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A Settlement Is A Settlement, Not An Adjudication Of Fraud For D&O Policy Exclusion Purposes

AT&T v. Clarendon America Ins. Co., C.A. No. 04C-11-167-JRJ (Del. Super. Ct. June 25, 2008).

This decision will be of interest to any parties drafting or negotiating D&O policy exclusions.

This coverage dispute arose out of stockholder litigation brought against certain AT&T directors, alleging false and misleading statements. That action settled during trial, with AT&T agreeing to pay $100 million to the plaintiffs. National Union, AT&T’s excess D&O carrier, denied coverage. 

The issue before the Superior Court here, on AT&T’s motion for partial summary judgment, was whether National Union could deny coverage based on the policy’s fraud exclusion. AT&T argued that the fraud exclusion requires an adjudication and does not apply to settlements.

The exclusion provides that National Union is not obligated to pay any claim “brought about or contributed to in fact by any deliberate dishonest, fraudulent or criminal act or omission, or any personal profit or advantage gained by any of the Directors and Officers to which they were not legally entitled and providing any such finding is material to the cause of action so adjudicated.”  (Emphasis added.) 

The Superior Court found that New York law applied to the D&O Policy and held that the fraud exclusion did not bar coverage for dishonest, fraudulent, or criminal acts or omission unless (1) there was a finding that such acts occurred and (2) that such finding was material to the cause of action being adjudicated. 

Since the stockholder litigation settled, no fact finder considered all of the evidence and rendered a “finding” or verdict. And, the court noted, a settlement is a settlement, not an adjudication. The fraud exclusion did not entitle the insurers to a trial now on the issue of whether the defendants in the stockholder litigation engaged in deliberate dishonest, fraudulent, or criminal acts. Such a determination is not for a coverage dispute. 

The court, therefore, granted AT&T's motion for partial summary judgment, declaring that National Union could not rely on the fraud exclusion to deny coverage.