In a recent decision, the Delaware Superior Court, applying Delaware law, held that two of Pfizer’s excess D&O insurers are on the hook for their portion of costs the company incurred in defending and settling a securities class action lawsuit, despite the excess insurers’ arguments that the claim was interrelated with an earlier securities suit and that coverage was therefore precluded under their policies’ Specific Litigation Exclusion. The critical determinant in the court’s ruling may have been its decision that Delaware law governed the coverage dispute, but there are still a number of interesting elements about issue of claims relatedness. The Delaware Superior Court’s July 23, 2019 decision can be found here.
This insurance dispute relates to an underlying securities class action lawsuit (referred to as the Morabito lawsuit) filed against Pfizer and certain of its directors and officers in 2004. At the time the Morabito lawsuit was first made, Pfizer was insured under a D&O insurance program providing $225 million of insurance coverage and consisting of thirteen layers – a layer of primary insurance and twelve layers of excess insurance.
The Morabito action ultimately settled for Pfizer’s agreement to pay to the plaintiff class a total of $486 million. Pfizer incurred a total of more than $82 million in defending the Morabito action. The primary D&O insurer and ten of the excess insurers ultimately contributed to the payment of the defense and settlement costs of the Morabito action, either by paying their limits in full or by paying a portion of their limits under settlement agreements with Pfizer.
However, two of the excess insurers denied coverage for the Morabito claim. The two excess insurers (hereafter the insurers) denied coverage on two grounds. First, the insurers argued that coverage for the claim is precluded under a Specific Litigation Exclusion, which excluded coverage for any Claim “arising out of, based upon, or attributable to” a prior securities lawsuit known as the Garber action. Second the insurers contended that coverage was precluded under the Interrelated Claim Provision, which excludes coverage for a claim that shares “as a common nexus any fact, circumstance, situation, event, transaction or cause” with a prior claim.
The Garber litigation, the prior claim on which the insurers relied in arguing that the Specific Litigation Exclusion precludes coverage, was a securities class action lawsuit filed in 2003 by the shareholders of Pharmacia alleging misleading statements contained in a study commissioned by Pharmacia regarding the gastrointestinal health risks of Celebrex. Pfizer acquired Pharmacia in April 2003.
The Morabito action was also a securities class action lawsuit, brought by Pfizer’s shareholders, alleging misrepresentations and omissions regarding the cardiovascular risks associated with Celebrex and Bextra.
Pfizer filed an action for declaratory relief and damages against the insurers in Delaware Superior Court. The parties filed cross-motions for summary judgment.
The insurers argued that the Garber and Morabito actions contained overlapping and common allegations regarding Pfizer’s and Pharmacia’s alleged misrepresentations concerning the safety of Celebrex.
In arguing that the two claims were interrelated and that coverage for the Morabito claim was precluded by the Specific Litigation Exclusion, the insurers cited seven main similarities between the two actions, including that: both actions were predicated on allegations that Pfizer and Pharmacia made misrepresentations regarding the safety and efficacy of the group of drugs that included Celebrex; that the two companies made misrepresentations regarding the so-called CLASS Study to create the impression that Celebrex was safer than competing alternatives; both complaint referred to the same articles and publications; the misrepresentations were made over a common time period; that articles in June 2002 disclosed that Celebrex had no safety advantage over competitive products; that the stock price of both companies dropped “when the truth was revealed”; and that both companies allege violations of Sections 10 and 20 of the ’34 Act, and Rule 10b-5 thereunder.
Pfizer argued that the two actions are unrelated for D&O insurance coverage purposes, because the two lawsuits involved “different shareholder plaintiffs, different alleged wrongful conduct, committed by different corporate and individual defendants, and different alleged harm to different company stock initiated by different revelations to the market at different times of different health risks of different drugs.”
The July 23, 2019 Opinion
In a July 23, 2019 Opinion, Delaware Superior Court Judge Paul R. Wallace granted Pfizer’s motion for summary judgment and denied the insurers’ summary judgment motion.
In reaching his ruling, Judge Wallace first had to decide whether New York or Delaware law controlled the parties’ dispute. Pfizer is a Delaware corporation with its principal place of business in New York. The policy was delivered in New York and the policy included New York amendatory endorsements. Judge Wallace acknowledged that there is “a significant difference” between the laws of New York and the laws of Delaware with respect to the “reasonable interpretation” of the exclusions at issue.
Under New York law, an insurer seeking to rely on interrelatedness provisions similar to the ones involved here , the claims “need not involved precisely the same parties, legal theories or Wrongful Acts” and “it is immaterial that one claim may involve additional facts or allegations” because all that is that the two claims share “any common fact, event, transaction” etc. Delaware, by contrast, interprets the relatedness language as precluding coverage “only where two underlying actions are ‘fundamentally identical.’”
Judge Wallace ultimately determined that the application of Delaware law principles accorded most closely with the parties’ reasonable expectations at the time they entered the contract, in reliance in part on the policies’ ADR provision, which specified that the law of the place of incorporation is to govern any mediation or arbitration. Judge Wallace rejected the insurers’ argument that while the law of the place of incorporation governs mediation or arbitration, a different law could apply to any later litigation. That, just Wallace said, is “the precise kind of uncertainty and inconsistency” that the choice of law principles seek to avoid.
In turning to the parties’ coverage dispute, Judge Wallace determined that the insurers’ attempt to argue that the exclusions use of the word “any” precludes coverage if the underlying actions “share any commonality” is “strained, uncharacteristically broad, and runs afoul” of the Delaware Superior Court’s prior interpretations requiring actions to be “fundamentally identical” in order for interrelatedness principles to preclude coverage.
Judge Wallace determined that the two actions are not, as he concluded Delaware law requires, “fundamentally identical.” The two actions do not cover the “same subject.” The Garber Action was brought by Pharmacia’s shareholders seeing redress for alleged misrepresentations regarding the CLASS study of gastrointestinal health risks of Celebrex; the Morabito action, by contrast, was brought by Pfizer’s shareholders based on alleged misrepresentations regarding the cardiovascular risks of Celebrex and another drug, Bextra, and the alleged market harm stemmed not from misrepresentations relating to the CLASS study but with respect to internal safety data.
In short, Judge Wallace said, while “there may be some thematic similarities, the Underlying Actions are truly, in all relevant respects, different.” The two actions involved “entirely distinct misrepresentations of very different health risks associated with Celebrex,” and they are not “fundamentally identical” as would be required under Delaware law for interrelatedness principles to preclude coverage.
This may be the classic case in which the choice of applicable law determined the outcome. The relatively strict requirement under Delaware law that two actions must be “fundamentally identical” in order for interrelatedness principles to preclude coverage appears to contrast significantly with principles under New York law, that two actions need not involve “precisely the same parties, legal theories, or Wrongful Acts,” for interrelated principles to apply, because all that is required is “any common fact, circumstance, situation, etc.”
Even without regard to these differences in potentially applicable law, there is definitely a degree to which the insurers’ argument was “strained” and “uncharacteristically broad.” To argue that the two underlying actions was interrelated simply because they both involved alleged violations of the ’34 Act is really too much. This argument carried to its logical extreme, if supported, would preclude coverage under the policies for any subsequent ’34 Act liability action, which obviously is an outcome no one intended.
The problem here and in so many of these kinds of disputes is the exclusions’ use of the word “any.” It is simply not practicable that “any” connection can or should be sufficient to preclude coverage. As I have noted before, the problem with relatedness analyses premised on this concept is that at a fundamentally level, everything in the universe is related, depending on the level of generalization.
That is what makes these kinds of interrelatedness disputes so challenging. There are always going to be ways that any two actions are similar and ways in which the disputes are different. The two underlying actions here unquestionable shared certain common elements. As Judge Wallace noted in his opinion “the two actions are unquestionably related.” The question is whether or not the two are sufficiently related to justify precluding coverage.
In my view, as was the view of Judge Wallace, the differences here matter more than the similarities. Pfizer was correct in arguing that coverage should not be precluded because the two actions involved “different plaintiffs, different defendants, different alleged harms, and different alleged wrongful conduct committed by different people.” It is undoubtedly the weight of these significant differences that motivated ALL of the other carriers in the tower to pay their limits of liability or to reach settlements with Pfizer.
The real significance of Judge Wallace’s decision may be his determination that Delaware law applied to this dispute, even though there were many connections between Pfizer, the policies at issue, and New York. Not only did Judge Wallace find the policies’ reference to the law of the state of incorporation in the policies’ ADR provisions to be indicative of the parties’ intent with respect to the question of governing law, but he also said that applying Delaware law “accords with this Court’s consistent application of Delaware law to resolve disputes over insurance coverage of directors’ and officers’ liability,” given Delaware’s interests in regulating the officers and directors of corporations incorporated under the state’s law.
This preference for the application of Delaware law could be significant in many insurance disputes. As I noted at the outset, the resolution of the choice of law issue could have been outcome determinative here. The fact is that most publicly traded companies are organized under the laws of Delaware. A presumption that Delaware law governs the interpretation of the D&O insurance policies of these Delaware corporations could be substantially beneficial to these companies when it comes to the scope of coverage available under their policies.
Special thanks to a loyal reader for providing me with a copy of the Judge Wallace’s opinion.