Delaware Court Rebuffs D&O Insurer on Proportionate Defense Costs

August 5, 2008

The Delaware Superior Court has ruled that a directors and officers insurance company must pay defense costs on behalf of its policyholder to the full policy limits against a criminal indictment alleging many wrongful acts over an extended period involving a subsidiary acquired after a number of the alleged acts had taken place.

The case is HLTH Corporation and Emdeon Practice Services, Inc. v. Federal Insurance Company et. al., July 31, 2008.

In granting summary judgment to HLTH Corp., Superior Court Judge Richard R. Cooch rejected defendant Federal Insurance Co.’s contention that defense costs must be allocated proportionately among multiple insurance companies according to the quantity of alleged wrongful acts committed during discreet policy periods, noting that the insurance policy failed to stipulate any such allocation.

The court also rejected Federal’s argument regarding exhaustion of underlying insurance that it was not liable up to full policy limits because the policyholder had settled some its claims against underlying insurance companies and that the limits of those underlying policies were not therefore exhausted. Citing Stargatt v. Fidelity in Delaware and Westinghouse v. American Home Assurance in New Jersey, Judge Cooch ruled that in the current case as in Westinghouse, “the excess policy was triggered when the underlying policy limit was reached by the total costs incurred by the insured, regardless of whether the total payments to the insured reached those limits.”

Rejecting the insurance companies’ argument that since there was a settlement with an underlying insurance company the excess policy was not activated, the court declined to follow the reasoning in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 2008 WL 763483 (Cal. App. Mar. 25, 2008) and Comerica Inc. v. Zurich American Insurance Co., 498 F. Supp.2d 1019 (E.D. Mich 2007). The court found that the underlying policies were exhausted as a matter of law.

In rejecting Federal’s motion for proportionate allocation, Judge Cooch noted:

“Defendants ask the Court to take at least two leaps in logic: 1) to equate ‘overt acts’ listed in the indictment to ‘wrongful acts’ as described in the insurance contract and 2) to assume that all ‘overt acts’ would require essentially the same amount of defense work. Defendants’ proposed allocation scheme is unfair to Plaintiffs, especially considering the inability of Defendants to direct the Court to any contract provision or case that would specifically require it.”

The court rejected Federal’s citation of several New Jersey cases, notably SL Industries v. American Motorists Insurance Co. and Hebela v. Healthcare Insurance Co., that did order proportionate allocation of insurance liability, finding a fundamental difference between allocating coverage after a claim has been resolved, as in all the cited cases, and attempting allocation of defense costs before the resolution of the underlying case. Citing a concern with “judicial economy,” Judge Cooch warned that a requirement to allocate insurance liability before a triggering claim has been finally decided “actually could create more, rather than less, uncertainty about ultimate proportionate liability for insurance coverage between two or more companies.”

The court also found a fundamental difference between allocating costs between covered and uncovered claims and allocating them among multiple insurance companies for covered claims.

William G. Passannante of Anderson Kill & Olick, P.C., lead counsel for HLTH, applauded the ruling. “The Delaware Superior Court has recognized that a broadly construed obligation to pay full defense costs as incurred is fundamental to the insurance promise,” he commented.

HLTH Corp. was represented by William G. Passannante and James J. Fournier of Anderson Kill & Olick, P.C. and by local counsel David J. Baldwin and Jennifer C. Wasson of Potter Anderson Corroon LLP.

Source: Anderson Kill & Olick, P.C.

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