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Insurers prevail in D&O case involving stock appraisal costs


In a victory for insurers, a unanimous Delaware Supreme Court overturned a lower court ruling Friday and held that costs associated with a stock appraisal sought by shareholders in connection with a merger are not insurable under directors and officers coverage.

Westlake, Texas-based Solera Holdings Inc., which was incorporated in Delaware, had purchased $55 million in D&O coverage, including $10 million in primary coverage from XL Specialty Insurance Co., a unit of Axa XL, and $45 million in excess coverage from nine insurers, including units of Chubb Ltd. and American International Group Inc.,  according to the Delaware Supreme Court’s ruling in In re: Solera Insurance coverage appeals.

After Solera was acquired by a private company, Austin, Texas-based Vista Equity Partners, several of its shareholders filed an appraisal action in March 2016 in Delaware Chancery Court to determine whether they had been paid a fair price.

The court ordered Solera to pay the petitioners the value of their shares, which was less than the merger price, plus $38.4 million in prejudgment interest, according to the ruling. Solera also incurred more than $13 million in attorneys and other fees in defending the litigation.

After the insurers refused to provide coverage, Solera filed suit in state court in 2018 seeking indemnification for the interest and defense expenses.

XL settled with Solera for an undisclosed amount, while most of the remaining excess insurers, which had policies that followed the form of the primary coverage, pursued the case, according to the ruling.

The insurers contended they were not obligated to cover the costs, arguing an appraisal action did not meet the primary policy’s definition of a securities claim, because it does not require an allegation of proof of wrongdoing under Delaware law. Solera argued allegations of wrongdoing were not required.

The Delaware superior court ruled in Solera’s favor, holding that a securities claim under the coverage is not limited to alleged wrongdoing, and that the insurers were obligated to pay prejudgment interest and defense expenses.

The state supreme court agreed with the insurers. The policy’s securities claim definition “requires that a claim be for a violation of a law regulating securities,” the ruling said.

It said, “this conclusion is compelled by the plain meaning of the word ‘violation,’ which involves some element of wrongdoing, even if done with an innocent state of mind.”

It is also compelled to reach this conclusion by Delaware law’s “historical background, its text and by a long line of unbroken cases” on this issue, the ruling said, in reversing the lower court.

The court said that because it was ruling in the insurers’ favor on this issue, the remaining prejudgment interest and defense expense issues were moot.

Attorneys in the case had no comment or could not be reached.