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An American International Group Inc. unit and several excess insurers are obligated to provide more than $48 million in defense costs to Verizon Communications Inc. in connection with litigation over the spinoff of a unit that later went bankrupt, says a Delaware court.
The litigation concerns Verizon’s 2006 spinoff of its print and electronic directories business into a stand-alone company, Idearc Inc., which eventually defaulted on notes issued in connection with the deal and filed for bankruptcy in March 2009, according to the ruling by Delaware Superior Court in Wilmington in Verizon Communications Inc. et al. v. Illinois Insurance Co. et al.
The ruling was issued March 2, with a public version released Wednesday.
In anticipation of the spinoff, Verizon and Idearc had purchased primary and excess executive and organizational liability policies to insure against litigation risks and potential liabilities that had arisen from the transactions, according to the ruling by the Wilmington court.
AIG unit Illinois National issued the primary policies, while excess policies, which were “follow-form” and incorporated the primary policy’s provisions, were issued by Stamford, Connecticut-based XL Specialty Insurance Co., a unit of XL Group Ltd.; Schaumburg, Illinois-based Zurich American Insurance Co.; and Twin City Fire Insurance Co., a unit of the Hartford Connecticut-based Hartford Insurance Group.
The runoff polices provide coverage for liability resulting from claims made during the six-year period from November 2006 to November 2012, according to the ruling.
Policy provisions allow Verizon to recover defense costs where a securities claim is brought against both Verizon and an insured person and a joint defense is maintained, said the ruling.
Shortly after Idearc defaulted on the notes, several lawsuits were filed against Verizon and others alleging liability about the spinoff, including litigation filed by Minneapolis-based U.S. Bank, which demanded $14 billion in damages from Verizon.
Verizon sought and obtained dismissal of a number of the claims asserted, with judgment by a Texas court later affirmed by the 5th U.S. Circuit Court of Appeals in New Orleans.
Plaintiffs incurred significant legal expenses in successfully defending the U.S. Bank action, but insurers denied defense costs on the basis the litigation was not a securities claim as defined in the policies, and filed litigation in the matter with the state court.
After an extensive and complex analysis of policy language, the Delaware court ruled in the plaintiffs’ favor.
“Here, it appears the financial incentive to sell these polices and obtain a marketing advantage by touting their more expansive coverage trumped the common sense, plain language approach to clearly articulating what was covered,” said the ruling.
“Since the court suspects that most of these policies are never activated by litigation and the costs to purchase coverage are considerable, it may have simply been seen as a risk worth taking. Unfortunately, here, the decision results in significant financial consequences for the insurers.”
The ruling adds: “This decision is not a statement of what the court perceives should be the proper scope of coverage under such policies, nor is it intended to reflect a shift in our present law.
“The court has no hesitation enforcing reasonable limitations on coverage, where the limiting language is clear and consistent with the terms of the policy. Unfortunately, this was not the case with the Idearc Runoff polices,” said the ruling.
An American International Group Inc. unit is not obligated to provide coverage in a dispute with a construction firm over a San Diego water project, based on exclusions in its policy, says a federal appeals court.