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In re Verizon Insurance Coverage Appeals

Supreme Court of Delaware

October 31, 2019

IN RE VERIZON INSURANCE COVERAGE APPEALS

         Submitted: September 11, 2019

          Rehearing Denied: November 18, 2019

Page 567

[Copyrighted Material Omitted]

Page 568

          Court Below: Superior Court of the State of Delaware, C.A. No. N14C-06-048 (CCLD)

         Upon appeal from the Superior Court. REVERSED.

         Kurt M. Heyman, Esq. (argued), Aaron M. Nelson, Esq., HEYMAN, ENERIO, GATTUSO & HIRZEL LLP, Wilmington, Delaware; Scott B. Schreiber, Esq., James W. Thomas, Jr., Esq., William C. Perdue, Esq., ARNOLD & PORTER KAYE SCHOLER LLP, Washington, D.C.; Robert Reeves Anderson, Esq., ARNOLD & PORTER KAYE SCHOLER LLP, Denver, Colorado; Attorneys for Defendants-Appellants Illinois National Insurance Co. and National Union Fire Insurance Co. of Pittsburgh, PA.

         Bruce W. McCullough, Esq., BODELL BOVÉ, LLC, Wilmington, Delaware; Ronald P. Schiller, Esq. (argued), Daniel J. Layden, Esq., Jason A. Levine, Esq., HANGLEY, ARONCHICK, SEGAL, PUDLIN & SCHILLER, Philadelphia, Pennsylvania; Attorneys for Defendant-Appellant/Cross-Appellee Zurich American Insurance Company.

         John C. Phillips, Jr., Esq., David A. Bilson, Esq., PHILLIPS, GOLDMAN, MCLAUGHLIN & HALL, P.A., Wilmington, Delaware; Joseph A. Bailey III, Esq., CLYDE & CO U.S. LLP, Washington, D.C.; Attorneys for Defendant-Appellant U.S. Specialty Insurance Company.

         Jennifer C. Wasson, Esq., Carla M. Jones, Esq., POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Robin L. Cohen, Esq. (argued), Keith McKenna, Esq., Michelle R. Migdon, Esq., McKOOL SMITH P.C., New York, New York; Attorneys for Plaintiffs Below-Appellees/Cross-Appellants Verizon Communications Inc., Verizon Financial Services LLC, and GTE Corporation.

         Before VALIHURA, VAUGHN, and SEITZ, Justices.

          OPINION

         SEITZ, Justice

Page 569

          This appeal turns on the definition of a Securities Claim in an insurance policy. Under the policy, a Securities Claim is a claim against an insured that "alleg[es] a violation of any federal, state, local or foreign regulation, rule or statute regulating securities ...." The Superior Court found the definition ambiguous. Using extrinsic evidence, the court held that fiduciary duty, unlawful dividend, and fraudulent transfer claims brought by a bankruptcy trustee against Verizon Communications Inc. and others are Securities Claims covered under the policy. We disagree, and find that, applying the plain meaning of the Securities Claim definition in the policy, the litigation trustee’s complaint did not allege any violations of regulations, rules, or statutes regulating securities. Thus, we reverse the Superior Court’s grant of summary judgment to Verizon and direct that summary judgment be entered for the Insurers.

          I.

          In 2006, Verizon divested its print and electronic directories business to its stockholders in a tax-free "spin-off" transaction. As part of the transaction, Verizon created Idearc, Inc. and appointed John W. Diercksen, a Verizon executive, to serve as Idearc’s sole director. Idearc obtained Verizon’s print and online directory business in exchange for about 146 million shares of Idearc stock, $7.1 billion in Idearc debt, and $2.5 billion in cash. Verizon then distributed Idearc common stock to Verizon shareholders. Idearc launched as a separate business with $9.1 billion in debt.

         In connection with the Idearc spinoff, Verizon and Idearc purchased primary and excess Executive and Organizational Liability Policies ("Idearc Runoff Policies").[1] Illinois National, an affiliate of AIG, issued the primary policy. Zurich American Insurance Company and other carriers issued follow form excess policies, meaning that the excess policies incorporate the coverage provisions of the primary policy. We refer to the primary and excess insurer parties as the "Insurers."[2]

         The Idearc Runoff Policies covered certain claims made against the defined insureds during the six-year policy period that exceeded a $7.5 million retention. Relevant to the dispute before us, Endorsement No. 7 to the policies states that "[i]n connection with any Securities Claim," and "for any Loss ... incurred while a Securities Claim is jointly made and maintained against both the Organization and one or more Insured Person(s), this policy shall pay 100% of such Loss up to the Limit of

Page 570

Liability of the policy."[3] "Securities Claim" is defined in pertinent part as a "Claim" against an "Insured Person" "[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)."[4] Under the policy, Verizon could recover its "Defense Costs" when a Securities Claim was brought against it and covered directors and officers, and Verizon indemnified those directors and officers.[5]

         Idearc operated as an independent, publicly traded company until it filed for bankruptcy in 2009. During the reorganization, the bankruptcy court appointed U.S. Bank N.A. as trustee of a litigation trust to pursue claims against Verizon and others on behalf of creditors. In 2010, U.S. Bank filed suit in Texas federal court against Verizon, two related entities, and John Diercksen, the Idearc director at the time of the spin off. U.S. Bank as trustee sought $14 billion in damages allegedly caused by saddling Idearc with excessive debt at the time of the spin-off. Its complaint alleged violations of fraudulent transfer statutes; payment of unlawful dividends in violation of Delaware General Corporation Law; and common-law counts for breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, promoter liability, unjust enrichment, and alter ego liability.[6]

         After a bench trial, Verizon prevailed. The United States Court of Appeals for the Fifth Circuit affirmed the district court’s decision.[7] During the nearly five years of litigation, Verizon and Diercksen incurred more than $48 million in defense costs. Verizon notified Illinois National of the U.S. Bank action and sought coverage for its joint defense costs under the Idearc Runoff Policies. In a June 21, 2011 letter, Illinois refused to ...


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