibility of coverage out of the picture. of range.
The Delaware case at issue is FirstSolar c. National Union First Insurance Co., which was decided on March 16, 2022. It arose out of a coverage dispute in which the insurance company denied coverage for a new securities lawsuit against the insured. The insurance company claimed that the new claim was related to a prior class action and applied a related claims provision to the new claim. The Related Claims provision in the policy grouped together all claims “alleging, arising out of, based upon or attributable to” “same or related” wrongdoing. Because the policy limits in effect in the earlier lawsuit had been exhausted by paying defense and settlement costs in the class action, the insurance company’s position effectively left no coverage remaining for the new securities lawsuit.
In the resulting coverage dispute, the trial court dealt with that dispute by applying what it called the “substantially identical” standard to the related claims provision. According to this standard, claims are related if the “subject matter” of the claims is “exactly the same” – it was not enough for the claims to share “thematic similarities”. The trial court granted the insurance company’s motion to dismiss on the grounds that the claims were related because the two suits alleged “the same fraudulent scheme – artificially boosting the stock price by misrepresenting First Solar’s ability to produce solar electricity at costs comparable to the costs of conventional energy production”. .”
On appeal, the Delaware Supreme Court upheld the trial court’s decision, but rejected its reasoning. He observed “[w]that a claim relates to a prior claim is decided by the language of the policy, not by a generic “substantially identical” standard. Using the language of “same or related” wrongdoing in the policy’s related claims provision, the appeals court concluded that the lawsuits were related because “the scope of the wrongdoing alleged in the two actions is the even” even if there were minor differences in the specific allegations or damages sought.
What does this mean for D&O policyholders?
Firstly the First Solar This case highlights the fact that, ultimately, insurance policies are contracts, where the rules of contract interpretation apply to the particular terms of the contract as sold to the policyholder. . Following this logic, the court held that whether two claims are deemed to be linked may depend on the precise wording of the linked claims provision: for example, does the provision require a thematic or merely causal relationship?
Second, a best practice is to consider the impact of this decision when purchasing an A&D policy. Are there any scenarios where the business would prefer to separate old and new claims as clearly as possible? Or vice versa? A best practice would be to assess the terms and conditions of new policies, as well as other factors that may affect the impact of a claims provision on the insured.
Third, whether they are in the market for a new D&O policy or embroiled in a dispute over coverage for an existing policy, policyholders are well served to consider the arguments an insurance company might make. to attempt to limit or eliminate coverage. It’s always best to be better prepared to explore solutions that maximize coverage options and respond to insurance companies’ efforts to evade coverage.