In addition to covering directors and officers, D&O policies for public companies provide balance-sheet protection for the company itself. However, such coverage is generally limited to “securities claims” as defined in each policy – also known as “Side C” coverage.
According to CAC Specialty, securities claims are typically brought in the form of class action and derivative lawsuits by shareholders. They often allege breaches of disclosure or fiduciary duties, or misleading and deceptive conduct that resulted in a loss of market value of the company’s shares.
However, the question of what constitutes a securities claim is still up in the air. The definition has been hotly contested in insurance litigation. Two recent rulings – both analyzed by CAC Specialty – relied on the same case law regarding securities claims and reached two different conclusions on coverage.
Verizon Communications Inc., et al. v. National Union Fire Ins. Co. of Pittsburgh, et al.
This dispute stemmed from Verizon Communications’ spinoff of a portfolio to FairPoint Communications. Following the deal, FairPoint filed for and later emerged from bankruptcy.
However, FairPoint’s bankruptcy trustee alleged that the company was insolvent at the time of the deal, and pursued Verizon for actual and constructive fraudulent transfers in connection with the deal, resulting in $24 million in defense fees, according to CAC Specialty.
Verizon sued its insurers after they declined to reverse the telecommunications giant for its defense fees. The insurers argued that the trustee’s lawsuit didn’t constitute a securities claim, defined as a claim “(1) alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities) which is: (a) brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an organization; or (b) brought by a security holder of an organization with respect to such security holder’s interest in securities of such organization; or (2) brought derivatively on the behalf of an organization by a security holder of such organization.”
Verizon, however, argued that the trustee qualified as a “security holder” under the Bankruptcy Code and brought the lawsuit “derivatively,” which would meet the second part of the definition.
In its analysis of the case, the court examined a previous coverage case involving Verizon (In re Verizon Insurance Coverage Appeals), in which the Delaware Supreme Court had ruled the underlying claim failed to meet the definition of “securities claim.” However, in the earlier case, the second prong of the policy’s definition of “securities claim” read: “brought derivatively on the behalf of an organization by a security holder of such organization, relating to a Securities Claim as defined in paragraph (1) above.”
The court found that the policy definition in the present case was “critically different” than in In re Verizon in that it did not incorporate the first prong of the definition, according to CAC Specialty.
The court found in favor of Verizon, concluding that the notes at issue constituted securities, and that the action was “brought derivatively” because “recovery would serve to increase the pool of assets available to all creditors.”
The insurers also argued that Verizon’s defense fees were “unreasonable and unnecessary.” However, the court ruled that Verizon was entitled to full coverage for its defense costs.
Calamos Asset Management Inc. v. Travelers Casualty & Surety Co. of America
The second case analyzed by CAC Specialty involved the announcement by Calamos Asset Management of a merger whereby the company would be taken private. Following the announcement, several stockholders alleged breaches of fiduciary duty against Calamos and its directors and officers. Calamos sought coverage from its primary and two excess follow-form D&O insurers, according to CAC Specialty.
However, the second excess insurer refused to cover the loss, claiming the lawsuits did not meet the primary policy’s definition of a securities claim. The primary policy’s language said it was intended to cover “any actual or alleged violation of any federal, state, local regulation, statute or rule (whether statutory or common law) regulating securities, including but not limited to the purchase or sale of, or offer to purchase or sell, securities which is … brought by any person or entity based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the purchase or sale of, or offer to purchase or sell, securities of the company…”
In the resulting legal action, the court also relied on the Delaware Supreme Court’s decision in In re Verizon Insurance Coverage Appeals, which found “regulations, rules, or statutes that regulate securities are those specifically directed towards securities, such as the sale, or offer for sale, of securities.”
In Calamos v. Travelers, the court reasoned that breach of fiduciary duty claims are not specific to any rule, regulation or law regulating securities. The court ruled in favor of the excess insurer in February.
“While the outcomes of these cases differed, so did the policy language, again demonstrating that words matter,” CAC Specialty said in its analysis.
“The takeaway from both recent decisions is that all D&O policies are not created equal, and nuanced differences in critical terms like ‘securities claim’ can have meaningful impact of the availability of coverage,” Geoffrey Fehling, an attorney with law firm Hunton Andrews Kurth, told CAC Specialty.