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WMI Liquidating Trust v. XL Specialty Insurance Company

Superior Court of Delaware, New Castle

July 30, 2013

WMI LIQUIDATING TRUST, Plaintiff,
v.
XL SPECIALTY INSURANCE COMPANY; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; COLUMBIA CASUALTY COMPANY; AXIS INSURANCE COMPANY; ACE AMERICAN INSURANCE COMPANY; ARCH INSURANCE COMPANY; RSUI INDEMNITY COMPANY; CHARTIS PROPERTY CASUALTY COMPANY, Formerly known as "AIG Casualty Company;" HOUSTON CASUALTY COMPANY; THOSE CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NO. B0509QA027908, also known as "Lloyd's Underwriter Syndicate No. 2488 AGM London;" and SCOTTSDALE INDEMNITY COMPANY, Defendants.

Submitted: April 25, 2013

Paul D. Brown, Esquire, Joseph B. Cicero, Esquire, Ann M. Kashishian, Esquire, Cousins Chipman & Brown, LLP, David M. Stern, Esquire (Argued), Lee R. Bogdanoff, Esquire, Matthew C. Heyn, Esquire, Klee, Tuchin, Bogdanoff & Stern LLP, Attorneys for Plaintiff

Edward M. McNally, Esquire, Patricia A. Winston, Esquire, Morris James LLP, Attorneys for Defendants National Union Fire Insurance Company of Pittsburgh, PA and Chartis Property Casualty Company

Thomas G. Macauley, Esquire, Macauley LLC, Daniel J. Standish, Esquire, Charley C. Lemley, Esquire (Argued), John E. Howell, Esquire, Wiley Rein LLP, Attorneys for Defendants XL Specialty Insurance Company and Columbia Casualty Company

Joseph H. Huston, Jr., Esquire, Stevens & Lee, Michael R. Goodstein, Esquire, Bailey Cavalieri LLC, Attorneys for Defendants RSUI Indemnity Company and Scottsdale Indemnity Company

Francis J. Murphy, Esquire, Kelley M. Huff, Esquire, Attorneys for Defendants Arch Insurance Company, Ace American Insurance Company, and Those Certain Underwriters at Lloyd's, London, Subscribing to Policy No. B0509GA027908

Howard A. Cohen, Esquire, Drinker Biddle & Reath LLP, Attorneys for Defendant Houston Casualty Company

Timothy Jay Houseal, Esquire, Young Conway Stargatt & Taylor LLP, Ommid C. Farashahi, Esquire, Michael T. Skoglund, Esquire, Brian J. Watson, Esquire, Bates Carey Nicolaides, LLP, Attorneys for Defendant AXIS Insurance Company

OPINION

JOHNSTON, J.

FACTUAL AND PROCEDURAL CONTEXT

Plaintiff WMI Liquidating Trust ("Trust") filed a Complaint on October 8, 2012 against the above-captioned Insurers (collectively "Defendants"), seeking compensation for breach of contract, breach of the duties of good faith and fair dealing, and declaratory judgment. All claims concerns various insurance policies obtained by Washington Mutual, Inc. ("WMI"), and Defendants' alleged failure to honor the terms of the policies. WMI declared bankruptcy on September 26, 2008, and the Trust is WMI's successor.

Defendants issued directors and officers liability insurance policies with a coverage period from May 1, 2008 to May 1, 2009. WMI paid approximately $15 million in premiums to obtain $250 million in insurance coverage.

"Side A" policies provide coverage only for directors and officers seeking indemnification or advancement when the company cannot or will not advance or indemnify litigation costs. The company is the beneficiary of "Side B" policies when the company has advanced or indemnified officers and directors, and the company is seeking reimbursement. "ABC" policies come into play when the company (as well as directors and officers under specified circumstances) has potential liability and the company is seeking reimbursement for defense costs, judgments, or other cash outlays. "Specialty" coverage is for losses in excess of applicable retentions. In this case, a $50 million retention applies to the Side B coverage.

The Columbia Casualty Company Side A policy limit is $25 million. The Columbia policy provides that coverage attaches only if the applicable limits of the ABC policies "have been exhausted by reason of losses paid thereunder by the underlying insurer of the Insured." The remaining Side A policies are in excess of the Columbia policy.

The allegations in this case arise out of Defendants' refusal to provide coverage for a claim against certain WMI directors and officers ("D&Os"). On September 10, 2008, WMI D&Os allegedly authorized or allowed $500 million to be transferred to Washington Mutual Bank. Fifteen days later, Washington Mutual Bank was seized by its regulators. On September 26, 2008, WMI filed for bankruptcy protection in the Bankruptcy Court for the District of Delaware.

On April 27, 2009, the Committee appointed in the WMI bankruptcy sent a letter titled "Notice of Circumstances Resulting in Potential Claims" to WMI and certain D&Os. WMI joined the Committee in sending a demand letter, dated October 13, 2011 ("Demand Letter"), to the D&Os. The Demand Letter stated the intent to pursue litigation against the D&Os, unless the parties negotiated a resolution. The claims against the D&Os alleged improprieties in connection with the $500 million transfer, and demanded payment of $500 million for alleged breach of duties to WMI.

The Bankruptcy Court confirmed WMI's plan. The Trust has asserted the claim against the D&Os set forth in the Demand Letter. WMI purportedly has acknowledged that the D&Os are entitled to indemnification and advancement of defense costs in connection with the allegations set forth in the Demand Letter, subject to objections as to amount.

In response to the Demand Letter, several D&Os and WMI sought coverage from Defendants. Defendant XL Specialty Insurance Company took the position that the Demand Letter would be treated as a claim under the policy issued by XL Specialty for the policy period from 2007 to 2008. Other Defendants that issued policies for 2007-2008 allegedly have agreed that defense costs in connection with the Demand Letter may be advanced under those policies, subject to reservations of rights, including subrogation to the D&Os' indemnification. (Policies issued covering the 2008-2009 period are the subject of this lawsuit.)

Defendants denied coverage on the grounds that: the Demand Letter claim is an "interrelated claim" with class-action lawsuits brought by WMI's former shareholders, and therefore is excluded by the "Interrelated Claims Exclusions"; and the Demand Letter claim falls within the "Insured v. Insured" policy exclusion.

The Bankruptcy Court approved a reserve of $65 million for payment of the D&O indemnification claims. The reserve allocated for defense costs ($55 million) has been reduced, through stipulation among the Trust and the D&Os, to $18, 239, 743 ("Reserve").

On February 15, 2012, WMI filed an action in the United States Bankruptcy Court for the District of Delaware, which was similar in most respects to the action presently before the Court.[1] The Bankruptcy Court dismissed WMI's action for lack of jurisdiction. The Bankruptcy Court also ruled that the declaratory judgment claims were not ripe.

After that matter was dismissed, the Trust, as WMI's successor, filed the present action with this Court. The Complaint asserts three claims for relief. Count I alleges that Defendants breached their obligations under the policies by denying coverage for the D&O defense costs and by failing to attempt to settle the claim against the D&Os. Count II alleges that Defendants have breached the implied covenant of good faith and fair dealing by denying coverage in bad faith. Count III seeks a declaratory judgment of the parties' rights and obligations under the policies because there is a ripe and actual controversy regarding the scope of Defendants' obligations.

Defendants have filed this Motion to Dismiss. The Motion seeks relief under Superior Court Civil Rule 12(b)(1) for lack of jurisdiction on the basis that the case is not ripe for adjudication, and under Rule 12(b)(6) for ...


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