DealLawyers.com Blog

Over on The D&O Diary, Kevin LaCroix blogged about a Delaware federal court’s decision in Liberty Insurance Underwriters v. Cocrystal Pharma, (D. Del.; 5/22). In that case, the Court denied coverage claims arising out of an SEC investigation & derivative litigation arising out of an alleged “pump & dump” scheme involving certain directors and officers of Biozone Pharmaceuticals that occurred prior to its 2014 merger with Cocrystal Discovery.

Cocrystal Pharma, the surviving company in the merger, maintained a D&O policy for the policy period January 2, 2015 to May 6, 2018 and submitted each of these matters to its insurer as claims under the policy.  The policy provided coverage for a “Wrongful Act,” which it defined as “any actual or alleged error, misstatement, misleading statements, act, omission, neglect, or breach of duty, actually or allegedly committed or attempted by the Insured Persons in their capacities as such.”

The insurers ultimately denied coverage and filed an action with the Court seeking a declaration that there was no coverage under the policy either for the derivative actions or for the SEC investigation. The insurers contended that because all of the alleged misconduct alleged took place prior to the merger, it did not involve conduct taken in the individuals’ capacities as directors or officers of Cocrystal. The Court agreed, and this excerpt from Kevin’s blog summarizes the Court’s decision on the coverage issue:

Judge Wolson first determined that, because the subject of the SEC investigation – the Biozone pump-and-dump scheme – occurred before the merger transaction, the alleged pre-merger pump-and-dump scheme did not involve actions undertaken by them in the capacities as directors and officers of Cocrystal (as Cocrystal did not even yet exist at the time). Because they “were not acting for Cocrystal when they engaged in the Pump-and-Dump Scheme, that conduct is not a Wrongful Act that triggers coverage under the Policy.”

Moreover, Judge Wolson held, the “plain language of the Policy” provides that Cocrystal must repay the Defense Costs that Liberty advanced to Cocrystal. Cocrystal had tried to argue that the insurer had waived the right to seek recoupment. However, Judge Wolson held, “the doctrine of waiver does not operate to expand or create coverage” that the Policy does not provide.

Judge Wolson also determined that there is no coverage for the derivative suits. In reaching this conclusion, he noted that the policy expired on May 6, 2018 but the first of the derivative suits was not filed until September 2018 or later. While the policy contained a standard relation back provision, Judge Wolson held that “the relation back provision applies only when a claim arises from a Wrongful Act or Interrelated Wrongful Act.” Because the pump-and-dump scheme is neither a Wrongful Act nor an Interrelated Wrongful Act, “there is nothing to which the Derivative Actions could relate back.” Because the derivative actions were not made during the applicable policy period, Cocrystal is not entitled to coverage for the Derivative Actions.

The blog says that the decision illustrates the importance of capacity issues in D&O litigation. Coverage for executives under their company’s D&O policy extends only to actions undertaken in their capacities as directors or officers of that company.  The blog also discusses another aspect of the Court’s opinion – choice of law issues. The choice of law decision turned out to be significant, because the Court found that Delaware law applied & that, under Delaware law, the company had an obligation to repay defense costs that the insurers advanced.

– John Jenkins