Delaware Trial Court Interprets Coverage Under a D&O Policy to Include an Appraisal Action as a Securities Claim

White and Williams LLP

White and Williams LLP

Delaware courts have established rules of construction for interpreting insurance policies. Among the most basic of these rules is that clear and unequivocal policy language will be given its plain meaning; and if the language is at all ambiguous, the ambiguity is construed in favor of the insured. Relatedly, the court will not interlineate non-existent terms or engage in a tortured reading of existing terms. In other words, clear and unambiguous policy language controls, as was recently confirmed by the July 31, 2019 Delaware Superior Court opinion in Solera Holdings, Inc. v. XL Specialty Insurance Company, et al., C.A. No. N18C-08-315 AML (CCLD).


Publicly-traded Solera Holdings, Inc. was taken private through a merger in September 2015. On March 7, 2016, several dissenting shareholders filed an action under section 262 of the Delaware General Corporation Law seeking appraisal of their Solera stock, rather than accept the merger consideration. Solera did not notify its D&O insurers of the appraisal action until January 2018, after a substantial portion of the litigation was complete. Solera had incurred approximately $13 million in Defense Costs to that point. In an August 20, 2018 post-trial decision in the appraisal action, the Delaware Court of Chancery found that the merger price was the fair value of Solera’s stock, and ordered Solera to compensate the dissenting stockholders at that value together with pre-judgment interest of approximately $38.4 million.


Following the Chancery Court decision, Solera sought coverage in the Superior Court from its D&O insurers for the award of pre-judgment interest and attorneys’ fees under the insuring agreement in the primary D&O policy that provided entity coverage for securities claims; even while conceding that the underlying appraisal valuation was not a covered “Loss” under the D&O policies. The primary D&O policy broadly defined “Securities Claim” as a violation of law, which the insurers argued required a finding of a “Wrongful Act” (i.e., an act, error or omission) by Solera itself. Given that the statutory appraisal action did not allege any “Wrongful Act” by Solera, the D&O insurers argued that there was no trigger of coverage under the D&O policies.

The Superior Court refused to require an allegation that a “Wrongful Act” was necessary to establish that a “violation” of securities laws had occurred. Rather, the Superior Court relied upon a basic dictionary definition of “violation,” defined as a “breach of the law or contravention of a right or duty,” which the Superior Court noted did not require any showing of a state of mind – often necessary to establish the intent necessary for the application of some securities law violations. According to the Superior Court, the dispensation of a requirement that a Securities Claim against an entity include an allegation of a “Wrongful Act” is also consistent with the strict liability standard applicable under various sections of the federal securities laws – which do not require such a showing.

Applying this analytical framework, the Superior Court found that a section 262 appraisal action constitutes a “Securities Claim,” as defined in the primary D&O policy at issue, because such actions naturally allege that a defendant company breached its lawful obligation to fairly value the stockholders’ shares in a merger transaction.

The Superior Court noted that another provision of the D&O policy potentially limited coverage to “Loss” incurred in connection with a “Securities Claim” that alleged one or more “Wrongful Acts.” The D&O insurers did not argue against coverage on the basis of the “Wrongful Act” element, and so the Superior Court did not address or resolve what effect, if any, the “Wrongful Act” may have on coverage for a section 262 appraisal action. However, the Superior Court’s view that “[b]y its very nature, a demand for appraisal is an allegation that the company contravened [the shareholder’s right to receive fair value for their shares in a merger] by not paying the shareholders the fair value to which they are entitled” suggests that it might conclude a section 262 appraisal action alleges a “Wrongful Act.”


The D&O insurers next argued that it was “purely logical” that there should be no coverage for the $38.3 million in pre-judgment interest that had accrued on the non-covered fair value award. The Superior Court noted that the primary D&O policy obligated the D&O insurers cover those sums Solera had the legal obligation to pay, including without qualification, pre-judgment interest. In reaching this conclusion, the Superior Court reasoned that the policy drafters had elected a broader definition of “Loss” to include all pre-judgment obligations Solera was ordered to pay, regardless whether the interest accrued on a non-covered loss, and refused what the Superior Court characterized as the D&O insurers’ invitation to insert more favorable language in the context of coverage litigation. However, other policy defenses, as well as factual disputes over the interest payment, precluded a final ruling here by the Superior Court on the insurers’ pre-judgment interest obligations.


Lastly, the D&O insurers argued that because it provided late notice of the appraisal action, Solera had violated the D&O policies’ consent-to-defense provision, and therefore no coverage was available for pre-notice Defense Costs. In rejecting the D&O insurers’ late notice defense, the Superior Court looked to Delaware cases that have applied a prejudice requirement in consent-to-settle clauses. The court then took the unusual step of equating consent-to-settle and consent-to-defense provisions (seemingly contravening its own basic principles of not interlineating policy terms), and found that it was “logical” to impute into the consent-to-defense provision a requirement that the insurers show they were “materially prejudiced” by lack of participation in the defense of the appraisal action. The court then concluded that a more established record of insurer prejudice would be necessary before it could make a final ruling on the D&O insurers’ obligation to reimburse Defense Costs incurred in connection with the underlying appraisal action.


Solera is the latest in a now unbroken recent string of Delaware decisions[1] that evidence a strong pro-policyholder leaning in insurance cases. This trend is consistent with Delaware’s deserved reputation as a pro-business venue, but which now suggests Delaware courts will be skeptical of the claims not only of shareholder plaintiffs challenging corporate decision-making, but also of insurers seeking to limit available insurance coverage for Delaware corporations. In fact, policyholder lawyers are increasingly filing coverage actions in Delaware to take advantage of the favorable judicial climate for policyholders there.

This trend should be extremely troubling to the D&O insurance industry, which has largely been deferential to policyholders in the past decade on choice-of-law issues, and may warrant a reconsideration of contractual deference to policyholders when it comes to choice-of-law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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