Insurers’ Counterclaims Based on Interrelated Wrongful Acts and Pending and Prior Litigation Exclusions Survive Motion to Dismiss

The Delaware Superior Court, applying Delaware law, has held that a group of D&O insurers’ counterclaims and affirmative defenses based on their policies’ interrelated wrongful acts provisions and pending and prior litigation exclusions could proceed past the motion to dismiss stage. But the court also held that the insurers’ counterclaim and affirmative defense under the policies’ prior notice exclusions were inapplicable and legally insufficient. Nat’l Amusements, Inc. v. Endurance Am. Specialty Ins. Co., 2023 WL 3145914 (Del. Super Ct. Apr. 28, 2023).

The insured sought coverage under its claims-made insurance tower for an underlying litigation challenging the fairness of the amount paid in a merger between two companies controlled by the insured. The insurers denied coverage because the merger litigation related back to four earlier litigations from 2016 challenging several corporate governance decisions undertaken by the insured to strengthen its control over the two companies that ultimately merged. As a result, the underlying merger litigation was deemed first made prior to the inception of the policy period. The insurers also denied coverage under a prior notice exclusion and a pending and prior litigation exclusion. In the coverage litigation filed against the insurers, the insured moved to dismiss the insurers’ counterclaims based on these various related-claims defenses.

The court denied the insured’s motion to dismiss as to the counterclaims and affirmative defenses pertaining to both the interrelated wrongful acts provision and the pending and prior litigation exclusion. In so holding, the court refused to analyze the insured’s argument that the policy language required a “meaningful linkage” between the underlying matters for them to fall within the scope of either provision. The court noted that there were substantial differences between the underlying merger litigation and the earlier 2016 lawsuits, including the types of claims asserted, the relief sought, the challenged conduct, and when the conduct occurred. The court highlighted that the insurers’ argument—that corporate control actions in 2016 culminated in the merger—could render coverage illusory because the insureds would effectively be deprived of all coverage if any board decision was deemed interrelated with the earlier 2016 litigations. However, the court concluded it would be premature to determine the applicability of the insurers’ coverage defenses based on these two provisions given the procedural posture of the case, the standard of review, and the unusual facts. These factors required further development of the record before the court could apply the contractual language and determine coverage. In particular, the court determined it was necessary to consider unredacted copies of the complaints from the underlying merger litigation and the insured’s indemnification claims in the underlying merger litigation to assess if the insured had made statements inconsistent with its current coverage position.

However, the court granted the insured’s motion to dismiss as to the counterclaim and affirmative defense relating to the prior notice exclusion. The prior notice exclusion only applied if the insured provided notice “before the Inception Date” of the policies and if coverage was afforded and accepted as a result of that notice. The court determined that the insured did not provide notice under the prior insurance program before the inception date. Rather, the insured notified the prior program only after the insurers had denied coverage for the underlying merger litigation under the current program. Because the notice was not given prior to the inception date and because coverage was not accepted as a result of any such pre-inception date notice, the court held that the plain language of the prior notice exclusion did not apply to the facts of the case.

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