CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262
CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262, that Pre-Judgment Interest on an Appraisal Award May be a Covered “Loss” and that a Breach of Consent-to-Defense Clause does not Bar Coverage Absent Prejudice to Insurer
The Complex Commercial Litigation Division of Delaware’s Superior Court has become a leading venue for complex insurance coverage disputes. This decision addresses D&O insurers’ denial of coverage for over $13 million spent defending an appraisal proceeding under 8 Del. C. § 262, as well as $38.4 million in pre-judgment interest on the appraisal award.
On the first issue, the insurers argued that appraisal actions were not covered “Securities Claims” because a claim for a “violation” implies wrongdoing, which need not be proven in an appraisal action. The Court reasoned, however, that “‘[v]iolation’ simply means, among other things, a breach of the law and the contravention of a right or duty.” This usage in the securities context is “logical” given that “[s]everal laws regulating securities can be violated without any showing of scienter or wrongdoing.” Because § 262 appraisal actions are, by nature, allegations that the company contravened the stockholders’ the statutory right to fair value, appraisal actions were covered under the policy language at issue.
Having resolved this question, the Court next considered whether the roughly $38.4 million in pre-judgment interest on the appraisal award was covered. The insurers argued that the fact the appraisal award itself was not covered was dispositive on the issue of pre-judgment interest. The Court disagreed, however, reasoning that “Loss” was defined to include all interest that Solera is “legally obligated to pay.” The Court reasoned that, unlike some insurance policies, the policies at issue did not define losses only to include “interest on a covered judgment.” The insurers raised certain fact-based defenses, however, that made inappropriate the insured’s request for summary judgment in its favor.
The Court also rejected as premature the insurers’ request for summary judgment based on the insured’s failure to comply with a consent-to-defense provision. It was not disputed that the insured failed to provide notice of the appraisal claim and a request for defense until after trial. The Court reasoned, however, that prior Delaware cases have implied a prejudice requirement in consent-to-settle clauses.
Following these analogous precedents, the Court reasoned there was a rebuttable presumption of prejudice from the failure to provide notice. The Court denied summary judgment due to the factual issue of prejudice. Although the appraisal action’s outcome – an award below the merger price – was favorable to the insured, the insurers could conceivably show prejudice due to their inability to participate in the defense. This question, like the pre-judgment interest question, required further proceedings, making summary judgment inappropriate.Share