The Delaware Supreme Court recently held that a group of directors incurred a “Loss” under their company’s director and officer liability (D&O) policies even though the directors were indemnified by a company shareholder for the defense costs and settlements in the underlying cases. AT&T Corp. v. Clarendon Ins. Co., No. 06-567 (July 2, 2007).
The At Home Corporation was formed in 1995 to provide internet access to subscribers of cable television. AT&T was At Home’s largest shareholder and had designated ten of its employees to serve as At Home directors. At Home filed for bankruptcy in 2001, and shareholder plaintiffs filed several lawsuits against AT&T and the At Home directors in 2002, alleging securities violations, fraud and various breaches of fiduciary duty.
Given its insolvency, At Home declined to indemnify the defendant directors for any liability and litigation costs resulting from those lawsuits. The At Home directors turned to At Home’s D&O insurers and requested that the D&O insurers advance their defense costs. The D&O insurers denied the request, asserting that the At Home Directors had not incurred a covered “Loss” under the D&O policies, primarily because they were indemnified, and indemnification by the “Company” was an exception to the definition of “Loss” under the D&O policies.
The At Home directors then turned to AT&T for assistance in paying defense costs, settlements and judgments in connection with the lawsuits. AT&T agreed to assist, funded the defense and contributed to settlements, in exchange for which the At Home directors assigned to AT&T their breach of contract claims against the D&O insurers. After settling the underlying shareholder litigation, AT&T brought suit against At Home’s D&O insurers, both as assignee of the At Home directors and as subrogee.
AT&T argued that the lawsuits alleged “Wrongful Acts” that fell within the scope of the D&O policies. The D&O insurers moved to dismiss the suit on two grounds: (1) the At Home directors had not suffered a “Loss” necessary to trigger the D&O coverage; and (2) AT&T could not prevail on its equitable subrogation claim because, when it indemnified the At Home directors, AT&T acted as a “volunteer.” Applying California law, the Superior Court granted the motion and dismissed the complaint. AT&T appealed and the Delaware Supreme Court reversed the trial court’s decision.
On appeal, the court found that the D&O policies defined “Loss” as an amount that the directors were either “financially liable” or “legally obligated” to pay arising from an actual or alleged “Wrongful Act;” for example, a “breach of duty.” The court also noted that any claims would be excluded from coverage if At Home indemnified its directors and officers, but not if a third party (such as AT&T) indemnified the directors.
Applying these principles, the court found that, despite AT&T’s indemnification, the At Home directors could be either “financially liable” or “legally obligated” to pay a judgment based on alleged wrongful acts. The Delaware Supreme Court further held that AT&T was equitably subrogated to the At Home directors’ rights under the D&O policies because the payment of defense costs and settlement was made by AT&T to protect its own interest, and therefore AT&T did not act as a volunteer.
