Court rules insurance policy covers Verizon's $24M defense costs
The decision could see application nationwide and make it more difficult to reject coverage in cases over corporate transactions.
Verizon can recoup $24 million in defense costs from its insurers, Superior Court Judge Eric M. Davis has ruled in a decision that could find application nationwide and make it more difficult to reject coverage in cases over corporate transactions.
That’s because Davis applied a broader definition of the insurance contract term “securities claim” that required coverage in a case over a challenge to a corporate spinoff and merger that was funded by debt instruments.
Defense counsel relied on a 2019 ruling of the state Supreme Court that, they argued, created a more narrow definition, but Davis did not agree.
Davis’ ruling, handed down on Tuesday, Feb. 23., doesn’t preclude Verizon, represented by attorneys with Potter Anderson & Corroon, Cohen Ziffer Frenchman & McKenna, from seeking to recover the $95 million it paid to settle the case in which the defense costs were incurred.
“After denying coverage and basically ignoring the FairPoint Action for six years, the Insurers now complain that (Verizon’s) fees are unreasonable and unnecessary,” Davis wrote. “The court is not equipped to second-guess the ‘reasonableness’ that the Insurers now timely bemoan.”
The conflict in the case stems from a deal made over a decade ago. Verizon transferred assets into a subsidiary which was spun off and merged into FairPoint Communications Inc. in a deal funded by debt securities. As part of the deal, Verizon purchased three insurance policies valued at a total of $30 million in 2009.
FairPoint went bankrupt shortly after the deal, and the trustee appointed in the bankruptcy case filed a fraudulent conveyance action against Verizon, alleging Verizon misled FairPoint into believing the assets it transferred were worth more than they actually were, giving FairPoint the right to go after what it paid Verizon.
‘Securities claim’ definition not uncommon
The issue put before the Superior Court when Verizon filed its case in 2018 was whether, based on the insurance policies’ definition of a securities claim, Verizon was entitled to recover costs incurred during the fraudulent conveyance action brought by the trustee. Davis sided with Verizon on three fronts, finding the trustee counted as a security holder despite not being a shareholder; the action was derivative in nature and FairPoint, while not part of Verizon itself, was still covered under Verizon’s policies.
Verizon’s policy uses a definition of “securities claim” is not uncommon in insurance contracts, which could make the court’s decision applicable to countless other cases involving contracts that also use that definition, requiring that one of two circumstances be met.
A 2019 Delaware Supreme Court decision, cited by the insurance companies, found defense costs didn’t meet the criteria for a securities claim as defined by a specific insurance policy. But while the cases shared similarities — both involved costs of fraudulent conveyance defenses, and both were brought by Verizon — Davis wrote there is a key difference that points to Verizon recovering costs in the Superior Court case despite not being able to in the Supreme Court one.
Both policies, he wrote, include language defining a securities claim as either a claim alleging a violation of securities regulations or one brought by a securities holder of the insured organization. The difference is that the policy put before the Supreme Court tacks on a phrase to the latter definition mandating that to be covered, a claim has to be both brought by a securities holder and involved in a claim that meets the first definition.
Because FairPoint’s contract doesn’t refer back to the first possible definition of a securities claim as part of its second definition, Davis reasoned, Verizon doesn’t have to prove, as it would have had to in the other case, that the fraudulent transfer claim was “specific to transfers involving securities” in order to be covered.
The six insurance company defendants in the case were represented by attorneys with Heyman Enerio Gattuso & Hirzel; Arkin Solbakken; Prickett, Jones & Elliott; Skarzynski Marick & Black; Smith Katzenstein & Jenkins; Peabody & Arnold; Phillips, McLaughlin & Hall; Clyde & Co; Bailey Cavalieri; and Dykema Gossett, all of whom either declined or did not respond for comment on Thursday.
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