HNRK Coverage Corner
On February 3, 2020, Justice Sherwood of the New York County Commercial Division issued a decision in Alexander v. Starr Surplus Lines Ins. Co., 2020 NY Slip Op 30297(U), granting a preliminary injunction directing a D&O insurer to advance defense costs to a former corporate officer for an investor lawsuit alleging fraudulent inducement.
The insurer (Starr) argued that coverage was barred by a Major Shareholder Exclusion, which provided that the policy would not cover any claim “made by the individual(s) or entity(ies) that own or control . . . 10% or more of the outstanding voting stock of the Company.” The plaintiff in the underlying fraud action met the policy’s definition of a Major Shareholder (i.e., owned 10% or more of the company’s stock) at the time the lawsuit was filed, but not when the alleged wrongful acts occurred, or at the time the policy was issued. Justice Sherwood found that the exclusion was ambiguous, and accordingly, construed it against the insurer, explaining:
Plaintiff argues the Major Shareholder Exclusion is ambiguous, as it fails to specify as of what date ownership should be measured. She states the Exclusion applies only to shareholders who own at least 10%, of Avaago's stock at the time the policy was issued.
The assertion is well taken. The Major Shareholder Exclusion provision in this case is similar to that analyzed in EMSI Acquisition, Inc. v RSUI Indemnity Co. (306 F. Supp 3d 647 [D. Del 2018] aff'd F3d Appx, 2019 US App LEXIS 28332 [2019] [hereinafter "EMSI-A"]) . . . . The arguments made in EMSI-A were the same as those advanced by the parties here. That court considered the present tense formulation of the policy was subject to more than one construction—"owns" at what point in time? Given the ambiguity, the court interpreted the contract against the insurer and agreed that ownership of the shares could be measured on either the dates of the alleged wrongful acts or the date the policy was issued. Accordingly, the court held the exclusion did not apply.
Starr argues that the nature of the Policy mandates the conclusion that coverage is barred. As to this issue, the EMSI-A court said "the ambiguity in the [Exception] is not a matter of whether the [policy] bar[s] claims by Major Shareholders, but instead, is a function of who those Major Shareholders are" (id. at 657). The Third Circuit concurred and added that “[i]f the Major Shareholder Exception bars the major shareholders at the time the policy was issued, then the question of whether the policy was claims-made or occurrence-based is irrelevant, the same set of shareholders would be excluded no matter how the policy is characterized" (EMSI-A, 2019 US App LEXIS 28332 *8 [3d Cir Del, Sept. 19, 2019]).
Plaintiff has shown a likelihood of success on the merits.
One of the principal purposes of a D&O policy is to provide “litigation insurance” to corporate directors and officers – i.e., coverage for the cost of defending civil lawsuits and criminal or regulatory investigations and prosecutions. Courts have recognized that such coverage “plays an important role in corporate governance in America. Unless directors can rely on the protections given by D&O policies, good and competent men and women will be reluctant to serve on corporate boards.” In re WorldCom Secs. Litig., 354 F. Supp. 2d 455, 469 (S.D.N.Y. 2005). In a seminal D&O coverage matter that HNRK Partner Bradley J. Nash litigated eight years ago, Dupree v. Scottsdale Ins. Co., 96 A.D.3d 546 (1st Dep’t 2012), the First Department upheld an injunction requiring advancement of defense costs, holding that “[t]he failure of an insurance company to advance payments covering defense costs and fees under a directors and officers liability policy . . . constitutes a direct, immediate and irreparable injury, as it would deprive the insured of the benefit bargained for through payment of the policy premium.” Justice Sherwood followed that precedent in another insurance coverage matter in which Mr. Nash represented the insureds, Freedom Specialty v. Platinum Management, 2017 WL 6610417 (Sup. Ct. N.Y. Co. Dec. 27, 2017), granting a preliminary injunction requiring three excess D&O insurers to advance up to $15 million for the defense of parallel criminal civil matters against officers of a New York hedge fund. See the New York Law Journal's coverage of the Platinum decision and my previous posts about the case here, here and here.
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Bradley Nash represents policyholders in insurance disputes and other parties in complex commercial litigation in state and federal courts in New York and across the country. Brad focuses his practice on insurance recovery for ...
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