Appraisal Action is a Covered Securities Claim and Pre-Judgment Interest Part of “Loss”

The Superior Court of Delaware, applying Delaware law, determined that an appraisal action constitutes a “Securities Claim” under a Directors’ and Officers’ (“D&O”) insurance policy.  The court also found that pre-judgment interest might be covered under a D&O policy pending the appropriate fact scenario.

Solera Holdings, Inc. (“Solera”) was a publicly traded company until it was acquired by a private company in March 2016.  After the deal closed for an agreed merger price of $55.85 per share, several Solera shareholders filed an appraisal action in the Delaware Court of Chancery seeking fair value for their shares.  The Delaware Court of Chancery found the fair value of shares at the time of the merger was $53.95 per share, an amount less than the merger price.  Solera was ordered to pay $53.95 per share plus $38.3 million in pre-judgment interest.  Solera incurred more than $13 million in attorneys’ fees and other costs defending the appraisal action.  At the relevant time, Solera held primary and excess D&O liability insurance, with the excess policies following form to the primary.  Solara first notified its D&O insurers of the appraisal action in January 2018, after a substantial portion of the litigation was complete.  The primary insurer denied coverage.  Solera then filed the instant breach of contract and declaratory judgment action against many of the D&O insurers seeking coverage for pre-judgment interest and defense expenses incurred in the appraisal action.  Many excess insurers moved for summary judgment.

First, the excess insurers argued that they were not obligated to cover Solera’s losses incurred in the appraisal action because an appraisal action is not a “Securities Claim” as defined by the policies.  The court held that the appraisal action qualifies as a covered “Securities Claim” because the term’s definition is not limited to claims of wrongdoing.  The definition of a Securities Claim includes a claim against Solera “for any actual or alleged violation of any federal, state or local statute, regulation, or rule or common law regulating securities… .”  Under Delaware law, shareholders have the right to receive “fair value” for their shares when they are cashed out of their position through certain types of mergers or consolidations.  By its very nature, a demand for appraisal is an allegation that the company contravened that right by not paying shareholders the fair value to which they are entitled.

Next, the excess insurers argued that even if the appraisal action is a “Securities Claim,” the pre-judgment interest award does not constitute a “Loss” under the policies because the underlying fair value awarded indisputably was not a covered “Loss”.  Under the policies, a “Loss” includes “damages, judgments, settlements, prejudgment and post-judgment interest or other amounts … that [Solera] is legally obligated to pay … .”  The excess insurers argued that because the fair value amount is not a covered “Loss,” it follows that the pre-judgment interest on the fair value amount is also not a covered “Loss.”  The court found no policy language that limited pre-judgment interest.  However, the court did not grant summary judgment on this issue finding that a factual dispute remained regarding coverage for the pre-judgment interest.

Finally, the excess insurers argued that coverage for Solera’s pre-notice defense expenses was barred because Solera incurred those expenses without the excess insurers’ consent.  Under Delaware law, a prejudice requirement is implied in insurance contract consent clauses.  Therefore, Solera’s breach of the consent clause did not bar coverage for defense expenses absent a showing of prejudice.  The court found that summary judgment was not appropriate because prejudice is a factual question.  Solera Holdings Inc. v. XL Specialty Ins. Co., C.A. No.: N18C-08-315 AML CCLD (Supr. Ct. Del. July 31, 2019).