November 21, 2019

D&O: Common Law & Statutory Claims Aren’t Covered “Securities Claims”

A few months ago, I blogged about a Delaware Superior Court decision holding that a D&O policy’s duty to defend “securities claims” extended to appraisal actions.  Late last month, in In re Verizon Insurance Coverage Appeals, (Del.; 10/19), the Delaware Supreme Court rejected a similar argument for coverage in the context of common law & statutory claims. Here’s an excerpt from this recent Morris James blog discussing the case:

The Delaware Supreme Court, applying principles of contract interpretation under Delaware law, held that claims of breach of fiduciary duty, unlawful dividends and fraudulent transfer were not Securities Claims reflecting a violation of any “regulation, rule or statute regulating securities” and hence the defendant’s director and officer insurance policy that covered such claims did not apply. The Supreme Court thus reversed a holding of the Delaware Superior Court that the insurance coverage applied because the claims “pertain[ed] to laws one must follow when engaging in securities transactions.”

The Supreme Court held that the unambiguous plain meaning of the policy language was that the parties intended coverage only for claims arising under regulations, rules or statutes that “regulate securities.” Using that definition, the Supreme Court held that claims of breach of fiduciary duty, aiding and abetting fiduciary duty breaches, and promoter liability were not Securities Claims because they do not involve regulations, rules and statutes regulating securities. Likewise, the claim for unlawful dividends arose under statutes that regulated dividends, not securities, and the fraudulent transfer claims arose under statutes that were not “specific to transfers involving securities.”

Verizon argued that the term “Securities Claims” as used in the policy should be construed to apply to “any laws one must follow while engaging in securities transactions.”  The Court concluded that this was an overly broad interpretation: “Parties involved in a securities-related transaction must follow laws not specifically directed toward securities. Verizon’s interpretation would make any unlawful conduct committed during a securities-related transaction fall within the Securities Claim definition.”

The Court’s decision in Verizon didn’t address the issue of whether appraisal claims should be regarded as “Securities Claims,” but appraisal actions address the issue of whether a shareholder received fair value for their shares in a transaction, so they are more directly related to transfers of securities than the common law & statutory claims at issue in Verizon.

John Jenkins