Following the reasoning of the First Circuit in its Genzyme decision (see prior blog entry here), a federal court in Virginia has granted summary judgment to an insured whose carrier had sued to recoup a $15 million settlement under a D&O policy.  Houston Casualty Company v. Sprint Nextel Corporation, No. 09-cv-1387 (E.D.Va. Nov. 22, 2010).  A copy of the decision is available here.

In 1998, the insured’s shareholders approved a reclassification of its then-existing common stock into two separate tracking stocks.  At the same time, they granted the insured’s board of directors full authority to recombine the tracking stocks “in a manner that was fair to both classes of shareholders” at any time after 2002.  In early 2004, the insured’s board announced that it would exercise its authority to recombine the two classes of tracking stocks.  The plan called for one of the classes to be cancelled, and its holders to be converted into holders of the surviving class at a conversion ration of 2:1 (i.e., a holder of the cancelled class who had two shares would receive one share of the surviving class).

In March 2004, some of the insured’s shareholders sued the insured and fourteen of its directors and officers in Kansas state court, alleging breach of fiduciary duty in setting a conversion ratio that significantly undervalued the cancelled class of shares.  At the time, the insured maintained a $100 million D&O insurance program, over a $25 million deductible.  The primary policy, to which the relevant excess policies followed form, covered “all loss” that the directors and officers became legally obligated to pay, with “loss” defined to include settlements and defense costs.  The definition of loss carved out “matters uninsurable under the law” under which the policy would be construed.  None of the policies – primary or excess – contained clauses permitting the carriers to recoup settlement advances.

In 2007, the insured settled its claims for a total payment of $57.5 million, of which the plaintiff insurer contributed $15 million.  The carrier then closed its file.  In December 2009, after the US District Court in Massachusetts issued its later-reversed Genzyme decision, the carrier sued to recoup its settlement contribution, arguing that the “loss” was uninsurable under the public policy of Kansas.

The court rejected the carrier’s argument, noting that the insured’s loss was indisputably fortuitous and that no Kansas authority existed to support the carrier’s public policy arguments.  In fact, the court stated, the carrier admitted that the (now reversed) district court ruling in Genzyme was a case of first impression and the “first decision of its kind” nationwide, undercutting its argument that Kansas had a “fixed” and “definite” public policy to the effect that the carrier claimed.  Rather, the court stated that Kansas public policy strongly favored the application of a valid and enforceable contract, which here obligated the carrier to fund its insured’s settlement.  The case was dismissed.