In Issue of First Impression, Judge LeGrow Denies Summary Judgment to D&O Insurer Who Disputed Coverage for Costs of Defending Policyholder’s Appraisal Action

November 7, 2019

Publication

In Solera Holdings, Inc. v. XL Specialty Insurance Co., et al., C.A. No. N18C-08-315-AML-CCLD, plaintiff Solera held multiple D&O policies underwritten by the defendant insurers. When Solera was privately acquired, its shareholders sought appraisal in Delaware’s Court of Chancery. Solera notified the defendant insurers of the appraisal action, but only after a “substantial portion” of the litigation was complete. The defendant insurers subsequently denied coverage for certain expenses Solera incurred in defending the appraisal action. Solera commenced a breach of contract and declaratory judgment action.

At summary judgment, Judge LeGrow rejected three arguments that the defendant insurers raised to support the denial of coverage. First, the defendant insurers denied coverage by arguing that an appraisal action is not a “securities claim,” as defined in the policy, because appraisal actions do not involve wrongdoing. But looking to the unambiguous terms of the policy, which defined a securities claim as “any actual or alleged violation of any federal, state, or local statute, regulation, or rule or common law regulating securities,” Judge LeGrow disagreed. She reasoned that the term “violation” in this context is not limited to wrongdoing and means, among other things, “a breach of the law and the contravention of a right or duty.” Giving effect to the language chosen by the parties, Judge LeGrow concluded that the securities claims were not as limited as the defendant insurers asserted. In short, the appraisal action against Solera constituted a securities claim.

Second, the defendant insurers argued that because fair value under the appraisal statute is not a loss under the policy, the pre-judgment interest award did not constitute a loss under the policy either. Accordingly, the defendant insurers refused to pay pre-judgment interest. But looking to the unambiguous terms of the policy, Judge LeGrow disagreed: “Nothing in the policy limits coverage for an interest award to interest on a covered judgment.” Again, giving effect to the language chosen by the parties, she found that the policy covered pre-judgment interest.

Finally, the defendant insurers contended that any expenses Solera incurred defending itself in the appraisal action before tendering the case to the insurers was Solera’s to bear. They argued that Solera violated the policies’ consent clause, which obligated Solera to obtain the insurers’ consent prior to incurring expenses in connection with the appraisal action.

Judge LeGrow disagreed. Borrowing from Allstate Insurance Co. v Fie, 2006 WL 1520088, at *3-4 (Del. Super. Mar. 9, 2006), a Superior Court case in which the court injected a prejudice requirement when evaluating whether a policyholder had breached a consent-to-settlement clause, Judge LeGrow reasoned that although Solera admitted that it had effectively breached the policy’s consent clause when it did not timely notify the defendant insurers of the appraisal action, Solera’s breach did not automatically bar coverage. Rather, Solera’s breach gave rise to a presumption that the insurers were prejudiced because of Solera’s tardiness. Solera would nevertheless have the opportunity to rebut the presumption with facts at trial. Thus, because the issue of prejudice was necessarily fact intensive, Judge LeGrow declined to enter summary judgment.

Analysis: Disputes between insurers and their insureds are not going away anytime soon, and this is yet another opinion demonstrating how the CCLD has become a popular venue for resolving those disputes. In resolving this case, the court made clear that typical securities clauses like the one at issue now provide coverage for appraisal actions—litigation that has frequented Delaware courts over the past few years. In this case, Judge LeGrow held that coverage was available for appraisal actions, a first of its kind ruling in Delaware. In fact, when she later certified an interlocutory appeal of her decision, Judge LeGrow recognized that the opinion decided two issues of first impression in Delaware: (1) the meaning of a securities claim within a D&O policy and whether an appraisal action constitutes such a claim, and (2) whether a consent clause relating to defense expenses contains an implied prejudice requirement under Delaware law.  The Delaware Supreme Court has accepted the interlocutory appeal.