New York Court Rules that Capacity Issues Result in No Coverage for Securities Settlements Under D&O Program
On February 2, 2021, a New York court granted summary judgment for a BatesCarey client and other insurers, finding that no coverage was owed under a D&O program issued to AR Capital, LLC. XL Specialty Insurance Company, et al. v. AR Capital, LLC, et al., N.Y. Sup Ct, N.Y. County, Feb. 2, 2021, Cohen, J., Index No. 650018/2019. BatesCarey partner David F. Cutter argued this case to the New York court on behalf of the D&O tower, and two members of our Professional Liability Coverage Team, Le G. Trieu and Emily R. Tripicchio, assisted David with the briefing.
This matter involved a coverage dispute over a billion dollars paid to settle a consolidated securities class action, derivative litigation, and SEC Action. The insureds – AR Capital and certain of its directors and officers – sought coverage for their $250 million share of the settlements under AR Capital’s $50 million D&O program.
The insurers filed a coverage action in New York, and the insureds, represented by Robin Cohen, filed a coverage action in Delaware the next day. The insurers ultimately got the Delaware case stayed. In the New York case, after extensive fact and expert discovery, the parties cross-moved for summary judgment. The court granted the insurers’ motion.
The court held that the directors and officers were not legally obligated to pay the settlements for the securities class action and derivative litigation because the settlements did not result from Claims for Wrongful Acts against them in their capacities as directors and officers of AR Capital.
The court also held that the primary policy’s capacity exclusion barred coverage for the settlements. The capacity exclusion provided that the insurers “shall not be liable to make any payment for Loss in connection with any Claim … based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving an Insured Person acting in their capacity as a Insured Person of any other entity other than [AR Capital] ...” Applying a “but for” test, the court held that the exclusion applied to bar coverage for the settlements in the securities class action and derivative litigation because the claims against the directors and officers would have failed but for the allegations against them in their capacities as directors and officers of an uninsured entity, VEREIT. The court went a step further and said that the exclusion also applied because the claims “in any way” involved the individuals’ action in their uninsured capacities for VEREIT. The court rejected the insureds’ argument that the language of the exclusion and the existence of an allocation provision in the primary policy meant that the capacity exclusion barred only some, but not all, of the Loss.
Finally, the court held that, based on J.P. Morgan Sec. Ins. v. Vigilant Ins. Co., 166 AD3d 1 (1st Dep’t 2018), the settlement with the SEC for disgorgement was uninsurable as a matter of law.