Third Circuit Finds Major Shareholder Exclusion Ambiguous as Applied to Company Acquiring All of Insured’s Stock after Policy Period

The United States Court of Appeals for the Third Circuit, applying Delaware law, has held that a D&O policy’s Major Shareholder Exclusion, barring claims brought against the insured entity by a company owning five percent or more of the entity, was ambiguous as applied to a company acquiring one hundred percent of the insured’s stock after the policy period.  EMSI Acquisition, Inc. v. RSUI Indem. Co., 2019 WL 4511948 (3d Cir. Sept. 19, 2019).  The court also rejected the insurer’s argument that the insured’s settlement with the acquiring company did not constitute “Loss” under the policy.

The insured entity was acquired by another company that learned after the acquisition that officers allegedly misrepresented the company’s financials during negotiations of the acquisition.  The acquiring company sued.  The company’s officers settled and assigned their rights under a D&O policy to the acquiring company.  The acquiring company then sued the insurer for indemnification.

The insurer argued that coverage was precluded under a “Major Shareholder Exclusion,” which barred coverage for claims “brought by or on behalf of individuals or entities that own, beneficially or directly, five percent (5%) or more of the outstanding stock of the Insured Organization.”  The insurer asserted that the exclusion applied because the acquiring company owned one hundred percent of the insured entity's stock.

The court of appeals disagreed, finding the exclusion ambiguous as to whom and when the exclusion applied.  The court pointed to the fact that the insured had submitted a list of shareholders when it purchased the policy and was not required to update the list when the “qualifying shareholders” changed, suggesting that the exclusion applied to major shareholders at the time the policy was issued.  The court also referred to the insured’s exercise of an option to extend the discovery period for six years after the end of the policy period.  The court held, “[t]he issue here is not what the policy’s language definitively means.  The question instead is whether the language ‘is reasonably or fairly susceptible of different interpretations.’  We agree with the District Court that such is the case here, and the provision is therefore ambiguous.”

The insurer also argued that the officers’ settlement payment did not constitute “Loss,” the definition of which carved out amounts owed under contract, because the settlement represented compensation for breach of warranty.  The court of appeals disagreed, finding that at least some of the claims for misrepresentations made during the acquisition process might not give rise to indemnification for breach of warranty.  The court also rejected the insurer’s argument that the insured’s officers did not suffer “Loss” because they “were never legally entitled to the money they received as a result of their misrepresentations.”  The court noted that “no Delaware decision supports [the insurer’s] theory.”


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