A recurring D&O insurance coverage issue is the question of whether or not the D&O insurance policy provides coverage for a plaintiffs’ fee award. The question often arises in the context of a settlement of a shareholders’ derivative suit that includes an agreement to pay the plaintiffs’ attorneys fees as part of the settlement. In many instances, the settling company’s D&O insurer will contest coverage for the plaintiffs’ attorneys’ fees.
In a May 28, 2013 Law 360 memorandum by Anthony Tatum and Shelby S. Guilbert, Jr. of the King & Spalding law firm entitled “Securing D&O for Attorneys’ Fees in Securities Cases” (here, subscription required), the authors present their views on this recurring coverage issue. The authors contend that “the plain language of most D&O policies, as well as the reported cases where this issue has been litigated, demonstrate that plaintiffs’ attorney’s fees should be covered.”
Carriers rely on several arguments when they contend that the plaintiffs’ fees are not covered under the policy. The principal argument on which they rely is that the plaintiffs’ attorneys’ fees portion of a derivative settlement represents a cost the company incurred in order to secure the benefits obtained for the company in the derivative lawsuit. The insurers argue that because the fees represent the cost of procuring a benefit for the company, they do not represent “damages” or otherwise represent covered “Loss” under the policy. Carriers will also sometimes argue further that under the “American rule,” each party to civil litigation bears its own costs, and so the agreement to pay the plaintiffs’ attorneys’ fees is a voluntary payment rather than a “Loss” to the company.
In their article, the authors argue that the typical D&O insurance policy has a very broad definition of Loss, typically including “damages, settlements, judgments and defense costs.” This broad definition typically contains no restriction or limitation removing plaintiffs’ attorneys’ fees from the definition of “Loss.” The authors assert that “when D&O insurers include broad definitions … but fail to specifically bar recovery of plaintiffs’ attorney’s fees, D&O policyholders have a compelling plain language argument that plaintiffs’ attorneys’ fees are covered loss.”
The authors argue further that, in addition to the policy language, “case law also generally supports the view that plaintiffs’ fees are covered loss.” The authors review at length the 2011 opinion of the First Department of New York’s Appellate Division in XL Specialty Insurance Co. v. Loral Space & Communications (here), in which the intermediate appellate court held that an insured’s payment of attorneys’ fees to plaintiffs’ counsel in a derivative lawsuit was covered loss, even though the lawsuit arguably benefitted the insured company. The authors also review two other decisions from other jurisdictions that the authors contend are “consistent” with the Loral case.
The authors conclude, with respect to the cases they reviewed, that
The takeaway from all of these cases is that consistent with the plain language of most D&O policies, courts generally view plaintiffs’ attorneys’ fees as just another type of damages. Plaintiffs’ attorneys’ fees fall squarely within the scope of most D&O policies’ definitions of key terms like “loss,” “damages and “claim,” and unless a D&O policy specifically excludes coverage for plaintiffs’ attorneys’ fees, such fees should be covered.
Policyholders are unanimous in their agreement with the authors’ views of this issue. In my experience, policyholders are shocked to learn that the carriers would even try to contend that the plaintiffs’ attorneys’ fee portion of a derivative settlement would not be covered. Nevertheless, while I am generally on the policyholder side of these issues these days, I do think it is important to note that the questions surrounding these issues have not been quite as definitively resolved as the authors suggest in their memo.
Among other things, it is very important to note that while a majority of three judges in the Loral case did conclude that the plaintiffs’ attorneys’ fees were covered, the ruling was accompanied by a spirited dissent by two other judges who argued strenuously that the fees should not be covered under the policy. As I discussed in a prior post regarding the decision (here), the dissent said that in order for the derivative fee award to be covered, it would have to represent "an actual loss, not an expense or the cost of doing business." The dissent reasoned that in this case, Loral "did not sustain a loss but rather benefitted from the judgment."
A fee award a derivative suit, the dissent observed, represents "the equitable entitlement of the successful derivative plaintiff to recover the expenses of his/her attorneys’ fees from all the shareholders of the corporation on whose behalf the suit was brought." The dissent observed that "if not spreading the cost of attorneys’ fees sounds in unjust enrichment, the obvious corollary is that shifting the cost to shareholders as a group cannot be characterized as a loss."
At a minimum, the vigorous dissent in the Loral case shows that judicial views on this issue are hardly uniform, and in view of the close vote in the case at the intermediate appellate level, the state of the law on these issues arguably is not settled. The narrowness of split between the majority and the dissent on this issue suggests that this dispute is far from resolved. The underlying issue is likely to continue to be debated in other cases.
I have long wondered whether all would be better off if this issue were addressed in the policy, along the lines of the way the industry developed a policy solution to the contentious issue that Section 11 settlements were not covered under the Policy. The way the industry addressed that issue is that it became standard to include in public company D&O policies language stating that the insurer would not take the position that a settlement of a ’33 Act case was not covered under the Policy. Perhaps the industry will adopt a similar approach on this derivative lawsuit fee award issue.
In the meantime, while we await a solution to this issue in the policy, policyholders will continue to argue that amounts agreed to in payment of plaintiffs’ attorneys’ fees in derivative settlements represent covered loss under the policy.
I would be very interested in hearing from others on this issue, particularly readers on the insurer side of the aisle who may have a different perspective on this recurring issue.