(Article from Insurance Law Alert, November 2019)
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The Supreme Court of Delaware ruled that a Securities Claim coverage provision in an Executive and Organization Liability policy is unambiguous and does not encompass a variety of statutory and common law claims arising out of a corporate “spin-off” transaction. In re Verizon Ins. Coverage Appeals, 2019 WL 5615263 (Del. Oct. 31, 2019).
The coverage dispute arose out of a “spin-off” transaction by which Verizon created Idearc, a new corporate entity, and distributed shares of Idearc common stock to Verizon shareholders. When Idearc filed for bankruptcy several years later, U.S. Bank, as trustee for creditors, sued Verizon and others, alleging violations of fraudulent transfer statutes, payment of unlawful dividends and common law claims for breach of fiduciary duty, unjust enrichment and alter ego liability. Verizon ultimately prevailed at trial after incurring more than $48 million in defense costs. Verizon’s insurers refused to cover the defense costs on the basis that the complaint did not allege covered “Securities Claims,” defined, in part, as claims alleging a “violation of any federal, state, local or foreign regulation, rule or statute regulating securities.”
A Delaware trial court ruled that the Securities Claim provision was ambiguous and should be construed in Verizon’s favor. In doing so, the trial court interpreted the provision to encompass any claim “pertaining to laws one must follow when engaging in securities transactions.” Based on this interpretation, the trial court granted Verizon’s summary judgment motion.
The Supreme Court of Delaware reversed, deeming the provision unambiguous. The court reasoned that the language of the provision mirrors the language used in “a specific area of the law recognized as securities regulation.” Therefore, the court explained, the Securities Claim provision is “aimed at a particular area of the law, securities law, and not of general application to other areas of the law.” Because none of the underlying claims implicated a regulation, rule or statute specifically directed at securities law, the court held that the insurers had no duty to fund Verizon’s defense. As the court noted, the New York Court of Appeals and the Ninth Circuit have construed similar provisions in the same manner.