An acquired bank’s D&O insurer’s defense cost obligation to the bank’s directors and officers in connection with merger-related litigation continued after the merger transaction closed and was owed to the acquiring bank, a federal district court judge has held, rejecting the policy-based arguments on which the insurer relied to contend that its payment obligations ceased at the time of the deal closing. District of New Jersey Judge John Michael Vazquez’s unpublished September 18, 2017 opinion containing his ruling can be found here.



On June 30, 2009, Pamrapo Bancorp and BCB Bancorp announced that they had signed a merger agreement pursuant to which Pamrapo was to merge into BCB, with BCB the surviving entity. The transaction was completed on July 6, 2010. Among other things, the merger agreement specified that BCB would indemnify Pamrapo’s directors and officers to the fullest extent to which they would have been entitled to indemnification under Pamrapo’s articles of incorporation and bylaws.


In July 2009, two Pamrapo shareholders filed separate shareholder derivative class action lawsuits in New Jersey state court against Pamrapo, certain of its directors and officers, and BCB. The cases ultimately were consolidated. The plaintiffs filed a consolidated amended complaint alleging claims for breach of fiduciary duty against the Pamrapo directors and claims for aiding and abetting the breach of fiduciary duty against BCB and Pamrapo. In 2014, following various proceedings in the case, the parties to the underlying lawsuit entered a stipulation of settlement that the court later approved.


The Insurance Dispute

Pamrapo submitted the state court lawsuits to its D&O insurer. Subject to a reservation of rights under the policy, the D&O insurer agreed to advance defense costs incurred on behalf of Pamrapo and its directors. After the policy’s $125,000 retention was exhausted, the insurer did pay amounts in reimbursement of defense expenses, including even making one payment post-merger to BCB for defense expenses Pamrapo had incurred prior to the merger.


However, on July 30, 2009, the insurer advised BCB that post-merger, its obligations under the policy were now excess of BCB’s indemnification obligation. In taking this position, the insurer relied on the policy’s “Other Insurance and Indemnification” provision. BCB demanded payment of the individual defendants’ defense expense in the underlying litigation, which continued after the merger closed. The insurer refused. BCB initiated an action seeking a judicial declaration that it was entitled to reimbursement for the post-merger defense costs. The parties filed cross-motions for partial summary judgment.


The policy’s “Other Insurance or Indemnification” provisions stated as follows:


This Policy shall not be subject to the terms of any other Insurance. All Loss, including Defense Costs, payable under this Policy shall be excess to:

(1) any other existing insurance regardless of whether collectible, including but not limited to, any insurance under which there is a duty to defend, unless such other insurance is written only as specific excess insurance over the Limits of Liability provided by this Policy; and

(2) indemnification to which an Insured is entitled from any entity other than the Company.


In its summary judgment motion, BCB argued that as the surviving entity in the merger it obtained all of the contractual rights and liabilities of Pamrapo, including Pamrapo’s right of reimbursement under the D&O insurance policy. For its part, the insurer argued that the “Other Insurance or Indemnification” provision made its obligations excess of BCB’s indemnification obligation, which, the insurer argued, was “indemnification to which an Insured is entitled from any entity other than the Company.”


The September 18, 2017 Opinion

In his September 19, 2017 opinion, Judge Vazquez granted BCB’s motion for partial summary judgment and denied the insurer’s cross-motion.


In ruling that BCB was entitled to reimbursement under Pamrapo’s D&O insurance policy, Judge Vazquez first reviewed the nature of the banks’ merger transaction, which was in the form of a statutory merger pursuant to the New Jersey Business Corporations Act (NJBCA). As Judge Vazquez noted, in a merger under the provisions of the NJBCA, “the surviving corporation of a merger in essence steps into the shoes of the merged entity for purposes of the merged entity’s rights and liabilities.” Thus all of Pamrapo’s rights and liabilities became BCB’s rights and liabilities as a result of the merger.


The NJBCA does not, Judge Vazquez noted, exclude insurance policies of the entity that merged into the surviving entity. Therefore, through the merger, the Policy and rights under the Policy transferred to BCB such that BCB “is now effectively the insured.” At a minimum, “BCB is entitled to the same coverage that Pamrapo was entitled to under the Policy.” Therefore, “as was the case before the merger, [the insurer], after the merger, was obligated to cover defense costs for the Individual Directors.” On this basis, Judge Vazquez rejected the insurer’s argument that BCB is not within the definition of the term “Company” and therefore not entitled to the benefits of the insurance policy.


Judge Vazquez also rejected the insurer’s argument, made in reliance on the “Other Insurance and Indemnification” provision, that because BCB is contractually bound to provide indemnification pursuant to the Merger Agreement, that reimbursement is barred. Judge Vazquez said that this argument disregards the effect of the NJBCA, pursuant to which BCB assumed all of Pamrapo’s rights and liabilities, including Pamrapo’s obligation to indemnify if directors and officers. Thus, Judge Vazquez said, even if the Merger Agreement had not separately contained an indemnification provision, BCB was bound to indemnify the individual defendants.


Judge Vazquez also referred back to analysis rejecting the insurer’s argument that BCB was not a “Company” within the meaning of the policy, noting that “it would certainly be an untenable result if the definition of ‘Company’ did not prevent BCB obtaining Pamrapo’s rights under the Policy but nevertheless precluded BCB from recovery pursuant to the ‘Other Insurance or Indemnification’ provision.”


Finally, Judge Vazquez said with respect to the post-merger payment the insurer made to BCB of amounts the insurer owed to Pamrapo under the policy that the insurer “provides no legal authority to support its position that the partial payment should not be construed as a concession or admission.” Instead, Judge Vazquez said, the payment “reflects the reality of the statutory merger”; that is, that the insurer could only make payment to BCB for amounts owed Pamrapo because BCB had acquired all of Pamrapo’s rights and liabilities and Pamrapo had ceased to exist.



All else equal, it would have been my expectation in this situation that the insurer would have continued to reimburse the defense costs even after the merger transaction closed. I had to read the opinion a second time to understand the basis on which the insurer was arguing that it did not have the obligation to continue to make the defense cost payments post-merger.


It is, of course, customary for liability insurance policies to have other insurance provisions. Other insurance provisions are there to provide rules of the road when more than one insurance policy applies in a particular situation. However, the other insurance provision involved here had an unusual additional clause. The additional clause made this policy excess not only to other insurance but also to “indemnification to which an Insured is entitled from any entity other than the Company.”


By its terms, this additional indemnification clause is only relevant if the indemnification at issue is coming from any entity “other than the Company” —  thus the need for Judge Vazquez to examine in such detail whether or not BCB is “the Company” within the meaning of the policy. This question in turn required Judge Vazquez to examine the nature of the merger transaction in which the two banks had engaged and in which BCB was the surviving entity. In effect, Judge Vazquez held that as a result of BCB’s acquisition of all of Pamrapo’s rights and liabilities in the transaction, Pamrapo in effect became BCB and BCB therefore was “the Company” for purposes of determining whether or not the indemnification provision applied as the insurer argued.


I do not have any direct experience that would shed any light on how this kind of indemnification provision is expected or intended to operate. Clearly, from Judge Vazquez’s perspective, the insurer’s argument of how the indemnification provision should be applied here was contrary to his expectation of how the policy should perform.


We all know that merger objection litigation is unfortunately frequent these days. Many merger-related cases are dismissed or settle before the merger transaction closes. However, many other cases continue on after the deal closes. From a practical perspective, it would be unworkable if D&O insurers defending their insureds in merger litigation were relieved of their defense obligations when the merger closed.


I want to be clear that I am not finding fault with the position that the insurer took here. After thinking about the situation and the specific language involved, I can see how the insurer took the position it advanced here. BCB had undertaken to indemnify the Pamrapo directors and officers, and unlike the indemnification undertakings in many merger agreements, the indemnification undertaking was not expressly made excess to Pamrapo’s insurance.


My problem is the policy language itself. If insurers are going to take the position that an indemnification provision of this type operates as the insurer argued here, then policyholders will want to be sure if their policy contains this kind of indemnification provision that the provision is removed, or at a minimum amended to specify that it does not apply if the indemnification is provided by the surviving entity in a merger transaction in which the named insured organization is acquired. It is outside the insurance arena, but another step companies can take to avoid what happened here is to ensure that the acquiring company’s indemnification undertakings  in the merger agreement are made expressly excess to the target company’s insurance.


In suggesting that policies containing an indemnification clause should be altered or amended, I am not implying anybody did anything wrong in connection with the placement of Samrapo’s policy. The policy period on Samrapo’s policy was June 15, 2009 through June 1, 2010. When this policy was negotiated and placed in spring 2009, in the depths of the global financial crisis, the D&O insurance marketplace for banks was very different than it is today. In general, there was far less opportunity for negotiation than is the case today, and for most banks relatively few alternative options available. Alternatives that might be negotiated today likely were not available then. Given the then-prevailing marketplace circumstances, it would not be appropriate to judge a placement made then by today’s marketplace standards.


I am very interested to know others’ reaction to this situation and to the judge’s ruling. I welcome readers to add their thoughts to this post using the blog’s comment feature.