The development 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 cost, made within the type of AMC shares valued at $99.3 million, certified as a coated “Loss” underneath its administrators and officers (D&O) legal responsibility insurance coverage coverage. This ruling is noteworthy for a wide range of causes, notably as a result of it establishes that non-traditional types of foreign money, like inventory, generally is a coated “Loss” underneath D&O insurance policies.
Background of the Underlying Motion
AMC, the movie show chain, was financially strained through the pandemic. It skilled a dramatic surge in inventory value, turning right into a “meme inventory” attributable to retail investor exercise. To reap the benefits of the state of affairs, AMC sought to problem extra frequent inventory. Nevertheless, shareholder approval to extend the frequent inventory issuance was blocked, prompting AMC to create a brand new safety—the AMC Most popular Fairness Models (APEs). These models carried voting rights just like frequent inventory and have been supposed to transform to frequent inventory if licensed by shareholders.
This led to a authorized battle with shareholders, who filed lawsuits to forestall AMC’s proposal to transform the APEs into frequent inventory. The fits have 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 obtained a settlement supply and had discussions with its insurers in regards to the proposed phrases. Per week later, AMC settled the litigation, agreeing to problem 6,897,018 shares of frequent 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 cost for 3 causes. First, it argued that the settlement cost was not a “Loss” underneath 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 offers 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 coated “Loss”.
Second, the insurer argued there was no “Loss” as a result of AMC didn’t undergo financial hurt by issuing the inventory. And third, even when settlement within the type of inventory issuance was a coated “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 obtained 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, underneath Delaware legislation, inventory is a type of foreign money that can be utilized for a wide range of company functions, together with settling money owed. Thus, AMC’s issuance of inventory was deemed a coated “Loss,” which the court docket refused to restrict in a means not explicitly offered for within the D&O coverage.
In additional assist of AMC’s coated “Loss,” the court docket seemed to the coverage’s bump-up exclusion, which makes use of the phrase “paid” twice. The court docket said, “[t]his is exclusion isn’t relevant to the difficulty offered, 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 underneath Delaware Regulation the bump-up exclusion, and its use of the phrase “paid,” can apply to inventory transfers, it’s “essentially implie[d] that inventory will be an quantity AMC ‘pays’ which creates a coated ‘Loss’.” Bump-up exclusions are a typical 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 proscribing 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 telephone name was a factual problem 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 a wide range of takeaways for policyholders.
Non-Money Settlements: Non-cash settlement funds, together with inventory, could also be coated as a “Loss” underneath D&O insurance policies in Delaware. Whereas AMC’s non-cash cost was in inventory, the court docket’s ruling could apply equally to a wide range of different cost types, comparable to cryptocurrency or different quantities that insureds are legally obligated to pay as damages or settlement. Policyholders ought to rigorously evaluate coverage language relating to the definition of “Loss” to find out if there’s protection for non-cash settlement funds.
Delaware Protection Tendencies: Over the previous few years, Delaware courts have issued a number of important rulings, many in favor of policyholders. The court docket’s determination on this case is yet one more instance of this. Delaware’s management in company governance and shareholder litigation additionally bleeds over into insurance coverage disputes. Within the latest determination, the court docket dominated in AMC’s favor by counting on Delaware legislation recognizing that inventory is a type of foreign money. Insurers and policyholders will proceed to concentrate to Delaware’s creating position in issuing necessary protection rulings.
Selection of Regulation Issues: In a single such landmark determination, the Delaware Supreme Court docket held that Delaware companies and their insured officers and administrators ought to be capable to 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 determination in a non-insurance swimsuit figuring out whether or not a declare was a spinoff or direct declare that the Superior Court docket used to assist the conclusion that AMC’s settlement was a coated “Loss” as a result of “[s]tock is a type of foreign money.” Different jurisdictions could not have related 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 could nonetheless receive protection if it might 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, underneath 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 could possibly leverage a rising physique of favorable Delaware legislation on necessary protection points. Conversely, the significance of what legislation governs an insurance coverage coverage makes choice-of-law, choice-of-forum, and related coverage provisions much more important when insurers mandate utility of one other state’s legislation. These provisions usually go unnoticed however can have an outsized impression 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 do not make inferences or decoding coverage language to assist their most well-liked studying if it’s not said 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 searching for protection and indemnity protection underneath legal responsibility insurance policies ought to be strategic in how they strategy settlement in underlying litigations, holding an eye fixed in the direction of potential protection and methods to maximise restoration. Small adjustments, like nuances in settlement agreements or accounting practices, could make or break claims for thousands and 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 cost was coated loss.
Data of Insurer Communications: Within the midst of high-stakes settlement negotiations and fast-paced litigation, it’s not at all times possible to doc all communications with insurers. Nonetheless, this case reveals the dangers of not documenting what is alleged throughout conversations held in-person or by way of telephone or video name. That is essential 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 stated throughout a telephone name. It’s unclear if a post-call affirmation e-mail would have helped right here, however, at a minimal, these sorts of written information can doubtlessly decrease the danger of factual disputes.
