In another pro-policyholder ruling in Delaware, a Delaware Superior Court judge has denied a group of insurers’ application for certification of interlocutory appeal in the long-running D&O dispute, Verizon Communications Inc. et al. v. National Union Fire Insurance Co. of Pittsburgh, PA, et al., C.A. No. N18C-08-086 EMD CCLD (Del. Super. March 16, 2021). The court’s most recent decision arises out of a February 23 ruling that Verizon could recover $24 million in legal fees incurred in defense of a fraudulent transfer lawsuit brought by a bankruptcy trustee. When the insurers’ sought to appeal this interlocutory decision, the court refused, concluding that the benefits of an immediate appeal, if any, do not outweigh the probable costs. The decision will permit the orderly resolution of what the court deemed to be “standard contract law principles,” which the insurers had failed to demonstrate negated coverage.

Background

A merger and asset sale among the insureds Verizon, Spinco, and FairPoint left the company, FairPoint, with considerable debt, resulting in FairPoint filing a Chapter 11 petition. After the plan of reorganization was confirmed, the trustee filed suit against Verizon, alleging that FairPoint was insolvent at the time of the merger and asset sale, resulting in an actual and constructive fraudulent transfer. The trustee’s claims ultimately settled, but only after the insureds had incurred approximately $24 million in defense costs.

The insureds provided notice of the trustee’s fraudulent conveyance suit under their D&O policies and demanded that the insurers provide coverage for both the settlement and the tens of millions of dollars in legal fees. The insurers refused to reimburse any legal fees or otherwise indemnify the insureds on the grounds that the trustee’s fraudulent conveyance suit did not satisfy the policies’ definition of “Securities Claim.” In the ensuing insurance coverage litigation, both parties moved for summary judgment on the issues of indemnification and defense costs related to the trustee action.

Denial of Interlocutory Appeal

The trial court ultimately found that the plain language of the D&O policies afforded coverage for the trustee action as a “Securities Claim.” The insurers raised a number of arguments in seeking to appeal the ruling immediately, including that lower court’s decision conflicted with other trial court decisions by finding that the trustee’s fraudulent transfer claims were derivative, that the trial court wrongly focused on the “theory of liability, not the nature of the injury by equating the estate with the debtor,” and that “a court should look to the nature of the wrong and to whom the relief should go” to determine whether a claim is derivative.

The court disagreed, finding that the trial court’s decision did not conflict with other trial court decisions and followed established Third Circuit precedent and Bankruptcy Code provisions to evaluate whether a claim brought by a bankruptcy trustee on behalf of a debtor’s estate was derivative. In contrast, the court found that the cases cited by the insurers either were “inapposite” or presented purported conflicts not properly resolved by Delaware courts. In addition, while the court “considered bankruptcy and corporate law principles when applying the facts to the relevant policies,” the central issue in the insurance coverage action was a question of contract interpretation, which the Delaware law has deemed “not worthy of an interlocutory appeal.”

Likewise, the decision that the defense costs were reasonable, the court concluded, did not conflict with any other trial court decisions. Moreover, the insurers had waived their right to dispute the reasonableness of the fees when they failed to involve themselves in the defense of the insureds despite possessing the invoices for nearly six years. Where the insurers had failed to evaluate the reasonableness of fees in the underlying claim, the court was displeased with their belated request that the court “audit the Insured’s counsel’s billable hours” as part of the coverage litigation.

While limited to the issue of interlocutory appeal, this decision is a win for policyholders nonetheless and underscores the sound reasoning of the trial court’s initial ruling in favor of coverage consistent with Delaware, Third Circuit, and bankruptcy law. In particular, it highlights the importance of evaluating the scope of issues raised (or not raised) during investigation and claims handling and later determining whether any arguments may have been waived to the extent coverage issues are raised for the first time months or even years later in litigation. Finally, the decision provides another example of pro-policyholder decisions upholding the rights of companies and their insured directors and officers seeking D&O coverage in Delaware courts. We will continue to monitor the case for further developments, including the insurers’ likely appeal.