Delaware Business Litigation Report

Superior Court Grants Defendant Insurers' Motion to Dismiss Because Employees who Served as Directors and Officers Suffered No Loss to which D&O Insurance Coverage Applies

AT&T Corp. v. Clarendon America Insurance, C.A. No. 04C-11-167, 2006 WL 2685081 (Del. Super. Ct. Sept. 18, 2006). This case is part of a larger insurance coverage dispute involving Directors and Officers and Company Liability ("D&O") coverage purchased from certain of the defendants by plaintiff AT&T Corp. ("AT&T") and the company of which AT&T was the majority stockholder, the now-bankrupt At Home Corporation ("At Home"). AT&T sought D&O coverage in connection with several underlying shareholder suits brought against it and certain directors and officers of AT & T and At Home. The court previously decided the potential coverage liability under the AT&T D&O policies but not the At Home policies. See AT & T Corp. v. Clarendon America Ins. Co., C.A. No. 04C-11-167 (JRJ), 2006 WL 1382268 (Del. Super. Ct. Apr. 13, 2006, amended Apr. 25, 2006). At issue in this case are the D&O policies issued by the five defendant insurers to At Home, including the primary insurer and the four excess insurers (collectively, the "At Home Insurers"). The At Home Insurers moved to dismiss AT&T's complaint. The At Home Insurers argued that At Home and the ten AT&T employees who served as At Home directors and officers suffered no loss as defined by the policies, and therefore the At Home Insurers' obligation to provide D&O coverage was not triggered. The At Home Insurers contended that AT&T failed to allege in its complaint that At Home and its directors and officers had paid or would ever pay any amount to defend or settle the underlying shareholder suits, and that AT&T had in fact conceded that it had paid all defense fees and costs and settlements related to the underlying litigation on behalf of At Home and its directors and officers. In response, AT&T contended that the At Homes Insurers "abandoned" the At Home directors and officers when they refused to advance defense costs, and that the directors and officers then sought those costs from AT&T and assigned their breach of contract claims against the At Home Insurers to AT&T. AT&T further argued that notwithstanding the assignment of the breach of contract claims to it, AT&T was equitably subrogated to the directors' and officers' rights against the At Home Insurers from the moment AT&T started paying the defense and settlement costs. The court granted the At Home Insurers' motion to dismiss, holding that AT&T could not prevail on any set of facts inferable from the complaint because under California law, the At Home directors and officers were not, and never have been, "legally obligated to pay" any portion of the defense or settlement costs associated with the underlying shareholder litigation and therefore suffered no "loss" as defined in the D&O policy. The court further found that AT&T could not prevail on its equitable subrogation claim because AT&T had "clearly acted as a 'volunteer' when it indemnified the At Home directors." Share