Policyholders have scored another victory in the Delaware Superior Court, this time on the issue of whether a “mergers and acquisition” endorsement required payment of a higher retention in two securities class actions. In August, we reported that, in CVR Refining, LP v. XL Specialty Insurance Co., No. N21C-01-260 EMD CCLD, 2021 WL 3523925 (Del. Super. Ct. Aug. 11, 2021), a Delaware Superior Court judge upheld a policyholder’s preferred forum in Delaware, denying five insurers’ motion to dismiss or stay the Delaware coverage action filed after the insurers had filed suit preemptively in Texas.

Now, the policyholder has won a motion for partial summary judgment under the policy’s mergers and acquisitions endorsement. The CVR court recently held that the policy’s unambiguous M&A endorsement’s $2.5 million retention did not apply to two securities class actions alleging that the company manipulated stock prices. The M&A endorsement provides for a higher retention:

. . . solely with respect to any Claim based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any: (a) acquisition, assumption, merger, consolidation or otherwise of any entity, asset, Subsidiary or liability described in Section VI General Conditions (D)(1) and (2); or (b) Change in Control, Item 4 of the Declarations is amended to read in its entirety as follows:

Item 4. Retentions

$0  each Insured Person under Insuring Agreement I (A) or (D)

$2,500,000  each Claim, other than Securities Claim, under INSURING AGREEMENT I (B) OR (E)

$2,500,000  each Securities Claim under INSURING AGREEMENT I (B) OR (C)

$0  each Investigation Demand under INSURING AGREEMENT I (F)

Subsection (a) involves a scenario where the policyholder increases the risk of loss through a merger or acquisition. Section VI General Conditions (D)(1) provides:

(1)  If during the Policy Period the Company acquires any entity by merger, consolidation or otherwise such that the entity becomes a Subsidiary, coverage shall be provided for any Loss involving a Claim, Interview or Investigation Demand for a Wrongful Act occurring after the consummation of the transaction.

Section VI General Conditions (D)(2) provides for the same type of transaction but one that results in the acquired assets or liabilities exceeding 40% of the Company’s total assets or liabilities.

The insurers argued that the M&A endorsement applies “when a claim involves acquiring (i) an entity, (ii) an asset, (iii) a Subsidiary or (iv) a liability described in Section VI General Conditions D(1) and (2).” In other words, the endorsement applied to claims involving acquisition of any asset or entity. The court that held that, even if the insurers’ interpretation was reasonable, it did not “faithfully include all the language of the endorsement.”

In contrast, the court adopted the policyholder’s position that the endorsement applied only to those limited situations described in Section VI General Conditions (D)(1) and (2). In other words, the endorsement applied only when a claim involves acquiring an entity, asset, a Subsidiary or a liability described in Section VI General Conditions D(1) and (2). The court found that this position “tracks the unambiguous language” of the endorsement. Thus, because the underlying class actions did not involve the acquisition of a subsidiary or a situation where assets or liabilities were even acquired, the M&A endorsement did not apply.

This decision is noteworthy for the following reasons.

First, the court’s approach in interpreting the mergers and acquisitions endorsement makes sense when considering the basic premise of transferring risk to insurers in exchange for payment of premium. The endorsement, which increased the policy’s deductible, should only apply where risks are increased because entities are added or assets and liabilities have increased due to acquisition. This principle can serve as a guide for policyholders seeking coverage. For COVID-19-related losses, for example, when a policyholder that purchased a policy without a virus exclusion in exchange for a higher premium should receive something of value for that payment and, as a result, should receive broader coverage than a policyholder that purchased a policy with a virus exclusion at a lower premium.

Second, in granting the policyholder’s partial summary judgment motion, the court followed the principle established earlier this year by the Delaware Supreme Court in the seminal Dole decision:  that Delaware law applies to determine coverage for companies incorporated in Delaware and their insured officers and directors under D&O insurance policies.  This ruling further confirms that insureds under D&O policies deserve the benefits of Delaware law as applied by Delaware courts.

Third, the decision shows that policyholders should consider coordinating D&O coverage in mergers, acquisitions, and other deals to ensure continuity of coverage for claims alleging both pre- and post-transaction wrongful conduct. This includes paying close attention to any endorsements that could impact the policy’s change-in-control provision or any other clause implicated by a merger, acquisition, consolidation, or similar transaction, which could materially alter the scope of coverage, the applicable retention, or available limits.

Finally, this case serves as a reminder of the very favorable standards for policyholders that should apply when determining if an insurer has a duty to defend, which the CVR court summarized as follows:

To determine if an insurer has a duty to defend an action against its insured, a court should use the following principles:

(a)  where there exists some doubt as to whether the complaint against the insured alleges a risk insured against, that doubt should be resolved in favor of the insured;

(b)  any ambiguity in the pleadings should be resolved against the carrier; and

(c)  if even one count or theory of plaintiff’s complaint lies within the coverage of the policy, the duty to defend arises.