Recent Developments in D&O Officer Liability Insurance 2023


The Honorable Meghan A. Adams
Anna Brousell, Esquire

Superior Court, State of Delaware
Leonard L. Williams Justice Center
500 N. King. St., Suite 10400
Wilmington, DE 19801
(302) 255-0634 phone
[email protected]
[email protected]

Jennifer C. Wasson, Esquire
Carla M. Jones, Esquire

Potter Anderson & Corroon LLP
1313 N. Market St., 6th Floor
Wilmington, DE 19801-6108
(302) 984-6122 phone
[email protected]

[email protected]

Mari Boyle, Esquire

Richards Layton & Finger
One Rodney Square
920 North King Street
Wilmington, DE 19801-6108
(302) 651-7503 phone
[email protected]


§ 1.1. Introduction

This chapter summarizes the significant case law developments from state and federal courts across the country in 2021–22 concerning directors’ and officers’ liability insurance coverage claims. Noteworthy decisions included the following:

  • First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 274 A.3d 1006 (Del. 2022). The Delaware Supreme Court held that the insurance policy language dictates whether a claim relates back to an earlier claim under a claims-made liability policy, not the “fundamentally identical” standard.
  • Verizon Communications Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2022 WL 14437414 (Del. Super. Oct. 18, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement in a fraudulent transfer suit brought by a bankruptcy trustee for FairPoint Communications against Verizon Communications Inc. was covered under Verizon’s directors and officers liability policy.
  • CUMIS Specialty Ins. Co., Inc. v. Kaufman, 2022 WL 10640903 (S.D.N.Y 2022). The United States District Court for the Southern District of New York denied the former Melrose Credit Union CEO’s motion to reconsider its ruling that CUMIS Specialty Insurance Company was not obligated to cover Kaufman’s legal costs in appealing his bribery conviction. The court held further that CUMIS was entitled further to recoup Kaufman’s post-sentencing expenses that the insurance company already paid. 

§ 1.2. Claim

First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 274 A.3d 1006 (Del. 2022). The Delaware Supreme Court held that the insurance policy language dictates whether a claim relates back to an earlier claim under a claims-made liability policy, not the “fundamentally identical” standard.

In March 2014, First Solar Inc.’s (“First Solar”) stockholders filed a class action lawsuit against the company, alleging that it violated federal securities laws by making false or misleading public disclosures (“Smilovits Action”). First Solar’s primary insurer, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), provided coverage for the Smilovits Action under a 2011–2012 $10 million “claims made” directors and officers insurance policy (“D&O policy”). While the Smilovits Action was pending, on June 23, 2015, First Solar stockholders who opted out of the Smilovits Action filed a class action lawsuit, referred to as the Maverick Action, alleging violations of the same federal securities laws as the Smilovits Action, in addition to violations of Arizona statutes and claims for fraud and negligent misrepresentation.

When the Maverick Action was filed, First Solar had a $10 million “claims made” policy with National Union for 2014–2015 (the “Primary Policy”) and a $10 million layer of excess coverage with XL Specialty Insurance Company (the “Excess Policy”). After First Solar sought insurance coverage under the Primary Policy and Excess Policy for the Maverick Action, the insurers denied coverage under a “Related Claims” exclusion, which provided that a Related Claim is “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured.” The insurers argued that the Maverick Action was a “related claim” to the Smilovits Action. Thereafter, First Solar brought the instant insurance coverage action against the insurers, asserting claims for breach of contract and declaratory judgment. The insurers moved to dismiss the complaint and First Solar filed a cross motion for partial summary judgment as to relatedness.

In considering whether the two claims were related, the Superior Court of Delaware’s Complex Commercial Litigation Division applied a “fundamentally identical” standard, ultimately finding that the exclusion applied. The court reasoned that the Smilovits and Maverick actions had “substantial similarities,” and were “fundamentally identical” because the lawsuits stemmed from the same original suit, were against “identical defendants,” overlapped in relevant time periods, alleged the same securities law violations, relied on the same specific disclosures, and pertained to the same underlying wrongful conduct—allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt metrics and falsifying financial reports.

On appeal, the Delaware Supreme Court affirmed the Superior Court’s holding, but rejected the application of the “fundamentally identical” standard. The Supreme Court instead held that whether a claim relates back to an earlier claim is decided by the language of the policy, not the generic “fundamentally identical” standard. Applying the policy language at issue, the Supreme Court reasoned that the primary policy’s Related Claim provision was broad and the question on appeal was therefore whether the Maverick Action raised Claims that “aris[e] out of, [are] based upon or attributable to any facts or Wrongful Acts that are the same as or related to” the Smilovits Action. The Supreme Court held that the Maverick Action was a Related Claim under the Primary Policy because both actions were based on the same alleged misconduct—First Solar’s misrepresentations about the cost-per-watt of its solar power. Accordingly, there was no coverage for the Maverick Action.

Smartsheet, Inc. v. Federal Insurance Co., Case No. C22-315 MJP (W.D. Wash. Aug. 8, 2022). The United States District Court for the Western District of Washington denied the insurers’ motion to dismiss Smartsheet’s claim for coverage, holding that the underlying actions were not related. In 2018, the wife of Smartsheet’s founder, Brett Frei, filed an arbitration demand alleging that Frei induced her into selling her Smartsheet shares ahead of a tender offer at a much lower price as part of their divorce settlement. In 2019, Smartsheet investors who had sold Smartsheet shares in the tender offer brought a class action against Smartsheet, alleging that it failed to disclose plans of an initial public offering to induce investors to sell Smartsheet shares in the tender offer at a reduced price.

Smartsheet held insurance policies for 2018 and 2019 and submitted both claims to its insurers. The insurers claimed that the actions were interrelated and constituted a single claim dated on the first of the claims, 2018. Thus, the insurers determined, only the 2018 policy, and not the 2019 policy applied. Smartsheet sought declaratory relief that the two claims were not interrelated and that the later claim triggered the 2019 policy.

The court held that the two claims shared “only limited overlap and several key distinctions” and thus were unrelated and distinct claims within the relevant policy definitions. In particular, the 2018 demand concerned alleged misrepresentations by Frei to his wife regarding the tender offer, while the 2019 class action concerned omissions by Smartsheet to investors regarding the IPO. The court held that the two distinct claims lacked sufficient overlap to make the claims related.

§ 1.3. Loss

Federal Insurance Company v. Healthcare Information and Management Systems Society, Inc., 567 F.Supp.3d 893 (N.D. Ill. 2021). In this case, the defendant-insured was a non-profit corporation in the health information systems sector which was responsible for organizing one of the largest annual conferences in the U.S. The 2020 conference was cancelled due to the pandemic. Two exhibitors to this conference filed actions against the insured seeking breach of contract damages for failing to return fees paid and damages incurred from preparing for and travelling to the conference. One of the exhibitors filed a class action which was resolved via settlement.

Plaintiff-insurer filed a declaratory action seeking a declaration that, under the insurance policy it issued to the insured, it had no duty to defend or indemnify defendant-insured in these underlying actions. The insured counterclaimed, asserting that the policy did provide coverage and that the insurer breached the contract. The United States District Court for the Northern District of Illinois denied in part the insurer’s motion to dismiss the counterclaim, holding that the underlying claims constituted a loss under the policy and that the two exceptions to the policy’s coverage for loss were inapplicable.

The insurance policy at issue was titled “ForeFront Portfolio Not-For-Profit Organizations Policy.” The Directors and Officers section of this policy covered losses that the insured became legally obligated to pay on account of any claim made against it during the policy period. This section contained a “Professional Services Exclusion” and a “Contract Exclusion.” The Professional Services Exclusion provided no coverage for loss resulting from an actual or alleged failure to render any professional services. The Contract Exclusion provided that the insurer was not liable for loss on account of any claim arising from liability under any written or oral contract.

The court found that the claims constituted a loss under the policy because the settlement resolved all of the exhibitors’ claims, not only those that were restitutionary in nature. The Professional Services Exclusion did not apply because the underlying claims were not entirely based on the insured’s negligent provision of professional services, but instead sought reimbursement for damages resulting from the inability to sublet floor space at the conference. The court found that subleasing floor space was not necessarily a professional service and that the underlying complaints did not allege the insured exercised poor professional judgment when cancelling the conference. The Contract Exclusion did not apply because the underlying complaints sought more than contract damages and the settlement agreement settled all of the exhibitors’ claims, not just the contract claims. The court dismissed the insured’s counterclaim for a statutory penalty for bad faith denial of coverage because it had an insufficient factual basis and because the insurer’s complaint established a bona fide dispute about coverage.

G-New, Inc. dba Godiva Chocolatier, Inc. v. Endurance American Insurance Co., 2022 WL 4128608 (Del. Super. Sept. 12, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a class action settlement was covered under Godiva’s directors and officers liability policy. Plaintiffs brought a class action suit against Godiva, alleging consumer protection violations based on the “Belgium 1926” label that appeared on Godiva’s products. The class action settled, and Godiva sought coverage under its insurance policies for the settlement. The insurers denied the coverage claims, asserting that the settlement was not a covered loss because Godiva’s unlawful conduct was intentional, and that the policy excludes from coverage unfair trade practices and fines or penalties imposed by law.

The court, however, held that the policy language contemplated settlements as covered losses and the insurers had not provided evidence that Godiva’s violation of law was knowing or willful. The Court noted further that the policy did not define “unfair trade practices” and insurers could not show that unfair trade practices were the equivalent of consumer fraud. Lastly, the court, relying on Delaware precedent, agreed that a settlement, which is meant to compensate plaintiffs, does not equate to a penalty imposed by law, which is meant to punish defendants.

§ 1.4. Securities Claim

Stillwater Mining Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2021 WL 6068046 (Del. Super. Ct. Dec. 22, 2021). After approximately two years and much procedural wrangling, the Superior Court of Delaware’s Complex Commercial Litigation Division dismissed a Delaware policyholder’s amended complaint with prejudice for failure to state a claim on which relief could be granted. After Stillwater sought D&O coverage for an appraisal action, both the insurers and Stillwater filed complaints in Delaware regarding insurers’ obligation to pay defense costs and indemnify Stillwater for its settlement payment and interest resulting from the appraisal action. At the time both sides filed their actions, the Delaware Supreme Court was considering whether appraisal claims fell within the definition of a “securities claim” under D&O insurance in another case, In re Solera Insurance Coverage Appeals (“Solera II”). In its initial complaint, Stillwater argued that Delaware law governed its D&O policies.

The Superior Court stayed Stillwater’s case until the resolution of the Solera II appeal. After Solera II was resolved in insurers’ favor and the Superior Court lifted the stay, however, Stillwater sought to dismiss its case in favor of a coverage action it had filed in Montana, where its headquarters was located. In its Montana action, Stillwater already had moved for summary judgment on its D&O policies, arguing that Montana law applied. In the alternative, Stillwater asked the Delaware court to allow it to amend its complaint to add Montana-law claims. The insurers opposed Stillwater’s motion to stay and moved to dismiss its amended complaint.

According to the Superior Court, the “decision as to whether Delaware or Montana law applies is dispositive to the case. If Delaware law applies . . . the Delaware Supreme Court’s Solera II decision bars Stillwater from receiving coverage for the Appraisal Action, effectively deciding the instant action.” To determine the governing law, the court first considered whether an actual conflict existed between Montana and Delaware law. The parties disagreed on this question, with Stillwater arguing that Montana law imposed a higher burden on insurers for refusing to defend and insurers arguing that the relevant standards were materially identical. The court assumed a conflict of law existed and proceeded to analyze which state had the “most significant relationship” to the action, using the factor test set forth in the Restatement (Second) Conflict of Laws. The court explained that “Delaware precedent holds that the state of incorporation is the ‘center of gravity’ for D&O policies” and that Stillwater was incorporated in Delaware. The court gave little weight to the fact that Stillwater was headquartered in Montana or that the D&O policy contained Montana endorsements, noting that “a company’s principal place of business generally will not outweigh its state of incorporation in determining coverage for a D&O policy.” The court also found that Stillwater’s previous statements about the application of Delaware law to its policy and its failure to raise its Montana claims in its initial complaint underscored the conclusion that Delaware law applied.

Finally, the Superior Court addressed the doctrine of depecage, in which different states’ laws are applied to different aspects of a contractual relationship, noting that the doctrine is “disfavored generally, including in Delaware.” The court found that Stillwater had not articulated any compelling basis to apply the doctrine, which the court believed contradicted the Delaware Supreme Court’s emphasis on applying a single body of law to national and multi-national insurance programs.

Because Stillwater’s policy covered Stillwater only for “securities claims,” and the Appraisal Action was not a “securities claim” under Delaware law, the Superior Court dismissed Stillwater’s amended complaint with prejudice.

Verizon Communications Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2022 WL 14437414 (Del. Super. Oct. 18, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement in a fraudulent transfer suit brought by a bankruptcy trustee for FairPoint Communications against Verizon Communications Inc. was covered under Verizon’s directors and officers liability policy. The court held that the suit was a securities claim brought derivatively on behalf of Northern New England Spinco Inc., an entity that Verizon created for the transfer of landline assets and merged into FairPoint Communications. The Court held further that the trustee that brought the claim qualified as a security holder of Spinco, as a result of the merger between Spinco and FairPoint. The Court reasoned that because FairPoint held Spinco liabilities, such as payment on Spinco Notes, anyone holding the Spinco Notes were holders of Spinco debt securities. Thus, the trustee brought the fraudulent transfer suit as a Spinco security holder.

The policy defined a Securities Claim to include a claim “brought derivatively on the behalf of an Organization by a security holder of such Organization.” The policy defined “Organization” to include any for-profit entity Verizon controlled on or before the effective date of the policy. Holding that the suit constituted a securities claim, the Court determined that the settlement for the suit was covered under the insurance policy.

§ 1.5. Wrongful Act

The Options Clearing Corporation v. U.S. Specialty Ins. Co., 2021 WL 5577251 (Del. Super. Ct. Nov. 30, 2021). Plaintiff-insured, Options Clearing Corporation (“OCC”), moved for partial summary judgment on its D&O insurers’ obligation to cover defense costs arising out of two federal enforcement actions against it. Its insurers opposed, arguing that the actions were related to previous federal investigations and therefore barred by related claims exclusions. The Delaware Superior Court’s Complex Commercial Litigation Division granted summary judgment in OCC’s favor, finding that the current enforcement actions were not meaningfully linked to the earlier investigations to trigger the exclusions.

OCC’s policy contained an “event exclusion” precluding coverage for specified federal investigations and “Interrelated Wrongful Acts.” Three letters and responses relating to proceedings by a compliance division of the SEC (the “2012-14 Letters”) were identified as non-covered events in the event exclusion. The policy also contained a prior notice exclusion that barred coverage for Loss in connection with a Claim arising out of Wrongful Acts alleged or contained in “any claim which has been reported, or with respect to any notice has been given, under any policy of which this Policy is a renewal or replacement or which it may succeed in time.” OCC sought coverage for two enforcement actions (“Enforcement Actions”) brought by the Securities and Exchange Commission and the Commodity Futures Trading Commission in 2017 and 2018, respectively.

In opposing summary judgment, insurers argued that fact discovery was necessary to determine the exact scope and circumstances of the Enforcement Actions, and that the event exclusion was broad enough to exclude coverage for the Enforcement Actions as related to the 2012-14 Letters. Reviewing the policy language, the court determined that the relevant terms were clear and unambiguous, such that the terms “arising out of,” “based upon,” and “attributed to” meant “originating from or sharing some meaningful linkage.” Accordingly, the court concluded that to invoke either exclusion, the insurers had the burden to demonstrate a “meaningful link” between the Enforcement Actions and the 2012-14 Letters.

The Superior Court then compared the two types of claims. It found that merely having some facts in common was insufficient to establish a meaningful link; “there is bound to be some surface-level overlap” between the claims, and the insurers “did not bargain for the inclusion of any Claim that has ‘any fact in common’ with the [2012-14 Letters] or any Claim involving an SEC office.” Key differences existed between the claims, including the type of investigation, the investigation time periods, the regulations allegedly violated, the type of conduct alleged, and the nature of the relief sought. Those differences led the Court to conclude that the exclusions did not apply. The Superior Court also denied the insurers’ request for discovery, noting that “the Court takes no issue with the timing of [OCC’s] motion.” The policy terms were unambiguous, and discovery beyond the pleadings was unnecessary to the analysis. Thus, the court granted partial summary judgment in favor of OCC on the applicability of the exclusions.

Jarden, LLC v. ACE Am. Ins. Co., 2021 WL 3280495 (Del. Super. Ct. July 30, 2021), aff’d, 273 A.3d 752 (Del. 2022). The Delaware Superior Court’s Complex Commercial Litigation Division granted the insurers’ motion to dismiss, finding that an appraisal proceeding did not constitute a claim “for a Wrongful Act” as required by the D&O policies.

After the insured underwent a merger, several stockholders who voted against the merger filed appraisal petitions in the Delaware Court of Chancery under 8 Del. C. § 262, requesting that the Court of Chancery determine the fair value of the company’s shares at the time of the merger (the “Appraisal Action”). After trial, the Court of Chancery ordered the insured to pay a judgment of $177,406,216.48, consisting of the fair value of the petitioners’ shares plus interest. The insured then filed a complaint in the Superior Court seeking insurance coverage for the interest award and defense costs that it incurred in the Appraisal Action. In its original complaint, the insured claimed the Appraisal Action was a “Securities Claim” under the D&O Policies, relying in part on the Superior Court’s decision in Solera Holdings, Inc. v. XL Specialty Insurance Co. (“Solera I”), which at that time was on appeal to the Delaware Supreme Court. The parties moved to stay the proceedings pending resolution of the Solera I appeal.

Thereafter, the Delaware Supreme Court reversed Solera I, holding that an appraisal action was not “for a violation of law” and therefore did not fit the definition of a “securities claim” under the policy at issue in that case (“Solera II”). After Solera II was resolved, the insured filed an Amended Complaint in this action, which included claims for declaratory judgment and breach of contract relating to the insurers’ refusal to cover the defense costs and interest award incurred in the Appraisal Action. The insurers moved to dismiss the Amended Complaint, arguing that although the Appraisal Action was a “securities claim,” it was not made “for a Wrongful Act.”

First, the Superior Court accepted the position advocated by the insurers, and which the insured did not squarely dispute, that the D&O policies’ requirement that a claim be made “for” a “Wrongful Act” meant that it must “seek redress in response to, or as requital of,” that act. The Superior Court reasoned that this conclusion is the logical extension of the Supreme Court’s decision in Solera II because an appraisal claim purely is a creature of statute and does not involve any inquiry into claims of wrongdoing. Instead, an appraisal proceeding is “neutral in nature” and requires the Court of the Chancery to determine the fair value of the dissenting stockholder’s shares. Accordingly, the Superior Court concluded that an appraisal action is a statutory proceeding that does not seek redress in response to any corporate act. Finally, the Superior Court held that even if the Appraisal Action was a claim “for a Wrongful Act,” it did not arise out of an act committed before the Run-Off Date. The Superior Court reasoned as to appraisal actions, the act at issue is the merger’s effectuation, which did not occur before the Run-Off Date.

Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc., 2022 WL 1624363 (D. Del. May 23, 2022). The United States District Court for the District of Delaware granted plaintiff-insurer’s request for a declaratory judgment and held that the defendant-insured’s insurance policy did not provide coverage for an SEC investigation or action, or derivative actions, and that the insurer did not engage in bad faith conduct when denying insured’s claim for coverage.

The insured, Cocrystal Pharma Inc., was formed in 2014 following a reverse merger of Biozone Pharmaceuticals, Inc. and Cocrystal Discovery, Inc. The insurers sold the insureds an insurance policy in 2015. In the policy, Cocrystal Pharma Inc. was the insured organization and Cocrystal’s directors and officers were the insured persons. The insured’s policy provided coverage for claims arising from the wrongful acts of the insured’s directors and officers. “Wrongful Act” was defined as “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or alleged[ly] committed or attempted by the Insured Persons in their capacities as such ….” The policy provided that, in the event the insurer advanced defense costs and later litigation determined that any such costs were not covered by the policy, the insureds agreed to repay the insurer the amount that was not covered.

After the SEC initiated investigation of the insured, the insured provided notice to the insurer who ultimately agreed to reimburse the insured for expenses incurred in the investigation. The SEC subsequently filed suit against the insured alleging violation of the Securities and Exchange acts of 1933 and 1934. The insured made a claim against its policy based on this action, which the insurer denied asserting that the allegations in the SEC’s complaint occurred in 2013, prior to the policy’s start date. For this reason, the insurers also advised that it was seeking a recoupment of the advanced defense costs related to the investigation of the litigation.

The court found that the policy did not provide coverage for the SEC investigation or action because the conduct alleged in the SEC’s complaint did not constitute a wrongful act. The SEC alleged that the directors and officers engaged in conduct that occurred before Cocrystal Pharma Inc. was formed, when they were the directors and officers of Biozone. The court ordered the insured to repay its defense costs because the policy did not cover the wrongful conduct that the SEC had investigated. The insurer did not waive the right to recoup these funds by electing to not issue an updated reservation of rights letter because, under Delaware law, “the doctrine of waiver does not operate to expand or create coverage that the Parties did not negotiate and for which the Policy does not provide.”

The court also found that the policy did not cover derivative actions filed by the insured’s shareholders, which alleged violations of the Exchange Act, because these claims were not made until after the policy expired. As the conduct in the SEC litigation did not qualify as a wrongful act, the derivative actions also did not fall under the policy’s relation-back provision because there was nothing to which the derivative actions could relate back.

CVR Refining, LP, v. XL Specialty Insurance Co., 2021 WL 5492671 (Del. Super. Nov. 23, 2021). The Delaware Superior Court’ Complex Commercial Litigation Division granted the insured’s motion for partial summary judgment that alleged the insurer anticipatorily breached the insurance policy by denying coverage for defense costs associated with two putative class action lawsuits. The class actions contended that the insured improperly used a call right in the limited partnership agreement to buy out its public common unit holders and that CVR Refining manipulated the price of its stock to enable CVR Energy to call common units at an artificially depressed price. The insurer had indicated that it would not cover defense costs related to pending litigation against insured.

The section of the insurance policy relevant to the underlying claim, Endorsement No. 23, provided for a $2.5 million retention limit “with respect to any Claim . . . 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). . . .” Section VI General Conditions (D)(1) and (2) covered any loss involving a claim for a Wrongful Act occurring after the acquisition of “any entity by merger, consolidation or otherwise such that the entity become a Subsidiary[,]” including acquisitions where the insured acquired assets or liabilities exceeding 40% of the insured’s total assets or liabilities.

The court found that that this section of the policy was unambiguous and that the purpose was to increase the deductible where the insured’s increased risk by acquiring entities, assets, or liabilities. The court held that the increase in retention required by Endorsement No. 23 did not apply to the underlying claims because they challenged a transaction that did not involve acquisition of a subsidiary or a buyback where assets or liabilities were acquired. The insured, therefore, was entitled to summary judgment that the insurer was obligated advance defense costs.

§ 1.6. Other Coverage Issues

J.P. Morgan Securities, Inc. v. Vigilant Insurance Company, 37 N.Y.3d 552 (2021). The New York Court of Appeals held that the insured’s disgorgement of funds as part of a settlement with the SEC was not excluded from insurance coverage as a “penalty imposed by law” under the insured’s insurance policy. The policy provided coverage for “loss” as a result of any claim that insured became liable to pay for “any civil proceeding or governmental investigation—for any wrongful act, which encompassed any actual or alleged act, error, omission, misstatement, neglect, or breach of duty. . . .” “Loss” included compensatory and punitive damages and excluded “fines or penalties imposed by law.” The SEC investigated and commenced an action against the insured which resolved in a settlement whereby the insured agreed to a disgorgement and civil money penalties, the latter of which it was required to treat as a penalty for tax purposes. The administrative settlement order stated the insured “facilitated late trading” and the “deceptive market timing activity” of certain clients.

The court found that a reasonable insured purchasing the policy at the time this policy was purchased would have understood the phrase “penalties imposed by law” to include coverage for the disgorgement payment. The court found that “penalty” was commonly understood to mean a monetary sanction exceeding actual damages that is designed to address a public wrong and aimed at deterrence and punishment. The court reasoned that “where a sanction has both compensatory and punitive components, it should not be characterized as punitive in the context of interpreting insurance policies.” The court found there was no genuine issue of material fact that the disgorgement payment served a compensatory goal and was estimated from the insured’s customers’ gains and the corresponding injury suffered by investors. The court further reasoned that when the insured purchased the policy, the SEC itself viewed disgorgement payments as an equitable remedy rather than a monetary penalty. The court reasoned that Kokesh v. SEC, 581 U.S. 455 (2017) did not control the disposition of this case because the meaning of “penalty” varies between contexts and the Supreme Court in that case was not interpreting the term “penalty” in an insurance contract. Moreover, Kokesh could not have informed the parties’ understanding of the meaning of this term because it was decided two decades after the parties executed the policy.

CUMIS Specialty Ins. Co., Inc. v. Kaufman, 2022 WL 10640903 (S.D.N.Y 2022). The United States District Court for the Southern District of New York denied the former Melrose Credit Union CEO’s, Alan Kaufman, motion to reconsider its ruling that CUMIS Specialty Insurance Company was not obligated to cover Kaufman’s legal costs in appealing his bribery conviction. The court held further that CUMIS is entitled further to recoup Kaufman’s post-sentencing expenses that the insurance company already paid.

After being convicted of bribery, Kaufman sought to appeal his conviction and requested an advancement of legal fees from CUMIS. CUMIS argued that legal fees for the appeal of Kaufman’s felony conviction were excluded under the policy’s dishonest or willful acts exclusion and remuneration exclusion. The court held that “New York law considers a criminal trial to be finally adjudicated upon conviction, and therefore held that the policy’s exclusions precluded coverage of Kaufman’s appeal costs.” Thus, Kaufman’s conviction constituted a final adjudication, releasing CUMIS from its obligation to pay Kaufman’s legal fees post-sentencing, including his appeal.

Infinity Q Capital Mgmt., LLC v. Travelers Casualty and Surety Co., 2022 WL 3902803 (Del. Super. Aug. 15, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that there was no genuine issue of fact as to whether warranty letters provided to insurers barred coverage and that the insurers were entitled to judgment as a matter of law. Upon procuring excess insurance coverage, Infinity Q provided the insurers with warranty letters representing that Infinity Q did not have “any knowledge or information of any act, error, omission, fact or circumstance that may give rise to a claim under the proposed insurance,” and that “any claim for, based upon, arising from, or in any way related to any act, error, omission, fact or circumstance of which any such person or entity has any knowledge or information shall be excluded from coverage under the proposed insurance.”

At the time, the Court found, Infinity Q executives were aware of an ongoing SEC investigation but did not disclose it to the insurers. Thus, the clear and unambiguous language of the prior knowledge exclusion in the warranty letters precluded defense and indemnity coverage for investigations, enforcements actions, and litigation arising out of the SEC’s inquiry into Infinity Q.


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