Following the merger of AWS and TeleCorp in 2002, TeleCorp shareholders filed a derivative action alleging that TeleCorp directors had breached their fiduciary duties. The Court of Chancery approved a $47.5 million settlement of the derivative suit. AWS then filed an action in Delaware Superior Court seeking reimbursement by both TeleCorp’s insurance carriers and AWS’s own primary and excess insurers, demanding coverage for the settlement amount. The D&O insurers moved to dismiss all claims, arguing that the terms of the acquisition called for AWS to indemnify TeleCorp’s directors and officers, calling into question whether the TeleCorp directors and officers were ever legally liable to pay the settlement – a prerequisite of coverage under TeleCorp’s D&O coverage. The AWS D&O insurers challenged coverage for the settlement on the ground that the Claim arose from actions of TeleCorp – and not AWS – directors and officers.
The court granted the motions as to all insurers except TeleCorp’s primary insurer. In ruling in favor of AWS’s primary and excess insurers, the court relied upon (1) a policy exclusion that excluded coverage for Claims arising from service by an AWS officer and director for a separate organization (i.e., TeleCorp); and (2) the fact that the AWS executives had not been required to make any personal contribution to the settlement.
On appeal, AWS argues that its insurers have a duty to reimburse it for the TeleCorp settlement regardless whether the TeleCorp directors personally contributed to the settlement and despite the language of the exclusion.
In support of the first argument, AWS cites to last year’s ruling in AT&T Corp. v. Clarendon Am. Ins. Co., 931 A.2d 409 (2007), where the court held that insurance coverage is not forfeited merely because insured directors are not personally obligated to make settlement payments or pay a judgment (unless the controlling state law requires a different result).
In support of its second argument, AWS argues that service on the TeleCorp board did not implicate the exclusion and that the exclusion in rendered inapplicable because the allegations in the underlying action involved alleged actions of other TeleCorp directors and shareholders who do not fall within the exclusion.
The AWS/TeleCorp dispute is the latest in a series of D&O coverage actions challenging the applicability of D&O coverage to claims involving M&A transactions. These disputes are a reminder that M&A lawyers need to carefully consider the D&O policies implicated by such transactions and the need for insurance brokers to be closely involved in the drafting of M&A deal documents that purport to address D&O coverage concerns.
