The pattern of Delaware court docket selections favoring policyholders continues with a positive ruling in AMC Leisure Holdings, Inc. v. XL Specialty Insurance coverage Firm, et al. The Delaware trial court docket discovered that AMC’s settlement fee, made within the type of AMC shares valued at $99.3 million, certified as a lined “Loss” beneath its administrators and officers (D&O) legal responsibility insurance coverage coverage. This ruling is noteworthy for quite a lot of causes, notably as a result of it establishes that non-traditional types of forex, like inventory, generally is a lined “Loss” beneath D&O insurance policies.
Background of the Underlying Motion
AMC, the movie show chain, was financially strained throughout the pandemic. It skilled a dramatic surge in inventory value, turning right into a “meme inventory” attributable to retail investor exercise. To make the most of the state of affairs, AMC sought to difficulty extra widespread inventory. Nevertheless, shareholder approval to extend the widespread inventory issuance was blocked, prompting AMC to create a brand new safety—the AMC Most well-liked Fairness Items (APEs). These items carried voting rights much like widespread inventory and had been supposed to transform to widespread inventory if approved by shareholders.
This led to a authorized battle with shareholders, who filed lawsuits to forestall AMC’s proposal to transform the APEs into widespread inventory. The fits had been consolidated in Delaware’s Court docket of Chancery.
AMC notified its D&O insurers of the shareholder claims, which proceeded to mediation. The day after mediation, AMC acquired a settlement provide and had discussions with its insurers in regards to the proposed phrases. Per week later, AMC settled the litigation, agreeing to difficulty 6,897,018 shares of widespread inventory and pay the plaintiffs’ attorneys’ charges. AMC recorded this settlement as a contingent legal responsibility and expense on its books and valued it at $99.3 million.
AMC’s D&O insurers denied protection. After AMC commenced protection litigation, most insurers settled, apart from one extra insurer that continued to refuse protection. AMC and the insurer moved for abstract judgment.
The Events’ Arguments
The insurer argued that there was no protection for the settlement fee for 3 causes. First, it argued that the settlement fee was not a “Loss” beneath the phrases of the coverage. The coverage outlined “Loss”, in related half, as “damages . . . settlements . . . or different quantities . . . that any Insured is legally obligated to pay.” Additional, the coverage gives that the insurer will “pay ‘Loss’ on behalf of AMC.” The insurer contended that as a result of the settlement concerned the issuance of inventory, not money, and since the insurer couldn’t pay the settlement on AMC’s behalf, it was not a lined “Loss”.
Second, the insurer argued there was no “Loss” as a result of AMC didn’t endure financial hurt by issuing the inventory. And third, even when settlement within the type of inventory issuance was a lined “Loss,” the insurer was not obligated to pay it as a result of AMC didn’t obtain the insurer’s prior written consent.
AMC countered that the settlement met the coverage’s definition of “Loss”, which isn’t restricted to money funds, as a result of it was an quantity that AMC was “legally obligated to pay.” AMC additionally argued that it suffered an financial hurt because it acknowledged a everlasting loss in its accounting by issuing new shares and suffered a chance value in offering the shares. Lastly, AMC believed it acquired the insurer’s consent on a convention name in regards to the anticipated settlement.
The Choice
The court docket present in favor of protection, granting AMC’s movement.
As for the definition of “Loss,” the court docket discovered that “Loss” was not restricted to money funds. It emphasised that, beneath Delaware legislation, inventory is a type of forex that can be utilized for quite a lot of company functions, together with settling money owed. Thus, AMC’s issuance of inventory was deemed a lined “Loss,” which the court docket refused to restrict in a method not explicitly supplied for within the D&O coverage.
In additional assist of AMC’s lined “Loss,” the court docket appeared to the coverage’s bump-up exclusion, which makes use of the phrase “paid” twice. The court docket acknowledged, “[t]his is exclusion just isn’t relevant to the problem introduced, however its use of the phrase ‘paid’ is related” as a result of phrases utilized in completely different components of a coverage are presumed “to bear the identical which means all through.” The court docket reasoned that as a result of beneath Delaware Legislation the bump-up exclusion, and its use of the phrase “paid,” can apply to inventory transfers, it’s “essentially implie[d] that inventory could be an quantity AMC ‘pays’ which creates a lined ‘Loss’.” Bump-up exclusions are a standard insurer protection and supply of frequent protection disputes, together with in Delaware, however right here the insurer’s bump-up wording ended up supporting the policyholder’s place in favor of protection.
The court docket disposed of the insurer’s “financial hurt” argument as a result of the coverage didn’t situation protection on the existence of such hurt. As soon as once more, the court docket refused to “insert a limiting clause into the Coverage.”
Lastly, the court docket dominated that whether or not AMC sought the insurer’s consent to settle, or waiver of consent, on a cellphone name was a factual difficulty to be determined by a jury. Nevertheless, the court docket famous that Delaware legislation permits a policyholder that doesn’t adjust to consent necessities to acquire protection by rebutting the presumption that the insurer was prejudiced by the breach and displaying that the settlement was cheap.
Dialogue
This case has a has quite a lot of takeaways for policyholders.
Non-Money Settlements: Non-cash settlement funds, together with inventory, could also be lined as a “Loss” beneath D&O insurance policies in Delaware. Whereas AMC’s non-cash fee was in inventory, the court docket’s ruling might apply equally to quite a lot of different fee types, equivalent to cryptocurrency or different quantities that insureds are legally obligated to pay as damages or settlement. Policyholders ought to fastidiously overview coverage language relating to the definition of “Loss” to find out if there may be protection for non-cash settlement funds.
Delaware Protection Tendencies: Over the previous few years, Delaware courts have issued a number of vital rulings, many in favor of policyholders. The court docket’s resolution on this case is one more instance of this. Delaware’s management in company governance and shareholder litigation additionally bleeds over into insurance coverage disputes. Within the current resolution, the court docket dominated in AMC’s favor by counting on Delaware legislation recognizing that inventory is a type of forex. Insurers and policyholders will proceed to concentrate to Delaware’s growing position in issuing essential protection rulings.
Selection of Legislation Issues: In a single such landmark resolution, the Delaware Supreme Court docket held that Delaware firms and their insured officers and administrators ought to be capable of get the good thing about Delaware legislation governing their D&O protection disputes. The AMC case exemplifies a Delaware policyholder reaping the advantages of Delaware legislation.
First, it was the Delaware’s Chancery court docket’s resolution in a non-insurance swimsuit figuring out whether or not a declare was a by-product or direct declare that the Superior Court docket used to assist the conclusion that AMC’s settlement was a lined “Loss” as a result of “[s]tock is a type of forex.” Different jurisdictions might not have comparable legislation to assist such a conclusion.
Second, the AMC court docket held that if the corporate didn’t search the insurer’s consent to settle, it might nonetheless receive protection if it could possibly rebut the presumption that the insurer was prejudiced and present that the settlement was cheap. This isn’t true in all jurisdictions. See, e.g., Perini/Tompkins Joint Enterprise v. Ace Am. Ins. Co., 738 F.3d 95, 104-06 (4th Cir. 2013) (recognizing that, beneath Maryland and probably Tennessee legislation, an insured’s breach of a coverage’s consent to settle provision negates protection with out regard as to if the insurer was prejudiced by the breach).
The purpose is that selection of legislation is critical, and Delaware policyholders might be able to leverage a rising physique of favorable Delaware legislation on essential protection points. Conversely, the significance of what legislation governs an insurance coverage coverage makes choice-of-law, choice-of-forum, and comparable coverage provisions much more vital when insurers mandate software of one other state’s legislation. These provisions usually go unnoticed however can have an outsized affect on protection within the occasion of a dispute.
Coverage Drafting Issues: The court docket’s refusal to rewrite the coverage highlights the significance of clear and unambiguous language. Insurers should be certain that coverage’s are drafted exactly, and policyholders should stay vigilant to make sure that insurers don’t make inferences or decoding coverage language to assist their most well-liked studying if it’s not acknowledged expressly within the coverage. It’s the phrases of the coverage—not the insurer’s unspoken intentions—that controls.
Take into account Insurance coverage Ramifications in Underlying Litigation: Policyholders in search of protection and indemnity protection beneath legal responsibility insurance policies needs to be strategic in how they strategy settlement in underlying litigations, holding a watch in the direction of potential protection and methods to maximise restoration. Small modifications, like nuances in settlement agreements or accounting practices, could make or break claims for hundreds of thousands of {dollars} of potential protection. Within the AMC case, for instance, the corporate recorded the settlement as a contingent legal responsibility and expense valued it at $99.3 million, which the court docket relied on to assist a discovering that the non-cash fee was lined loss.
Information of Insurer Communications: Within the midst of high-stakes settlement negotiations and fast-paced litigation, it’s not all the time possible to doc all communications with insurers. Nonetheless, this case exhibits the dangers of not documenting what is alleged throughout conversations held in-person or through cellphone or video name. That is important to keep away from post-conferral disputes. The AMC court docket was unable to resolve the query of whether or not the insurer consented to AMC’s settlement as a result of a factual dispute existed as to what was mentioned throughout a cellphone name. It’s unclear if a post-call affirmation e-mail would have helped right here, however, at a minimal, these sorts of written data can doubtlessly reduce the chance of factual disputes.
