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Solera Holdings, Inc. v. XL Specialty Insurance Co.

Superior Court of Delaware

July 31, 2019

SOLERA HOLDINGS, INC., Plaintiff,
v.
XL SPECIALTY INSURANCE COMPANY, ACE AMERICAN INSURANCE COMPANY, ILLINOIS NATIONAL INSURANCE COMPANY, ARGUONAUT INSURANCE COMPANY, HUDSON INSURANCE COMPANY, ENDURANCE AMERICAN INSURANCE COMPANY, ZURICH AMERICAN INSURANCE COMPANY, LIBERTY INSURANCE UNDERWRITERS INC., FEDERAL INSURANCE COMPANY, Defendants.

          Submitted: April 16, 2019

         Upon Defendants ACE American Insurance Company and Federal Insurance Company's Motion for Summary Judgment: Denied

          David J. Baldwin, Esquire, Carla M. Jones, Esquire of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, and Peter M. Gillon, Esquire, Alexander D. Hardiman, Esquire, Tamara D. Bruno, Esquire of PILLSBURY WINTHROP SHAW PITTMAN LLP, Washington, D.C., Attorneys for Plaintiff.

          Gregory F. Fischer, Esquire of COZEN O'CONNOR, Wilmington, Delaware, and Angelo G. Savino, Esquire of COZEN O'CONNOR, New York, NY, Attorneys for Defendants ACE American Insurance Company and Federal Insurance Company.

          Carmella P. Keener, Esquire of ROSENTHAL, MONHAIT & GODDESS, P.A, Wilmington, Delaware, Attorney for Defendants Endurance American Insurance Company and Liberty Insurance Underwriters Inc.

          Ronald P. Schiller, Esquire, Michael R. Carlson, Esquire, Matthew N. Klebanoff, Esquire of HANGLEY ARONCHICK SEGAL PUDLIN & SCHILLER, Philadelphia, Pennsylvania, Attorneys for Defendant Endurance American Insurance Company.

          Scott A. Schechter, Esquire, Matthew E. Mawby, Esquire of KAUFMAN BORGEEST & RYAN LLP, Valhalla, New York, Attorneys for Defendant Liberty Insurance Underwriters Inc.

          Bruce W. McCullough, Esquire, of BODELL BOVÉ, LLC, Wilmington, Delaware, Attorney for Defendant Zurich American Insurance Company.

          Bruce E. Jameson, Esquire, John G. Day, Esquire of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware, and Tammy Yuen, Esquire, Kenneth M. McBrady, III, Esquire of SKARZYNSKI BLACK LLC, New York, New York Attorneys for Defendant XL Specialty Insurance Company.

          Kurt M. Heyman, Esquire, Aaron M. Nelson, Esquire of HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware, and Scott B. Schreiber, Esquire, James W. Thomas, Jr., Esquire of ARNOLD & PORTER KAYE SCHOLER LLP, Washington, D.C., Attorneys for Defendant Illinois National Insurance Company.

          Stephen F. Dryden, Esquire of WEBER GALLAGHER SIMPSON STAPLETON FIRES & NEWBY, LLP, New Castle, Delaware, Attorney for Defendant Hudson Insurance Company.

          John C. Phillips, Jr., Esquire, David A. Bilson, Esquire, of PHILLIPS, GOLDMAN, MCLAUGHLIN & HALL, P.A., Wilmington, DE, and Geoffrey W. Heineman, Esquire, Jung H. Park, Esquire of ROPERS, MAJESKI KOHN & BENTLEY, New York, New York, Attorneys for Defendant Argonaut Insurance Company.

          OPINION

          LeGrow, J.

         This case involves the interpretation of a directors' and officers' insurance policy, specifically whether that policy covers attorneys' fees and pre-judgment interest the insured company incurred defending an appraisal action. Plaintiff purchased primary and excess directors' and officers' liability insurance policies from Defendants. After Plaintiff was acquired by a private company in March 2016, several of Plaintiff's shareholders filed an appraisal action in the Delaware Court of Chancery. Plaintiff first notified Defendants of the appraisal action in January 2018, after a substantial portion of the litigation was complete. This dispute arose when Defendants denied Plaintiff coverage for expenses incurred defending the appraisal action. In response, Plaintiff initiated this breach of contract and declaratory judgment action against Defendants seeking coverage for pre-judgment interest and defense expenses incurred in the appraisal action. Defendants moved for summary judgment on all claims.

         The pending motion presents three questions: (1) whether a "Securities Claim" under the insurance policies is limited to a claim alleging wrongdoing, (2) whether the policies cover pre-judgment interest on a non-covered loss, and (3) whether Plaintiff's acknowledged breach of the policies' consent-to-defense clause bars recovery of Plaintiff's defense expenses. Based on the policies' plain language, I conclude the appraisal action qualifies as a covered "Securities Claim" because that term's definition is not limited to claims of wrongdoing. Additionally, because there is no limiting language in the policies' definition of "Loss," coverage for pre-judgment interest is not limited to covered losses. As to the defense expenses, Delaware law implies a prejudice requirement in insurance contract consent clauses, and Plaintiff's breach of the consent clause therefore does not bar coverage for defense expenses absent a showing of prejudice. Defendants' motion for summary judgment therefore is denied.

         FACTS AND PROCEDURAL BACKGROUND

         Unless otherwise noted, the following facts are drawn from the complaint and the record provided by the parties.

         The D&O Policies

         Plaintiff Solera Holdings, Inc. ("Solera") is a software company incorporated in Delaware. Defendants issued Solera's primary and excess directors' and officers' liability insurance policies. Defendants provided Solera's tower of insurance coverage for securities claims made between June 10, 2015 and June 10, 2016. Defendant XL Specialty Insurance Company ("XL") issued the primary policy (the "Policy") and the remaining defendants issued excess policies, which follow-form and incorporate the Policy's provisions.[1] The Policy provides $10 million in coverage, and the excess policies provide a total of $45 million in additional coverage.

         Under the Policy, Defendants agreed to pay any "Loss resulting solely from any Securities Claim first made against [Solera] during the [p]olicy [p]eriod for a [w]rongful [a]ct."[2] The Policy defines a "Securities Claim" as a claim:

(1) [M]ade against [Solera] for any actual or alleged violation of any federal, state or local statute, regulation, or rule or common law regulating securities, including but not limited to the purchase or sale of, or offer to purchase or sell, securities, which is:
(a) brought by any person or entity resulting from, the purchase or sale of, or offer to purchase or sell, securities of [Solera]; or
(b) brought by a security holder of [Solera] with respect to such security holder's interest in securities of [Solera] . . .[3]

         The Policy covers any "Loss" resulting from a Securities Claim, which includes "damages, judgments, settlements, pre-judgment and post-judgment interest or other amounts (including punitive, exemplary or multiplied damages, where insurable by law)" that Solera legally is obligated to pay and "Defense Expenses, including that portion of any settlement which represents the claimant's attorney's fees."[4] The policy defines "Defense Expenses" as the "reasonable and necessary legal fees, expenses and other costs (including experts' fees): (1) incurred in the investigation, adjustment, settlement, defense and/or appeal of any [c]laim, [i]nvestigation [d]emand or [i]nterview . . ."[5] Under Section V of the Policy, Solera must obtain Defendants' consent before incurring any Defense Expenses (the "Consent Clause"). The Consent Clause makes clear that Solera may not "incur any Defense Expenses . . . or admit liability for, make any settlement offer with respect to, or settle any [c]laim without [Defendants'] consent, such consent not to be unreasonably delayed or withheld . . ."[6] Section VI of the Policy also contains a provision requiring Solera to provide Defendants timely notice of a claim as a condition to coverage (the "Notice Provision"). The Notice Provision contains a prejudice requirement, specifically:

[a]s a condition precedent to any right to payment under [the Policy] . . . [Solera] shall give written notice to [Defendants] of each [c]laim or [i]nvestigation [d]emand as soon as practicable after it is first made . . . [i]n the event that [Solera] fail to provide timely notice to [Defendants] . . . [Defendants] shall not be entitled to deny coverage solely based on such untimely notice unless [Defendants] can demonstrate its interests were materially prejudiced by reason of such untimely notice.[7]

         The Appraisal Action

         Solera was a publicly traded company until it was acquired by an affiliate of Vista Equity Partners in March 2016. Solera first announced the merger in September 2015. Following the announcement, a group of Solera's shareholders filed a class action against Solera, its directors and officers, and other companies involved in the merger for breach of fiduciary duty (the "Shareholder Action").[8]The Shareholder Action later was dismissed by the Court of Chancery for failure to state a claim.[9] In the meantime, a majority of Solera's shareholders approved the merger, and the transaction closed on March 3, 2016 for an agreed merger price of $55.85 per share.

         On March 7, 2016, several shareholders filed an appraisal action under 8 Del. C. § 262 (the "Appraisal Action") seeking fair value for their shares.[10] The petitioners in the Appraisal Action claimed Solera's value at the time of the merger actually was $84.65 per share. A trial was held in the Appraisal Action in June 2017. On July 30, 2018, after post-trial briefing and argument, the Court of Chancery issued its final decision, finding the fair value of the petitioners' shares at the time of the merger was $53.95 per share, an amount less than the merger price. The Court of Chancery ordered Solera to pay the petitioners fair value for their shares at $53.95 per share plus pre-judgment interest of $38, 387, 821.61.[11]Solera incurred more than $13 million in attorneys' fees and other costs defending the Appraisal Action.

         The Coverage Dispute

         Solera notified Defendants of the Shareholder Action on October 13, 2015, but the Court of Chancery dismissed that case before Solera's costs met the Policy's retention. On January 31, 2018, Solera notified Defendants of the Appraisal Action and requested coverage under the Policy. On April 17, 2018, XL issued Solera a letter denying coverage. Following the denial, Solera filed this action against Defendants for breach of contract and declaratory judgment, seeking coverage for the pre-judgment interest and defense expenses incurred in the Appraisal Action. Defendants ACE American Insurance Company ("ACE") and Federal Insurance Company ("Federal") moved for summary judgment (the "Motion"). Solera settled with XL after ACE and Federal filed the Motion, [12] and the remaining Defendants (the "Joining Defendants"), with the exception of Hudson Insurance Company, joined in the Motion.

         The ...


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