Delaware high court reverses pro-policyholder D&O ruling

The Delaware Supreme Court last month reversed a 2021 lower court ruling that held Verizon Communications Inc. could recover $24 million in defense costs from insurers for litigation over a spinoff.

In In Re Fairpoint Insurance Coverage Appeals the high court ruled Dec. 15 that a post-bankruptcy litigation trust’s fraudulent transfer claims were direct and not derivative under securities law and, therefore, were not covered by D&O policies.

The complex litigation involved the 2006 spinoff by Verizon of a telecommunications portfolio to Charlotte, North Carolina-based FairPoint Communications Inc.

FairPoint went into bankruptcy in 2009, emerging in 2011. The bankruptcy trustee filed a fraudulent transfer lawsuit the same year against Verizon that was eventually settled for $95 million. A fraudulent transfer lawsuit is litigation in which it is charged that transfers are made with the intent to defraud creditors.

A Delaware Superior Court judge previously ruled that the dispute involved a securities claim and that National Union Fire Insurance Co. of Pittsburgh PA, a unit of American International Group Inc., and other D&O insurers on the risk owed Verizon defense costs in the case.

In their appeal, the insurers argued that the meaning of “securities claim” in the policies “refers to claims brought derivatively under securities and corporate law, not the bankruptcy law relied upon by the Superior Court,” court papers say.

In ruling for the insurers, the high court stated: “The Policies defined a Securities Claim in the context of securities and corporate law, not bankruptcy law. If a bankruptcy occurred, the Policies provided that existing contractual rights would be protected but did not expand or create new coverage.”

Lawyers representing Verizon did not immediately respond to a request for comment.

The ruling is one of several pro-insurer D&O rulings that the Delaware Supreme Court has issued in recent years. In October 2020, the court overturned a lower court and ruled that costs associated with a stock appraisal sought by shareholders in a merger were not insured; in March 2022, the court affirmed a ruling in favor of insurers stemming from litigation over a 2016 merger; and in January 2023 the court affirmed a lower court ruling in a dispute involving a mining company acquisition.