An unbroken sequence of Delaware trial court decisions have reflected strong pro-policyholder leaning in insurance cases in furtherance of the state’s pro-business model. Following the most recent of these pro-policyholder decisions, we observed that policyholder lawyers are increasingly filing coverage actions in Delaware to take advantage of this seemingly favorable judicial climate. Whether the policyholder rush to Delaware will continue remains to be seen now that the Delaware Supreme Court has reversed the first of the trial court decisions that sparked the trend.

Background

In 2006, Verizon Communications, Inc. divested its print and online directories business to a newly created entity, Idearc, Inc. Idearc filed for bankruptcy in 2009, and the bankruptcy trustee filed suit against Verizon alleging violations of fraudulent transfer statutes, payment of unlawful dividends in violation of the Delaware General Corporation Law (DGCL), and common law counts for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, promoter liability and unjust enrichment. Verizon prevailed on these claims, and thereafter filed suit seeking indemnification from its insurers for $48 million in defense costs incurred in the bankruptcy litigation.

Verizon’s insurance policy allowed for payment of the costs associated with defending a “Securities Claim,” which was defined in pertinent part to mean a claim “[a]lleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities)….” The trial court found this definition ambiguous, and relying on extrinsic evidence it interpreted “any … regulation, rule or statute regulating securities” as “pertaining to laws one must follow when engaging in securities transactions.” As a result, the trial court deemed the definition broad enough to encompass the claims asserted against Verizon in the bankruptcy litigation because they potentially arose from or were based upon or attributable to the purchase or sale or offer to purchase or sell any securities.

The Supreme Court Reverses

The Supreme Court reversed the trial court and entered judgment in favor of the insurers because the claims asserted against Verizon in the bankruptcy litigation did not fit within the policy definition of a “Securities Claim.” In doing so, the Court stayed true to the fundamental principles used for interpreting insurance contracts. The policy language was evaluated as a whole, so as not to render any terms superfluous. The plain and ordinary meanings of the words were applied. And, the language was not stretched to create an ambiguity.

The Court found that the words used in the definition “mirror[ed] those in a specific area of the law recognized as securities regulation,” and so began its consideration of the issue “with a basic understanding of the words used in the policy that the definition of a Securities Claim is aimed at a particular area of the law, securities law and not of general application to other areas of the law.” The Court’s understanding was “confirmed by courts that have addressed the same or similar issues[,]” as well as “the parties’ use of the limiting phrase ‘regulating securities.’” Using the plain meaning of the words of the policy, a “regulation, rule, or statute regulating securities” is one “specifically directed towards securities, such as the sale, or offer for sale, of securities,” and not those “directed at the common law or statutory laws outside the securities regulation area.” The Court rejected Verizon’s argument that, because a dictionary defined “rule” as including a “judicial order, decree, or direction; ruling,” the term must encompass common law rules established and developed by the judiciary. The Court declared that the dictionary definition was “not dispositive,” as the definition was “more naturally aimed at court ‘rulings’ and not rules themselves.”

As a result, none of the claims asserted against Verizon in the bankruptcy litigation fell within the policy definition of a “Securities Claim.” For example, the Court noted that the fiduciary duty allegations arose from common law duties, not regulations, rules, or statutes. More importantly, the fiduciary duty allegations certainly were not specific to regulations, rules, or statutes regulating securities. Turning to the claim for unlawful distribution of dividends under the DGCL, the Court held that the relevant statutes regulate dividends rather than securities and so that claim did not constitute a Securities Claim. With regard to the claim for statutory fraudulent transfer claims, the Court held that none of the relevant statutes are specific to transfers involving securities, and thus the claim was not a Securities Claim. Finally, the Court held that the trustee’s claims for unjust enrichment and alter ego liability were common law claims, and thus neither was a Securities Claim.

Takeaways

It is doubtful that the Supreme Court’s Verizon decision standing alone will dampen the current view of Delaware as a pro-policyholder venue. For those engaged in insurance policy analysis, however, this decision should stand as a sound reminder of the fundamental analytical principles to be followed. If there is consistent application of these principles going forward, Delaware is more likely to be deemed insurance neutral – as it should be.