A recurring D&O insurance coverage concern involves the question whether the standard pollution exclusion typically found in most D&O policies could preclude coverage for a securities lawsuit alleging pollution-related misrepresentations or omissions. An August 15, 2008 opinion (here) by a New Jersey intermediate appellate court addressed this issue squarely.
The New Jersey Superior Court Appellate Division per curiam opinion affirmed a trial court determination, in a coverage case arising out of a securities class action lawsuit alleging misrepresentation of contingent asbestos liabilities, that the "alleged pollution at issue was too attenuated from the damages arising from the alleged misrepresentations to trigger the pollution exclusion."
The underlying case arose out of a series of complex corporate recapitalization, reorganization and merger transactions, as result of which Sealed Air Corporation acquired certain assets and liabilities previously held by W.R. Grace. In post-transaction statements, Sealed Air made representations concerning its contingent liability for asbestos-related claims retained by a spun-off subsidiary.
As a result of asbestos liability lawsuits against the spun-off subsidiary, the subsidiary sought bankruptcy protection. The bankruptcy court later determined that the corporate reorganization transaction represented a fraudulent conveyance. After the fraudulent conveyance ruling became public, Sealed Air’s stock price plunged.
Sealed Air shareholders initiated a securities class action lawsuit against the company and its directors and officers. Background regarding the securities lawsuit can be found here. The company sought coverage for its litigation costs from its D&O insurer. The D&O insurer denied coverage in reliance upon the pollution exclusion in its policy. The pollution exclusion precludes coverage, in pertinent part, for loss "based on, arising out of, or in any way involving: (a) the actual or threatened discharge, release, escape, seepage, migration or disposal of Pollutants."
Sealed Air filed a declaratory judgment action against the insurer. Following a trial in the coverage action, the trial court entered judgment in the company’s favor, requiring the insurer to advance the company’s securities litigation defense expense. The insurer appealed.
The Appellate Ruling
On appeal, the insurer argued that the exclusion should be "given a literal reading," contending that "the language and effect of the Policy’s pollution exclusion is clear and unambiguous." Sealed Air, for its part, argued that "the alleged loss to shareholders arises out of the allegedly misleading financial statements, not from air-borne pollutants." The company contended that because "the alleged damages arise from securities misrepresentation and not traditional environmental pollution," the policy provides coverage.
The New Jersey Superior Court Appellate Division found that "the language of the policy at issue precludes [the insurer] from disclaiming based on the pollution exclusion." The court said that "it is clear to us that the gravamen of the securities holders’ complaint has its root in securities fraud and misrepresentation, not pollution." The Court found that the pollution on which the insurer sought to rely "is too attenuated from the damages sought and the legal grounds supporting such alleged damages."
The appellate court specifically addressed the insurer’s argument that the broad preamble to the exclusion, precluding coverage for loss "based on, arising out of, or in any way involving" excluded pollution. The appellate court concluded that the damages sought in the securities lawsuit were neither "based on" nor "arising out of" excluded pollution. In concluding that the "in any way involving" wording similarly did not trigger the exclusion, the appellate court noted:
Read together with the surrounding words, "based on" and "arising out of," in the context of the pollution exclusion clause, "in any way involving" requires a more direct causal relationship between the pollution and the harm. [The insurer’s] interpretation of the pollution exclusion is too broad, unfair and contrary to the reasonable expectations of the insured.
The appellate court concluded that the "plain and ordinary language of the policy, as well as the reasonable expectations of the insured," prevent the insurer from precluding coverage.
As a preliminary matter, it should be noted that the appellate court’s opinion is designated as "Not for Publication." Under Rule 1:36-3 of the New Jersey Rules of Court (here), "no unpublished opinions shall constitute precedent or be binding on any court." In addition, under the Rule, an unpublished opinion cannot be cited "unless the court and all other parties are served with a copy of the opinion and of all other relevant unpublished opinions known to counsel including those adverse to the position of the client."
While the appellate court’s opinion is therefore of no precedential authority and of only restricted persuasive potential, there are nonetheless lessons that can be derived from the case.
First, it should be noted that Sealed Air was able to establish its entitlement to coverage under the Policy for its defense expense incurred in defending against the securities litigation only after enduring a trial and subsequent appeal (and any other proceedings that the insurer may yet pursue in its attempt to deny coverage). It clearly is in the interest of any policyholders for their policy to clarify that the policy is intended to provide coverage for securities claims, even if the underlying misrepresentations alleged relate in some way to pollution.
In the current marketplace, many carriers will agree to provide a coverage carve back from the pollution exclusion specifying that the exclusion does not in any event apply to securities claims or to shareholders’ derivative actions.
In addition, in the current marketplace, many carriers will also agree to modify the exclusion’s preamble so that rather than the broad preamble wording found in Sealed Air’s policy, the preamble specifies that the exclusion applies only if the claim is "for" excluded pollution. This wording provides some measure of protection against carrier attempts to rely on remote connections between the actual claim against the insured persons and underlying facts involving pollution as a basis to deny coverage.
It should also be noted that certain of the so-called Side A/DIC policies available in the marketplace do not contain pollution exclusions. Depending on the coverage provided under these policies, the policies could potentially "drop down" and provide a measure of protection for individual defendants if the first line D&O insurer denies coverage for a claim based on the pollution exclusion.
One final note pertains to the underlying securities claim. I have previously commented (most recently here), about the possibility that growing social and political pressures relating to climate change issues could lead to climate change-related claims against directors and officers of publicly traded companies, particularly in connection with climate change-related disclosures. My views in this regard have met with some interest, but also with some skepticism.
The underlying securities lawsuit involved here demonstrates how shareholders might allege that a company did not fully disclose, for example, its contingent liabilities arising out of climate change-related issues. The Sealed Air case suggests (to me at least) how short the leap might be to these kinds of allegations. But the risk, however measured, underscores the need for the policy-wording issues identified above to be addressed.
Securities Docket: Bruce Carton of the Unusual Activity blog (here) has launched a new securities litigation news website called the Securities Docket (here). The Docket bills itself as a "globlal securities litigation and enforcement report." The first iteration is certainly visually attractive and full of a wide variety of interesting items. The Docket looks like it will be an interesting resource that we intend to monitor closely. Congrats to Bruce on getting the Docket launched.
WSJ RIP: Joe Nocera of the New York TImes has a post on his Talks Business blog (here) in which he mourns the death of the Wall Street Journal — not the death of the newspaper itself, just its death as the repository of important business news. I have felt the same things that Nocera expresses for a while. The pre-Rupert Murdoch WSJ filled a valuable role that no one other paper (or other news source) plays. Now instead of a unique and indispensible source of business news, it is just one more source for stories about politics that have already been reported in any number of our media sources. I agree with Nocera — I miss the old Journal a lot.