Gridlock with D&O insurers is stalling settlements with automaker Nikola's shareholders

Electric and fuel-cell vehicle company Nikola Corp. has turned to a Delaware court with claims that its directors and officers (D&O) insurers are keeping settlement proposals from being made in the Court of Chancery, the District of Delaware and the District of Arizona.

In a complaint filed in the Delaware Superior Court’s Complex Commercial Litigation Division, Nikola claims it is prepared to offer settlements that would resolve claims against the company and its directors and officers named as defendants, excluding former CEO Trevor Milton, in three shareholder lawsuits.

But the suit alleges the insurers — XL Specialty Insurance, Hudson Insurance and National Union Fire Insurance — have refused to approve those proposals without either a release from Milton himself or a court’s confirmation that the potential for Milton to bring claims on the same proceeds in the future doesn’t bar them from making payouts to the other defendants.

Milton, who resigned from Nikola in 2020, has been convicted of securities fraud and wire fraud charges brought in the Southern District of New York and in December was sentenced to four years in prison and ordered to pay a $1 million fine.

The complaint claims there’s nothing in the policies that makes a payout contingent on getting a release and that policy proceeds should be handed out on a “first come, first served” basis. Nikola is asking Judge Vivian L. Medinilla to make that determination.

“A contrary interpretation would mean that the individual insureds could never settle a derivative action with insurance proceeds unless Milton joined in the settlement,” the complaint states. “Because settlements of derivative actions are not indemnifiable by the nominal company-defendant in Delaware, this would defeat a key function of D&O insurance. And it would lead to particularly absurd results here, given that Milton’s sentencing on his criminal conviction will likely render him unable to even obtain insurance coverage in connection with the underlying actions.”

Nikola is represented by Christensen & Dougherty and Cohen Ziffer Frenchman & McKenna attorneys who did not comment on the filings. The complaint doesn’t disclose details of the proposed settlements but indicates Nikola’s D&O insurance program allows for $17.5 million in coverage, $10 million of which is included in a policy from XL.

As of Jan. 11, 2024, counsel for the insurers had not entered appearances in the case, and press officers for the carriers did not immediately respond for comment.

The derivative action in Delaware federal court has been stayed since shortly after it was filed in 2020 pending the resolution of the SDNY case against Milton and the securities class action ongoing in Arizona. The Superior Court filing comes around the time that two of the three cases Nikola now purports it is attempting to settle are at the motion to dismiss stage.

In the Arizona case, filed the week prior to the one in the District of Delaware, motions to dismiss were partially denied in December.

In the consolidated Chancery litigation that’s been proceeding independent of the federal matters since 2022, Chancellor Kathaleen St. J. McCormick heard argument on the Nikola defendants’ motion to dismiss in December, but she has not yet issued a ruling.

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