Showing 3 posts in Director and Officer Liability Policy.
Supreme Court of Delaware, Applying New York Law, finds that Settlement Amounts were not Uninsurable Disgorgement Under D&O Policies
The Supreme Court of Delaware affirmed the Superior Court’s finding that under the relevant D&O policies at issue, the settlement amounts TIAA-CREF paid to class action plaintiffs did not represent uninsurable disgorgement. In doing so, the Supreme Court distinguished certain cases from New York relied upon by the insurance companies that held settlements represented uninsurable disgorgement. Unlike the cases cited by the defendants, the settlement amounts at issue in the underlying cases here did not represent the return of ill-gotten gains. After this decision, whether or not a claim will be treated as uninsurable disgorgement should be an important consideration by defendants when deciding whether to settle merger objection litigation with a payment to the class.Share
This decision upholds coverage under a D&O policy for a claim alleging fraud by directors. This is not too surprising as the Delaware Corporation Law has long relied on insurance to cover the gap in the DGCL that denies indemnification for some claims based on disloyalty. The business judgment rule, the right to advancement, and indemnification and insurance are the triad of protections for Delaware directors.Share
D&O policies often attempt to exclude from coverage sums paid to disgorge unlawful profits. The underlying theory is that the company did not suffer a true loss when it has to give back something that it never should have had in the first place. This decision tackles the hard problem of applying that theory in specific circumstances. The Court held that when a company settles a claim without admitting it has made an unlawful profit then the insurer has to prove the sums paid were in fact a return of an illegal profit. Merely settling a claim for some amount does not establish disgorgement occurred, even when the claim itself may have made that allegation. In particular, when the actual settlement agreement does not refer to a return of an illegal gain, there is no tie to actual disgorgement and the exclusion may not apply. Hence, when settling a claim it is important to consider how the settlement agreement should read.Share